UNIVEST FINANCIAL CORP
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Commission File number 0-7617
Univest Corporation of Pennsylvania
(Exact name of registrant as specified in its charter)
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Pennsylvania
(State or other jurisdiction of incorporation of organization) |
23-1886144
(IRS Employer Identification No.) |
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| 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(g) of the Act:
(215) 721-2400
Securities registered pursuant to Section 12(g) of the Act:
| Title of Class | Number of shares outstanding at 1/31/11 | |
| Common Stock, $5 par value | 16,714,152 |
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
YES
o
NO
þ
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
o
NO
þ
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
þ
NO
o
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
o
NO
o
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 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.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer, a non-accelerated file 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 o | Accelerated filer þ |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES
o
NO
þ
The approximate aggregate market value of voting stock held by non-affiliates of the registrant
is $272,075,723 as of June 30, 2010 based on the June 30, 2010 closing price of the Registrant’s
Common Stock of $17.32 per share.
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 19, 2011.
UNIVEST CORPORATION OF PENNSYLVANIA
TABLE OF CONTENTS
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PART I
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PART III
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PART IV
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| Exhibit 32.2 | ||||||||
Table of Contents
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
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Economic, political and competitive forces impacting various lines of business
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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
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Volatility in interest rates
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Other risks and uncertainties, including those occurring in the U.S. and world
financial systems
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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
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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 elected to become a Financial Holding Company in 2000 as provided
under Title I of the Gramm-Leach-Bliley Act. The Corporation decided to terminate its Financial
Holding Company status which became effective in February 2011; this had no material impact on
the Corporation. The Corporation owns all of the capital stock of Univest National Bank and Trust
Co. (the Bank), Univest Delaware, Inc., and Univest Reinsurance Corporation. The consolidated
financial statements include the accounts of the Corporation and its wholly owned subsidiaries.
The Corporation’s and the Bank’s legal headquarters are located at 14 North Main Street,
Souderton, PA 18964.
The Bank is engaged in the general commercial banking business and provides a full range of
banking services and trust services to its customers. The Bank is the parent company of Delview,
Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency,
and Univest Investments, Inc., a full-service broker-dealer and investment advisory firm. Univest
Insurance has two offices in Pennsylvania and one in Maryland. Univest Investments has two
offices in Pennsylvania. The Bank is also the parent company of Univest Capital, Inc., a small
ticket commercial finance business, and TCG Investment Advisory, a registered investment advisor
which provides discretionary investment consulting and management services. Through its
wholly-owned subsidiaries, the Bank provides a variety of financial services to individuals,
municipalities and businesses throughout its markets of operation.
Univest Delaware, Inc. is a passive investment holding company located in Delaware.
Univest Reinsurance Corporation, as a reinsurer, offers life and disability insurance to
individuals in connection with credit extended to them by the Bank.
The Corporation’s former subsidiary, Univest Realty Corporation, which was established to
obtain, hold and operate properties for the holding company and its subsidiaries, was liquidated
during the fourth quarter of 2010 and the net assets were transferred to the Corporation.
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Univest Investments, Inc., Univest Insurance, Inc., Univest Capital, Inc. and Univest
Reinsurance Corporation were formed to enhance the traditional banking and trust services provided by
the Bank. Univest Investments, Univest Insurance, Univest Capital and Univest Reinsurance do not
currently meet the quantitative thresholds for separate disclosure as a business segment.
Therefore, the Corporation currently has one reportable segment, “Community Banking,” and
strategically is how the Corporation operates and has positioned itself in the marketplace. The
Corporation’s activities are interrelated, each activity is dependent, and performance is
assessed based on how each of these activities supports the others. Accordingly, significant
operating decisions are based upon analysis of the Corporation as one Community Banking operating
segment.
As of December 31, 2010, the Corporation had total assets of $2.1 billion, net loans and
leases of $1.4 billion, total deposits of $1.7 billion and total shareholders’ equity of $266.2
million.
Employees
As of December 31, 2010, the Corporation and its subsidiaries employed five hundred and
fifty-one (551) persons. None of these employees are covered by a collective bargaining
agreement 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-two 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, Jefferson Health Care,
Prudential Insurance, Glaxo Smith Kline, Lockheed Martin, Aetna/U.S. Healthcare, Unisys
Corporation, St. Mary Medical Center, Healthcare Services, Giant Food Stores LLC, Doylestown
Hospital and Northtec LLC. Unemployment rates as of December 2010 were 6.7% and 7.1% in
Montgomery and Bucks counties, respectively, significantly lower than Pennsylvania’s state
unemployment rate of 8.1% and the federal unemployment rate of 9.1%, 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 Lehigh and Chester counties. These areas currently represent a
small segment of the Corporation’s market area.
The Corporation ranks sixth in market share in Montgomery County with fifteen financial
service centers and 5.73% of total market share, and fourteenth in Bucks County with seventeen
financial service centers and 2.48% of total market share according to data provided by SNL
Financial. Montgomery County’s population has grown 4.8% to 786,000 since the year 2000, and is
expected to grow 1.3% through 2015, while Bucks County’s population has grown 5.4% to 630,000
during the same period, and is expected to grow .6% through 2015, according to SNL Financial. The
median age is 39.9 years and 40.7 years in Montgomery and Bucks counties, respectively,
consistent with the median age of 39.6 years in Pennsylvania and slightly higher than the median
age in the Unites States of 36.5 years. County estimates project the median age to increase over
the next two decades. Median yearly household income of $81,000 during 2010 for Montgomery County
has increased 32.3% since 2000, and is expected to increase 16.6% through 2015; median yearly
household income of $79,000 during 2010 for Bucks County has increased 31.9% since 2000 and is
expected to increase 15.8% through 2015, according to SNL Financial. The yearly median income
for both counties is well above that of both the state of Pennsylvania and the United States of
$53,000 thousand and $54,000 during 2010, respectively.
Competition
The Corporation’s service areas are characterized by intense competition for banking
business among commercial banks, savings and loan associations, savings banks 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, Chester and Lehigh
counties, as well as other financial institutions outside its primary service area.
In competing with other banks, savings and loan associations, and other financial
institutions, the Bank seeks to provide personalized services through management’s knowledge and
awareness of their service area, customers and borrowers.
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Table of Contents
Other competitors, including credit unions, consumer finance companies, insurance companies,
leasing companies and mutual funds, compete with certain lending and deposit gathering services
offered by the Bank and its subsidiaries, Univest Investments, Inc., Univest Insurance, Inc. and
Univest Capital, Inc.
Supervision and Regulation
The Bank is subject to supervision and is regularly examined by the Office of the
Comptroller of the Currency. Also, the Bank is 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 was enacted to
address corporate and accounting fraud. SOX adopts new standards of corporate governance and
imposes additional requirements on the board of directors and management of public companies. SOX
law 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 controls over financial reporting, identify any material weaknesses in its internal
controls over financial reporting and assert that such internal controls are effective. The
Corporation has continued to be in compliance with SOX 404 during 2010. The Corporation must
maintain effective internal controls which require 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.
In October 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was enacted and in
February 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was enacted. Under these
laws, the Treasury was granted authority to provide a financial stability plan intended to
provide for the government to invest additional capital into banks and otherwise facilitate bank
capital formation; increase the limits on federal deposit insurance; and provide for various
forms of economic stimulus, including to assist homeowners restructure and lower mortgage
payments on qualifying loans. We did not participate in the U.S. Treasury’s Capital Purchase
Program.
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. Generally, the Dodd-Frank Act was
effective the day after it was signed into law, but different effective dates apply to specific
sections of the law. 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:
| • |
Centralizes responsibility for consumer financial protection by creating a new agency,
the Consumer Financial Protection Bureau, that will have rulemaking authority for a wide
range of consumer protection laws that would apply to all banks and would have broad powers
to supervise and enforce consumer protection laws;
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Provides for an increase in the FDIC assessment for depository institutions with assets
of $10 billion or more, increases the minimum reserve ratio for the deposit insurance fund
from 1.15% to 1.35% and changes the basis for determining FDIC premiums from insured
deposits to consolidated assets less tangible capital;
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Permanently increases the federal deposit insurance coverage to $250 thousand, increases
the Securities Investor Protection Corporation protection from $100 thousand to $250
thousand, and provides unlimited federal deposit insurance until December 31, 2012 for
non-interest bearing demand transaction accounts at all insured depository institutions;
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Repeals the federal prohibitions on the payment of interest on demand deposits, thereby
permitting depository institutions to pay interest on business transaction and other
accounts;
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Amends 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;
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Provides for new disclosures and other requirements relating to executive compensation,
proxy access by shareholders and corporate governance;
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Changes standards for Federal preemption of state laws related to federally chartered
institutions and their subsidiaries;
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Provides 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
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Creates a financial stability oversight council that will recommend to the Federal
Reserve increasingly strict rules for capital, leverage, liquidity, risk management and
other requirements as companies grow in size and complexity.
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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 in an amount equal to: 1) not
less than 4.5% and not more than 6.0% of its outstanding FHLB loans and 2) at least a certain
percentage of its unused borrowing capacity, not to exceed 1.5%. In December 2008, the FHLB
suspended its dividends and the repurchase of capital stock due to capital compliance
requirements. On October 29, 2010, the FHLB repurchased a limited amount of excess capital
stock. The FHLB will make decisions on future repurchases of excess capital stock on a quarterly
basis. At December 31, 2010, the Bank owned $7.1 million in FHLB capital stock.
The deposits of the Bank are insured under the Federal Deposit Insurance Corporation (FDIC)
up to applicable limits. Under the cross-guarantee provisions of the Federal Deposit Insurance
Act, in the event of a loss suffered or anticipated by the FDIC—either as a result of default of
a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of
default—the other banks may be assessed for the FDIC’s loss, subject to certain exceptions.
Presently, the Bank has affiliates but none of them is a separate banking institution. On
September 28, 2009, the FDIC Board implemented an institutional prepaid FDIC assessment to
recapitalize the Deposit Insurance Fund (DIF) which was finalized in the Fourth Quarter of 2009.
The amount was paid on December 30, 2009 for the Fourth Quarter 2009, and for all of 2010, 2011
and 2012. This assessment was based on an estimated 5% annual growth rate in deposits during
2010, 2011 and 2012; and a 3 basis-point increase in the base assessment rate at September 30,
2009 to be applied in 2011 and 2012. The Bank paid $9.0 million to the FDIC on December 30,
2009. At December 31, 2010 $6.1 million remained in a prepaid asset account. The prepaid amount
of $6.1 million has a zero percent risk-weighting for risk-based capital ratio calculations. The
remaining prepaid amount will be expensed over the 2011 though 2012 period as the actual FDIC
assessment is determined for each interim quarterly period. Any excess prepaid amounts may be
utilized up to December 30, 2014 at which time any excess will be returned to the Bank.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund
reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the
new restoration plan, the FDIC will forego the uniform 3-basis point increase in initial
assessment rates scheduled to take place on January 1, 2011 as previously discussed and maintain the current schedule of assessment rates for all
depository institutions. At least semi-annually, the FDIC will update its loss and income
projections for the fund and, if needed, will increase or decrease assessment rates, following
notice-and-comment rulemaking if required.
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In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act
that provide for temporary unlimited coverage for non-interest-bearing transaction accounts. The
separate coverage for non-interest-bearing transaction accounts became effective on December 31,
2010 and terminates on December 31, 2012.
In February 2011, the FDIC issued a final rule regarding deposit insurance assessments. The
rule changes the assessment base as required by the Dodd-Frank Act from domestic deposits to
average consolidated total assets minus average tangible equity, adopts a new large-bank pricing
assessment scheme, and sets a target size for the DIF. The changes will go into effect beginning
with the second quarter 2011 and will be payable at the end of September 2011. The rule, as
mandated by the Dodd-Frank Act, finalizes a target size for the DIF at 2 percent of insured
deposits. It also implements a lower assessment rate schedule when the fund reaches 1.15 percent
(so that the average rate over time should be about 8.5 basis points) and, in lieu of dividends,
provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent. The
rule lowers 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. The assessment rates in total would be
between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30 to
45 basis points for banks in the highest risk category. Nearly all institutions with assets less
than $10 billion will pay smaller assessments as a result of this rule. The rule eliminates the
adjustment to the rate paid for secured liabilities, including Federal Home Loan Bank advances,
since these will be part of the new assessment base. It also creates a new depository institution
debt adjustment that increases the assessment rate of an institution that holds long-term unsecured
debt issued by another insured depository institution. This adjustment amounts to 50 basis points
for every dollar of long-term unsecured debt held in excess of 3 percent of Tier 1 capital. The
final rule also creates 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.
Statistical Disclosure
Univest Corporation of Pennsylvania and its subsidiaries Univest National Bank and
Trust Co., Univest Insurance, Inc., Univest Capital, Inc., Univest Investments, Inc. and TCG
Investment Advisory, provide Financial Solutions to individuals, businesses, municipalities and
nonprofit organizations. Univest Corporation prides itself on being a financial organization that
continues to increase its scope of services while maintaining traditional beliefs and a
determined commitment to the communities it serves. Over the past five years Univest Corporation
and its subsidiaries have experienced steady and stable growth, both organically and through
various acquisitions to be the best integrated financial solutions provider in the market. The
acquisitions included:
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B. G. Balmer and Co. on July 28, 2006
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Liberty Benefits, Inc. on December 29, 2008
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Trollinger Consulting Group (commencing in January 2011, Trollinger Consulting Group is
operating under the trade name of Univest Municipal Pension Services)
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TC Group Securities Company, Inc. on December 31, 2008
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Allied Benefits Group, LLC on December 31, 2008
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TCG Investment Advisory Inc. on December 31, 2008
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In addition to these acquisitions, in May 2006, the Bank entered into the small ticket
commercial leasing business through its newly formed subsidiary Vanguard Leasing, Inc., which is
incorporated under Pennsylvania law. In February 2008, Vanguard Leasing, Inc. changed its name
to Univest Capital, Inc.
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
. The Corporation will provide at no charge a copy of the SEC Form 10-K
annual report for the year 2010 to each shareholder who requests one in writing after March 31,
2011. Requests should be directed to: Karen E. Tejkl, Corporate Secretary, Univest Corporation of
Pennsylvania, P.O. Box 64197, Souderton, PA 18964.
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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
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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
T
he 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.
The U.S. economy entered into one of the longest economic recessions in December 2007. The
capital and credit markets experienced extreme volatility and disruption for an extended period
of time. The volatility and disruption in the capital and credit markets have produced downward
pressure on stock prices of, and credit availability to, certain companies without regard to
those companies’ underlying financial strength. This resulted in significant write-downs of asset
values by financial institutions, including government sponsored entities and major commercial
and investment banks. Uncertainty in the financial markets and downturn in general economic
conditions, including dramatic declines in the housing market, with falling home prices and
increased foreclosures and continued high levels of unemployment, has persisted over the past few
years. Although general economic trends and market conditions have since stabilized to some
degree, the continued economic pressures on consumers and businesses 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, enacted in July 2010, instituted major changes to the banking and
financial institutions regulatory regimes in light of the recent performance of and government
intervention in the financial services sector. Included is the creation of a new federal agency
to administer and enforce consumer and fair lending laws, a function that is now performed by the
depository institution regulators. The full impact of the Dodd-Frank Act on our business and
operations will not be known for years until regulations implementing the statute are written and
adopted. 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 and/or reputation damage, which could have a material
adverse effect on the Corporation’s business, financial condition and results of operations.
In addition, recent government responses to the condition of the global financial markets
and the banking industry has, among other things, increased our costs significantly and may
further increase our costs for items such as federal deposit insurance. The FDIC insures deposits
at FDIC-insured financial institutions, including our Bank up to applicable limits. The FDIC
charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a
certain level. Current economic conditions have increased bank failures and expectations for
further failures, in which case the FDIC would pay all deposits of a failed bank up to the
insured amount from the Deposit Insurance Fund. Increases in deposit insurance premiums could
adversely affect our net income.
7
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The recent repeal of Federal
Prohibitions on payment of interest on business demand deposits could
increase the Corporation’s interest expense.
All federal
prohibitions on the ability of financial institutions to pay interest
on business demand
deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on
July 21,
2011, financial institutions could commence offering interest on
business demand deposits to compete for
clients. The Corporation does not yet know what interest rates other institutions may offer. The
Corporation’s interest expense will increase and its net interest margin will decrease if
it begins
offering interest on business demand deposits to attract additional customers or maintain current customers,
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 affect 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 affect 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 our 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 our 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. The
ongoing liquidity crisis and the loss of confidence in financial institutions may increase our
cost of funding and limit our access to some of our customary sources of capital, including, but
not limited to, inter-bank borrowings, repurchase agreements and borrowings from the discount
window of the Federal Reserve.
Such sources of capital 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 subsidiary 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.
8
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Risks Related to Our Market and Business
The Corporation’s profitability is affected by economic conditions in the Commonwealth of
Pennsylvania.
Unlike larger national or regional banks that operate in large geographies, the Corporation
provides banking and financial services to customers primarily in Bucks, Montgomery, Chester and
Lehigh Counties in Pennsylvania. Because of our geographic concentration, continuation of the
economic downturn 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 economic downturn continues or a prolonged economic recession occurs in the economy as a
whole, borrowers will be less likely to repay their loans as scheduled. A continued economic
downturn 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 and loan
associations, mutual savings banks, credit unions, consumer finance companies, insurance
companies, securities dealers, brokers, mortgage bankers, investment advisors, money market
mutual funds and other financial institutions, compete with lending and deposit-gathering
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.
9
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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, resulting in management’s attention being diverted from the
operation of our existing business;
|
||
| • |
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 middle 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. As of December 31, 2010, 16.1% of our deposit base was comprised of
noninterest bearing deposits, of which 12.8% consisted of business deposits, which are primarily
operating accounts for businesses, and 3.3% 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 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.
10
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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. Our management has
established disaster recovery policies and procedures that are expected to mitigate events
related to natural or man-made disasters; however, 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.
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.
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 impact 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.
As of December 31, 2010, approximately 80.3% of our loan and lease portfolio consisted of
commercial, financial and agricultural, commercial real estate and construction loans and leases;
these 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 will
increase if the economy worsens.
11
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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 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 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.
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.
The loan and lease
provision for the year ended December 31, 2010 was $21.6 million as
opposed to $20.9 million for the same period of 2009. The increase in the provision for loan
and
lease losses was due to the deterioration of underlying collateral and economic factors. This
resulted in the migration
of loans to a higher risk category and increased specific reserves on impaired loans to $1.6
million at December 31, 2010 from $1.4 million at December 31, 2009. Additionally,
nonaccrual
loans and leases and troubled debt restructured loans increased to $45.8 million at December 31, 2010
from
$37.1 million at December 31, 2009. Economic conditions may not improve in the near term
and our
provision for loan and lease losses could increase in the future.
12
Table of Contents
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. Our Bank is subject to extensive
regulation, supervision, and examination by our primary federal regulator, the Office of the
Comptroller of the Currency, and by the FDIC, the regulating authority that insures customer
deposits. Also, as a member of the FHLB, our Bank must comply with applicable regulations of the
Federal Housing Finance Board 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. Our Bank’s activities are also regulated under consumer protection laws
applicable to our lending, deposit, and other activities. A large claim against our 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 that
will change the bank regulatory framework, create an independent consumer protection bureau that
will assume the consumer protection responsibilities of the various federal banking agencies, and
establish more stringent capital standards for financial institutions and their holding
companies. The legislation will also result in new regulations affecting the 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.
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 Our Common Stock and Common Stock Offerings
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.
13
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The Corporation has broad discretion in applying the net proceeds from offerings and the failure
to apply these funds effectively could adversely affect its business.
The Corporation intends to use the net proceeds from offerings for general corporate
purposes, which may include the funding of additional contributions to the capital of the Bank.
We will have significant flexibility in applying the net proceeds of offerings. Our failure to
apply these funds effectively could adversely affect our business by reducing its return on
equity and inhibiting our abilities to expand and/or raise additional capital in the future.
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 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.
|
These factors could cause the Corporation’s stock price to decrease regardless of our operating
results.
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 resell
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.
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.
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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 our 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 national banks and banks that are
regulated by the Office of the Comptroller of the Currency. If our 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.
| Item 1B. |
Unresolved Staff Comments
|
Univest Corporation may receive written comments from the staff of the SEC regarding
its periodic or current reports under the Exchange Act. There are no comments that remain
unresolved that Univest Corporation received not less than 180 days before the end of its fiscal
year to which this report relates.
| Item 2. |
Properties
|
The Corporation and its subsidiaries occupy forty-one properties in Montgomery, Bucks,
Chester and Lehigh counties in Pennsylvania and Prince Georges County in Maryland, 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 building, which is shared with the Bank and
Univest Investments, Inc., in Souderton, Montgomery County. Univest Investments, Inc. also
occupies a location in Allentown, Lehigh County. Univest Insurance, Inc. occupies three locations
of which two are owned by the Bank, one in Lansdale, Montgomery County and one in West Chester,
Chester County; and one is leased in Upper Marlboro, Prince Georges County in Maryland. Univest
Capital, Inc. occupies one leased location in Bensalem, Bucks County. The Bank serves the area
through its thirty 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; seventeen
banking offices are located in Bucks County, of which five are owned, nine are leased and two are
buildings owned on leased land. The Bank has two additional regional leased offices primarily
used for loan productions one of which is located in Bucks County and one in Lehigh County.
Additionally, the Bank provides banking and trust services for the residents and employees
of twelve retirement home communities, offers a payroll check cashing service at one work site
office and offers merchants an express banking center located in the Montgomery Mall. The work
site office and the express banking center are located in Montgomery County. The Bank has eight
off-premise automated teller machines located in Montgomery County. The Bank provides banking
services nationwide through the internet via its website www.univestdirect.com.
| Item 3. |
Legal Proceedings
|
Management is not aware of any litigation that would have a material adverse effect on
the consolidated financial position of the Corporation. There are no proceedings pending other
than the ordinary routine litigation incident to the business of the Corporation. In addition,
there are no material proceedings pending or known to be threatened or contemplated against the
Corporation or the Bank by government authorities.
| Item 4. |
Removed and Reserved
|
15
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| 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, 2010, Univest had 4,495 stockholders.
StockTrans, a Broadridge Company serves as the Corporation’s transfer agent to assist
shareholders in managing their stock. StockTrans, Inc. is located at 44 West Lancaster Avenue,
Ardmore, PA. Shareholders can contact a representative by calling 610-649-7300.
Range of Market Prices of Common Stock and Cash Dividends
The following table shows the range of market values of the Corporation’s stock. The
prices shown on this page represent transactions between dealers and do not include retail
markups, markdowns, or commissions. The table also presents the cash dividends paid per share for
each quarter.
| Market Price | Cash dividends | |||||||||||
| 2010 | High | Low | paid per share | |||||||||
|
January–March
|
$ | 19.90 | $ | 16.64 | $ | 0.20 | ||||||
|
April–June
|
21.86 | 17.08 | 0.20 | |||||||||
|
July–September
|
18.25 | 15.71 | 0.20 | |||||||||
|
October–December
|
20.41 | 17.08 | 0.20 | |||||||||
| Market Price | Cash dividends | |||||||||||
| 2009 | High | Low | paid per share | |||||||||
|
January–March
|
$ | 33.50 | $ | 16.19 | $ | 0.20 | ||||||
|
April–June
|
21.99 | 17.50 | 0.20 | |||||||||
|
July–September
|
26.87 | 19.00 | 0.20 | |||||||||
|
October–December
|
21.85 | 15.14 | 0.20 | |||||||||
16
Table of Contents
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, 2010, 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, 2005,
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.
Comparison of Cumulative Total Return on
$100 Investment Made on December 31, 2005
$100 Investment Made on December 31, 2005
Five Year Cumulative total return Summary
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
|
Univest Corporation
|
100.00 | 151.86 | 109.16 | 170.34 | 97.15 | 110.67 | ||||||||||||||||||
|
NASDAQ Stock Market (US)
|
100.00 | 184.35 | 203.94 | 122.77 | 178.10 | 210.16 | ||||||||||||||||||
|
NASDAQ Banks
|
100.00 | 164.19 | 131.98 | 103.99 | 86.92 | 99.09 | ||||||||||||||||||
17
Table of Contents
Equity Compensation Plan Information
The following table sets forth information regarding outstanding options and shares
under the equity compensation plan, “Univest 2003 Long-term Incentive Plan”, as of December 31,
2010:
| (c) | ||||||||||||
| Number of | ||||||||||||
| Securities | ||||||||||||
| (a) | Remaining | |||||||||||
| Number of | (b) | Available for | ||||||||||
| Securities to | Weighted- | Future Issuance | ||||||||||
| be Issued | Average | Under Equity | ||||||||||
| Upon | Exercise | Compensation | ||||||||||
| Exercise of | Price of | Plans | ||||||||||
| Outstanding | Outstanding | (Excluding | ||||||||||
| Options, | Options, | Securities | ||||||||||
| Warrants and | Warrants and | Reflected in | ||||||||||
| Plan Category | Rights | Rights | Column (a) | |||||||||
|
Equity compensation plan approved by security holders
|
428,032 | $ | 23.07 | 877,157 | ||||||||
|
Equity compensation plans not approved by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
428,032 | $ | 23.07 | 877,157 | ||||||||
|
|
||||||||||||
The following table provides information on repurchases by the Corporation of its
common stock during the fourth quarter of 2010:
ISSUER PURCHASES OF EQUITY SECURITIES
| Maximum | ||||||||||||||||
| Total Number | Number of | |||||||||||||||
| of Shares | Shares | |||||||||||||||
| Purchased as | that May | |||||||||||||||
|
|
Yet Be | |||||||||||||||
| Total | Publicly | Purchased | ||||||||||||||
| Number of | Average | Announced | Under the | |||||||||||||
| Shares | Price Paid | Plans or | Plans or | |||||||||||||
| Period | Purchased | per Share | Programs | Programs | ||||||||||||
|
Oct. 1, 2010 – Oct. 31, 2010
|
— | $ | — | — | 643,782 | |||||||||||
|
Nov. 1, 2010 – Nov. 30, 2010
|
— | — | — | 643,782 | ||||||||||||
|
Dec. 1, 2010 – Dec. 31, 2010
|
— | — | — | 643,782 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
— | — | ||||||||||||||
|
|
||||||||||||||||
| 1. |
Transactions are reported as of settlement dates.
|
|
| 2. |
The Corporation’s current stock repurchase program was approved by its Board of
Directors and announced on 8/22/2007. The repurchased shares limit is net of normal
Treasury activity such as purchases to fund the Dividend Reinvestment Program, Employee
Stock Purchase Program and the equity compensation plan.
|
|
| 3. |
The number of shares approved for repurchase under the Corporation’s current stock
repurchase program is 643,782.
|
|
| 4. |
The Corporation’s current stock repurchase program does not have an expiration date.
|
|
| 5. |
No stock repurchase plan or program of the Corporation expired during the period
covered by the table.
|
|
| 6. |
The Corporation has no stock repurchase plan or program that it has determined to
terminate prior to expiration or under which it does not intend to make further
purchases. The plans are restricted during certain blackout periods in conformance with
the Corporation’s Insider Trading Policy.
|
18
Table of Contents
| Item 6. |
Selected Financial Data
|
| Years Ended December 31, | ||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Earnings
|
||||||||||||||||||||
|
Interest income
|
$ | 91,003 | $ | 96,359 | $ | 108,057 | $ | 116,144 | $ | 104,853 | ||||||||||
|
Interest expense
|
17,469 | 28,723 | 42,310 | 54,127 | 43,651 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income
|
73,534 | 67,636 | 65,747 | 62,017 | 61,202 | |||||||||||||||
|
Provision for loan and lease losses
|
21,565 | 20,886 | 8,769 | 2,166 | 2,215 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income after provision
for loan and lease losses
|
51,969 | 46,750 | 56,978 | 59,851 | 58,987 | |||||||||||||||
|
Noninterest income
|
34,418 | 29,917 | 26,615 | 27,268 | 25,730 | |||||||||||||||
|
Noninterest expense
|
67,349 | 65,324 | 57,225 | 52,211 | 49,958 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income before income taxes
|
19,038 | 11,343 | 26,368 | 34,908 | 34,759 | |||||||||||||||
|
Applicable income taxes
|
3,282 | 563 | 5,778 | 9,351 | 9,382 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | $ | 25,557 | $ | 25,377 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Financial Condition at Year End
|
||||||||||||||||||||
|
Cash, interest-earning deposits and federal funds sold
|
$ | 29,187 | $ | 68,597 | $ | 40,066 | $ | 59,385 | $ | 70,355 | ||||||||||
|
Investment securities
|
467,024 | 420,045 | 432,266 | 415,465 | 374,814 | |||||||||||||||
|
Net loans and leases
|
1,440,288 | 1,401,182 | 1,436,774 | 1,342,356 | 1,340,398 | |||||||||||||||
|
Assets
|
2,133,893 | 2,085,421 | 2,084,797 | 1,972,505 | 1,929,501 | |||||||||||||||
|
Deposits
|
1,686,270 | 1,564,257 | 1,527,328 | 1,532,603 | 1,488,545 | |||||||||||||||
|
Borrowings
|
143,865 | 214,063 | 312,736 | 208,729 | 225,066 | |||||||||||||||
|
Shareholders’ equity
|
266,224 | 267,807 | 203,207 | 198,726 | 185,385 | |||||||||||||||
|
|
||||||||||||||||||||
|
Per Common Share Data
|
||||||||||||||||||||
|
Average shares outstanding (in thousands)
|
16,645 | 14,347 | 12,873 | 12,885 | 12,960 | |||||||||||||||
|
Earnings per share — basic
|
$ | 0.95 | $ | 0.75 | $ | 1.60 | $ | 1.98 | $ | 1.96 | ||||||||||
|
Earnings per share — diluted
|
0.95 | 0.75 | 1.60 | 1.98 | 1.95 | |||||||||||||||
|
Dividends declared per share
|
0.80 | 0.80 | 0.80 | 0.80 | 0.78 | |||||||||||||||
|
Book value (at year-end)
|
15.99 | 16.27 | 15.71 | 15.49 | 14.25 | |||||||||||||||
|
Dividend payout ratio
|
84.32 | % | 109.33 | % | 50.03 | % | 40.40 | % | 40.00 | % | ||||||||||
|
|
||||||||||||||||||||
|
Profitability Ratios
|
||||||||||||||||||||
|
Return on average assets
|
0.75 | % | 0.52 | % | 1.02 | % | 1.32 | % | 1.38 | % | ||||||||||
|
Return on average equity
|
5.82 | 4.68 | 10.09 | 13.44 | 14.04 | |||||||||||||||
|
Average equity to average assets
|
12.92 | 11.06 | 10.08 | 9.84 | 9.81 | |||||||||||||||
|
|
||||||||||||||||||||
|
Asset Quality Ratios
|
||||||||||||||||||||
|
Nonperforming loans and leases to total loans
and leases
|
3.16 | % | 2.65 | % | 0.45 | % | 0.65 | % | 0.68 | % | ||||||||||
|
Net charge-offs to average loans and leases outstanding
|
1.07 | 0.63 | 0.62 | 0.17 | 0.17 | |||||||||||||||
|
Allowance for loan and leases losses to total
loans and leases
|
2.10 | 1.74 | 0.90 | 0.97 | 0.98 | |||||||||||||||
|
Allowance for loan and leases losses to nonperforming loans and leases
|
66.48 | 65.54 | 200.15 | 148.79 | 144.33 | |||||||||||||||
19
Table of Contents
| 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. “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’s financial condition and results of operations that
involve certain risks, uncertainties and assumptions. Univest’s actual results may differ
materially from those anticipated, projected, 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
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.
The Corporation designates its investment securities as held-to-maturity, available-for-sale
or trading. Each of these designations affords different treatment in the statement of operations
and statement of financial condition 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 either
statement of financial position or statement of operations adjustments may be required.
Management evaluates debt securities, which comprise of U. S. Government, Government Sponsored
Agencies, municipalities and other issuers, for other-than-temporary impairment and considers the
current economic conditions, the length of time and the extent to which the fair value has been
less than cost, interest rates and the bond rating of each security. All of the debt securities
are highly 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 certain equity securities will not regain market value
equivalent 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.
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 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.
20
Table of Contents
Goodwill and other intangible assets have been recorded on the books of the Corporation in
connection with its acquisitions. Goodwill and other intangible assets are reviewed for potential
impairment on an annual basis, or more often if events or circumstances indicate that there may
be impairment. Goodwill is tested for impairment at the reporting unit level and an impairment
loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair
value. The Corporation employs general industry practices in evaluating the fair value of its
goodwill and other intangible assets. The Corporation tests for impairment by first allocating
its goodwill and other assets and liabilities, as necessary, to defined reporting units, which
are generally the Bank, Univest Investments and Univest Insurance. After this allocation is
completed, a two-step valuation process is applied. For the Bank, in Step 1, fair value is
determined based on a market approach, which measures fair value based on trading multiples of
independent publicly traded entities of comparable sizes. A second fair value analysis is
performed using the income approach. The Corporation utilizes 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. If
the fair value of the Bank exceeds its adjusted book value, no write-down of goodwill is
necessary. If the fair value of any reporting unit is less than its adjusted book value, a Step 2
valuation procedure is required to assess the proper carrying value of the goodwill. The
valuation procedures applied in a Step 2 valuation 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 current market value does not exceed the net book value, impairment exists
which requires an impairment charge to noninterest expense.
In its analysis of goodwill for Univest Insurance, Inc. and Univest Investments, Inc., the
Corporation utilizes 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. A second fair value analysis is
performed using the market approach which measures fair value based on trading multiples of
independent publicly traded entities of comparable sizes. The fair value that is calculated is
compared to the net book value of each company. If the fair value exceeds the net book value, no
impairment exists. If the fair value of any reporting unit is less than its adjusted book value,
a Step 2 valuation procedure is required to assess the proper carrying value of the goodwill. The
valuation procedures applied in a Step 2 valuation 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 current market value does not exceed the net book value, impairment exists
which requires an impairment charge to noninterest expense.
For other 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 operations. 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.
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 present value of the cash flows
that will be received from servicing the loans over the 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 loan servicing rights tends to shorten, as borrowers have increased incentive to refinance.
Shortened loan servicing lives require changes in the value of the servicing rights that have
already been recorded to be marked down in the statement of operations of the servicing company.
This may cause a material change in reported 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.
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. Future tax rate changes
could occur that would require the recognition of income or expense in the statement of
operations 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.
21
Table of Contents
The Corporation has a retirement plan that it provides as a benefit to employees hired
before December 8, 2009 and former employees. The Corporation also provides supplemental
retirement plans that it provides as a benefit to certain current and former executives. Determining the adequacy of the funding of
these plans may require estimates of future salary rate increases, of long-term rates of
investment return, 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 results of operations or statement of
financial condition.
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.
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.
Executive Overview
Univest Corporation of Pennsylvania (the Corporation) earns its revenues primarily
through its subsidiaries, from the margins and fees it generates from the loan and lease and
depository services it provides as well as from trust fees and insurance and investment
commissions. The Corporation seeks to achieve adequate and reliable earnings by growing its
business while maintaining adequate levels of capital and liquidity and limiting its exposure to
credit and interest rate risk to Board of Directors approved levels. Growth is pursued through
expansion of current customer relationships and development of additional relationships with new
offices and strategically related 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, 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 has shifted to
a more asset sensitive position; although interest rates are expected to remain low for the
foreseeable future, it anticipates increasing interest rates over the longer term, which it
expects would benefit its net interest margin. The Corporation seeks to maintain a steady net
interest margin and consistent growth of net interest income.
The Corporation’s consolidated net income, earnings per share and returns on average equity
and average assets were as follows:
| For the Years Ended December 31, | ||||||||||||
| Dollars in thousands, (except per share data) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | ||||||
|
Net income per share:
|
||||||||||||
|
Basic
|
0.95 | 0.75 | 1.60 | |||||||||
|
Diluted
|
0.95 | 0.75 | 1.60 | |||||||||
|
Return on average assets
|
0.75 | % | 0.52 | % | 1.02 | % | ||||||
|
Return on average equity
|
5.82 | % | 4.68 | % | 10.09 | % | ||||||
The higher return on average assets during 2010 compared to 2009 was mostly
attributable to a higher level of net income. The higher return on average equity during 2010
compared to 2009 was mainly attributable to a higher level of net income which was partially
offset by the issuance of common stock totaling $55.7 million in August 2009. The lower return on
average assets during 2009 compared to 2008 was mostly due to the lower net income during 2009.
The lower return on average equity during 2009 compared to 2008 was mainly attributable to the
lower level of net income during 2009 and the issuance of common stock totaling $55.7 million in
August 2009.
22
Table of Contents
2010 versus 2009
The 2010 results compared to 2009 include the following significant pretax components:
| • |
Net interest income and the net interest margin increased during 2010 mainly
attributable to declines in the cost of interest-bearing liabilities, primarily time
deposits, and a decline in the volume of FHLB borrowings, exceeding the declines in
yields on total interest-earning assets. The Corporation has continued to experience core
deposit growth which has allowed the Corporation to not replace or renew its maturing
FHLB advances. The net interest margin on a tax-equivalent basis increased 32 basis
points to 4.11% from 3.79%.
|
| • |
The provision for loan and lease losses increased by $679 thousand primarily due to
the migration of loans to higher-risk ratings as a result of deterioration of underlying
collateral and economic factors.
|
| • |
Total non-interest income increased $4.5 million, or 15.0% primarily due to increased
income from trust fees, investment advisory commissions and fees, insurance commissions
and fees, other service fee income, a higher net gain of mortgage banking activities and
a litigation settlement. Additionally, 2009 was impacted by other-than-temporary
impairments of $1.7 million on equity securities and $500 thousand on other long-lived
assets compared to $62 thousand of other-than-temporary impairments recorded during 2010.
These favorable variances were partially offset by a decline in service charges on
deposit accounts in part due to Regulation E which was implemented in the third quarter
of 2010 (requires customers to opt-in for overdraft protection on debit card and point of
sale transactions), a reduction in the net gain on sales of securities and a net loss on
the interest rate swap of $1.1 million during 2010 compared to a net gain of $641
thousand during 2009.
|
| • |
Total non-interest expense increased $2.0 million, or 3.1%. Salaries and benefits
increased $612 thousand for the year ended December 31, 2010 as compared to the same
period in the prior year mainly due to additional personnel to grow the commercial
lending and mortgage banking businesses, higher restricted stock expense and increased
incentive awards partially offset by reduced pension plan expenses. Equipment expense
increased $373 thousand primarily as a result of increased computer software contract
expenses. Marketing and advertising expenses increased $478 thousand mainly to support a
major brand campaign to position the Corporation to take advantage of the disruption in
its markets. Other expenses increased $875 thousand primarily due to increased director
fees resulting mainly from fair value adjustments on directors’ deferred fees, increased
legal fees resulting from non-performing loan activity, increased audit expenses and
increased interchange expenses.
|
2009 versus 2008
The 2009 results compared to 2008 include the following significant pretax components:
| • |
Net interest income increased due to volume increases on average interest-earning
assets and decreases in rates on interest-bearing liabilities. This growth was partially
offset by volume increases on interest-bearing liabilities along with decreases in rate
on interest-earning assets. The net interest margin on a tax-equivalent basis increased
slightly to 3.79% from 3.75%.
|
| • |
The provision for loan and lease losses increased by $12.1 million primarily due to
the migration of loans to higher-risk ratings as a result of deterioration of underlying
collateral and economic factors.
|
| • |
Total noninterest income increased by $3.3 million or 12.4% due primarily to increased
mortgage-banking activities, increased investment advisory commission and fee income and
insurance commission and fee income resulting from the Trollinger and Liberty
acquisitions, a higher net gain on sales of securities and a net gain on the interest
rate swap. These increases were partially offset by decreases in bank owned life
insurance income, trust fees and increases in other than temporary impairments on equity
securities and other long-lived assets.
|
| • |
Total noninterest expense increased $8.1 million or 14.2% primarily due to increases
in salaries and benefits expense resulting from growing the mortgage-banking business and
the Trollinger and Liberty acquisitions, and higher deposit insurance premiums.
|
23
Table of Contents
Acquisitions
On December 29, 2008, the Corporation completed the acquisition of Liberty Benefits,
Inc., a full service employee benefits brokerage and consulting firm specializing in providing
comprehensive employee benefits packages to businesses both large and small. The Corporation
recorded $2.8 million in goodwill and $740 thousand in customer related intangibles as a result
of the Liberty Benefits, Inc. acquisition. On December 31, 2008, the Corporation completed the
acquisition of the Trollinger Consulting Group and related entities, an independent actuarial,
administrative, consulting/compliance, and investment counseling firm that exclusively serves
Municipal Pension Plan clients. The Corporation recorded $2.9 million in goodwill and $3.0
million in customer related intangibles as a result of the Trollinger Consulting Group
acquisition. The Corporation recorded additional goodwill of $925 thousand at December 31, 2010
for an earn-out payment related to the acquisition of Trollinger Consulting Group for meeting
minimum operating results. The Corporation recorded additional goodwill of $157 thousand in 2009
related to its 2008 acquisition of Trollinger Consulting Group.
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 years ended December 31, 2010 compared to 2009 and for the years
ended December 31, 2009 compared to 2008. 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.
24
Table of Contents
Table 1 — Average Balances and Interest Rates — Tax-Equivalent Basis
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Average | Income/ | Average | Average | Income/ | Average | Average | Income/ | Average | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning deposits with other banks
|
$ | 24,790 | $ | 72 | 0.29 | % | $ | 5,645 | $ | 16 | 0.28 | % | $ | 1,040 | $ | 16 | 1.54 | % | ||||||||||||||||||
|
U.S. Government obligations
|
151,725 | 3,160 | 2.08 | 110,781 | 3,608 | 3.26 | 99,547 | 4,617 | 4.64 | |||||||||||||||||||||||||||
|
Obligations of states and political subdivisions
|
108,694 | 7,006 | 6.45 | 104,481 | 6,890 | 6.59 | 94,549 | 6,305 | 6.67 | |||||||||||||||||||||||||||
|
Other debt and equity securities
|
172,763 | 7,217 | 4.18 | 218,660 | 10,406 | 4.76 | 232,715 | 12,145 | 5.22 | |||||||||||||||||||||||||||
|
Federal funds sold
|
— | — | — | 58 | — | — | 14,714 | 394 | 2.68 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-earning deposits, investments
and federal funds sold
|
457,972 | 17,455 | 3.81 | 439,625 | 20,920 | 4.76 | 442,565 | 23,477 | 5.30 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Commercial, financial and agricultural loans
|
422,401 | 20,315 | 4.81 | 410,729 | 18,838 | 4.59 | 385,652 | 23,849 | 6.18 | |||||||||||||||||||||||||||
|
Real estate—commercial and construction loans
|
534,573 | 30,834 | 5.77 | 521,029 | 30,549 | 5.86 | 481,016 | 31,741 | 6.60 | |||||||||||||||||||||||||||
|
Real estate—residential loans
|
256,427 | 11,124 | 4.34 | 291,229 | 13,520 | 4.64 | 309,307 | 16,019 | 5.18 | |||||||||||||||||||||||||||
|
Loans to individuals
|
45,287 | 2,698 | 5.96 | 49,930 | 3,440 | 6.89 | 62,813 | 4,422 | 7.04 | |||||||||||||||||||||||||||
|
Municipal loans and leases
|
107,524 | 6,409 | 5.96 | 90,065 | 5,444 | 6.04 | 82,563 | 5,209 | 6.31 | |||||||||||||||||||||||||||
|
Lease financings
|
75,873 | 6,690 | 8.82 | 90,192 | 7,655 | 8.49 | 80,620 | 6,843 | 8.49 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Gross loans and leases
|
1,442,085 | 78,070 | 5.41 | 1,453,174 | 79,446 | 5.47 | 1,401,971 | 88,083 | 6.28 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-earning assets
|
1,900,057 | 95,525 | 5.03 | 1,892,799 | 100,366 | 5.30 | 1,844,536 | 111,560 | 6.05 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Cash and due from banks
|
35,612 | 33,514 | 35,507 | |||||||||||||||||||||||||||||||||
|
Reserve for loan and lease losses
|
(28,688 | ) | (18,200 | ) | (13,843 | ) | ||||||||||||||||||||||||||||||
|
Premises and equipment, net
|
34,914 | 33,170 | 31,475 | |||||||||||||||||||||||||||||||||
|
Other assets
|
151,527 | 142,164 | 127,385 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 2,093,422 | $ | 2,083,447 | $ | 2,025,060 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing checking deposits
|
$ | 178,679 | 242 | 0.14 | $ | 162,615 | 257 | 0.16 | $ | 144,415 | 463 | 0.32 | ||||||||||||||||||||||||
|
Money market savings
|
303,012 | 1,060 | 0.35 | 305,113 | 1,724 | 0.57 | 409,586 | 8,861 | 2.16 | |||||||||||||||||||||||||||
|
Regular savings
|
445,721 | 2,555 | 0.57 | 353,748 | 2,955 | 0.84 | 276,908 | 4,348 | 1.57 | |||||||||||||||||||||||||||
|
Time deposits
|
432,919 | 10,054 | 2.32 | 508,337 | 17,371 | 3.42 | 483,872 | 20,894 | 4.32 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total time and interest-bearing deposits
|
1,360,331 | 13,911 | 1.02 | 1,329,813 | 22,307 | 1.68 | 1,314,781 | 34,566 | 2.63 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Securities sold under agreements to repurchase
|
97,667 | 390 | 0.40 | 91,390 | 544 | 0.60 | 84,254 | 943 | 1.12 | |||||||||||||||||||||||||||
|
Other short-term borrowings
|
42,109 | 1,726 | 4.10 | 92,209 | 2,937 | 3.19 | 40,889 | 801 | 1.96 | |||||||||||||||||||||||||||
|
Long-term debt
|
5,363 | 190 | 3.54 | 48,979 | 1,640 | 3.35 | 100,527 | 4,266 | 4.24 | |||||||||||||||||||||||||||
|
Subordinated notes and capital securities
|
24,927 | 1,252 | 5.02 | 26,427 | 1,295 | 4.90 | 27,950 | 1,734 | 6.20 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total borrowings
|
170,066 | 3,558 | 2.09 | 259,005 | 6,416 | 2.48 | 253,620 | 7,744 | 3.05 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
1,530,397 | 17,469 | 1.14 | 1,588,818 | 28,723 | 1.81 | 1,568,401 | 42,310 | 2.70 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Demand deposits, non-interest bearing
|
259,303 | 224,417 | 223,353 | |||||||||||||||||||||||||||||||||
|
Accrued expenses and other liabilities
|
33,232 | 39,817 | 29,211 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities
|
1,822,932 | 1,853,052 | 1,820,965 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Shareholders’ Equity:
|
||||||||||||||||||||||||||||||||||||
|
Common stock
|
91,332 | 80,969 | 74,370 | |||||||||||||||||||||||||||||||||
|
Additional paid-in capital
|
61,420 | 37,844 | 22,643 | |||||||||||||||||||||||||||||||||
|
Retained earnings and other equity
|
117,738 | 111,582 | 107,082 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total shareholders’ equity
|
270,490 | 230,395 | 204,095 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,093,422 | $ | 2,083,447 | $ | 2,025,060 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 78,056 | $ | 71,643 | $ | 69,250 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest spread
|
3.89 | 3.49 | 3.35 | |||||||||||||||||||||||||||||||||
|
Effect of net interest-free funding sources
|
0.22 | 0.30 | 0.40 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest margin
|
4.11 | % | 3.79 | % | 3.75 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Ratio of average interest-earning assets to
average interest-bearing liabilities
|
124.15 | % | 119.13 | % | 117.61 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| 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, 2010, 2009 and 2008 have been
calculated using the Corporation’s federal applicable rate of 35.0%.
|
25
Table of Contents
Table 2 — Analysis of
Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below compares changes in
tax-equivalent net interest for the years ended December 31, 2010 compared to 2009 and for the
years ended December 31, 2009 compared to 2008, indicated by their rate and volume components.
The change in interest income/expense due to both volume and rate has been allocated
proportionately.
| The Years Ended December 31, | The Years Ended December 31, | |||||||||||||||||||||||
| 2010 Versus 2009 | 2009 Versus 2008 | |||||||||||||||||||||||
| Volume | Rate | Volume | Rate | |||||||||||||||||||||
| (Dollars in thousands) | Change | Change | Total | Change | Change | Total | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
Interest-earning deposits with other banks
|
$ | 55 | $ | 1 | $ | 56 | $ | 13 | $ | (13 | ) | $ | — | |||||||||||
|
U.S. Government obligations
|
1,094 | (1,542 | ) | (448 | ) | 365 | (1,374 | ) | (1,009 | ) | ||||||||||||||
|
Obligations of states and political subdivisions
|
268 | (152 | ) | 116 | 661 | (76 | ) | 585 | ||||||||||||||||
|
Other debt and equity securities
|
(2,018 | ) | (1,171 | ) | (3,189 | ) | (669 | ) | (1,070 | ) | (1,739 | ) | ||||||||||||
|
Federal funds sold
|
— | — | — | (394 | ) | — | (394 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest on deposits, investments and federal funds sold
|
(601 | ) | (2,864 | ) | (3,465 | ) | (24 | ) | (2,533 | ) | (2,557 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial, financial and agricultural loans and leases
|
550 | 927 | 1,477 | 1,121 | (6,132 | ) | (5,011 | ) | ||||||||||||||||
|
Real estate—commercial and construction loans
|
769 | (484 | ) | 285 | 2,368 | (3,560 | ) | (1,192 | ) | |||||||||||||||
|
Real estate—residential loans
|
(1,555 | ) | (841 | ) | (2,396 | ) | (829 | ) | (1,670 | ) | (2,499 | ) | ||||||||||||
|
Loans to individuals
|
(303 | ) | (439 | ) | (742 | ) | (888 | ) | (94 | ) | (982 | ) | ||||||||||||
|
Municipal loans and leases
|
1,038 | (73 | ) | 965 | 458 | (223 | ) | 235 | ||||||||||||||||
|
Lease financings
|
(1,254 | ) | 289 | (965 | ) | 812 | — | 812 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest and fees on loans and leases
|
(755 | ) | (621 | ) | (1,376 | ) | 3,042 | (11,679 | ) | (8,637 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest income
|
(1,356 | ) | (3,485 | ) | (4,841 | ) | 3,018 | (14,212 | ) | (11,194 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Interest expense:
|
||||||||||||||||||||||||
|
Interest-bearing checking deposits
|
22 | (37 | ) | (15 | ) | 25 | (231 | ) | (206 | ) | ||||||||||||||
|
Money market savings
|
(12 | ) | (652 | ) | (664 | ) | (625 | ) | (6,512 | ) | (7,137 | ) | ||||||||||||
|
Regular savings
|
675 | (1,075 | ) | (400 | ) | 628 | (2,021 | ) | (1,393 | ) | ||||||||||||||
|
Time deposits
|
(2,309 | ) | (5,008 | ) | (7,317 | ) | 832 | (4,355 | ) | (3,523 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Interest on time and interest-bearing deposits
|
(1,624 | ) | (6,772 | ) | (8,396 | ) | 860 | (13,119 | ) | (12,259 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Securities sold under agreement to repurchase
|
36 | (190 | ) | (154 | ) | 39 | (438 | ) | (399 | ) | ||||||||||||||
|
Other short-term borrowings
|
(1,894 | ) | 683 | (1,211 | ) | 1,633 | 503 | 2,136 | ||||||||||||||||
|
Long-term debt
|
(1,538 | ) | 88 | (1,450 | ) | (1,731 | ) | (895 | ) | (2,626 | ) | |||||||||||||
|
Subordinated notes and capital securities
|
(75 | ) | 32 | (43 | ) | (76 | ) | (363 | ) | (439 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Interest on borrowings
|
(3,471 | ) | 613 | (2,858 | ) | (135 | ) | (1,193 | ) | (1,328 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest expense
|
(5,095 | ) | (6,159 | ) | (11,254 | ) | 725 | (14,312 | ) | (13,587 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 3,739 | $ | 2,674 | $ | 6,413 | $ | 2,293 | $ | 100 | $ | 2,393 | ||||||||||||
|
|
||||||||||||||||||||||||
| 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, 2010, 2009 and 2008 have been
calculated using the Corporation’s federal applicable rate of 35.0%.
|
2010 versus 2009
Net interest income on a tax-equivalent basis for the year ended December 31, 2010
increased $6.4 million, or 9.0% compared to 2009. The tax-equivalent net interest margin for the
year ended December 31, 2010 increased 32 basis points to 4.11% from 3.79% for 2009. The increase
in net interest income and the net interest margin during 2010 was mainly attributable to
declines in the cost of interest-bearing liabilities, primarily time deposits, and a decline in
the volume of FHLB borrowings, exceeding the declines in yields on total interest-earning assets.
The Corporation has continued to experience core deposit growth which has allowed the Corporation
to not replace or renew its maturing FHLB advances reducing FHLB advances from $92.0 million at
December 31, 2009 to $5.0 million at December 31, 2010.
26
Table of Contents
2009 versus 2008
Net interest income on a tax-equivalent basis for the year ended December 31, 2009
increased $2.4 million, or 3.5% compared to 2008 primarily due to increased volume in commercial
real estate and construction loans, commercial business loans and lease financings, along with
decreased rates on money market savings, time deposits and savings accounts. These increases were
partially offset by decreased rates on commercial business loans and commercial real estate and
commercial construction loans. The tax-equivalent net interest margin was 3.79% and 3.75% for the
years ended December 31, 2009 and 2008, respectively. The tax-equivalent net interest spread was
3.49% for the year ended December 31, 2009 compared to 3.35% for the same period in 2008.
Interest Income
2010 versus 2009
Interest income on a tax-equivalent basis for the year ended December 31, 2010
decreased $4.8 million, or 4.8% from 2009. This decrease was mainly due to a 95 basis point
decrease in the average rate earned on investment securities and deposits at other banks, a 6
basis point decrease in the average rate earned on loans and an $11.1 million decrease in average
loan volume. The decline in interest income on investment securities and deposits at other banks
of $3.5 million for the year ended December 31, 2010 compared to 2009 was mostly due to the lower
interest rate environment during 2010. The decline in interest and fees earned on loans and
leases of $1.4 million for the year ended December 31, 2010 compared to 2009 was primarily due to
decreases in the average rates on residential real estate loans, commercial real estate and
construction loans and loans to individuals as well as decreases in average volume for
residential real estate loans and lease financings. These decreases were mostly attributable to
the lower interest rate environment and increased refinancing activity as well as reduced lease
origination volume. These unfavorable variances were partially offset by growth and higher
average rates of commercial business loans as well as growth in commercial real estate and
construction loans and municipal loans and leases.
2009 versus 2008
Interest income on a tax-equivalent basis for the year ended December 31, 2009
decreased $11.2 million, or 10.0% from 2008. The decrease was primarily due to an 81 basis point
decrease in the average rate earned on loans as well as a 54 basis point decrease in the average
rate earned on investments securities, deposits at other banks and federal funds sold partially
offset by a $51.2 million increase in average loan volume. Interest income on U. S. Government
obligations decreased during the year ended December 31, 2009 compared to 2008 due to a decline
in average rates that was partially offset by an increase in average volume. Interest income on
obligations of state and political subdivisions increased due to average volume increases that
were partially offset by a decline in average rates. Interest income on other debt and equity
securities decreased primarily due to average volume and rate decreases on mortgage-backed
securities. Interest income decreased on federal funds sold primarily due to decreases in the
average volume. The decline in interest and fees on loans and leases during the year ended
December 31, 2009 compared to 2008 was due primarily to average rate decreases on commercial
business loans and real estate—commercial and construction loans. The rate decreases were
attributable to the declines in the average prime rate, and one-month and three-month U.S. London
Interbank Borrowing Rate (LIBOR). The average interest yield on the commercial business loan
portfolio decreased 159 basis points for the year ended December 31, 2009 in comparison to 2008;
this was partially offset by a $25.1 million increase in volume resulting in a $5.0 million
decrease in interest income. The average interest yield on the commercial and construction real
estate loan portfolios decreased 74 basis points; this was partially offset by a $40.0 million
increase in volume resulting in a $1.2 million decline in interest income. The average volume
decline on real estate—residential of $18.1 million and average interest yield declines of 54
basis points contributed to a $2.5 million decrease in interest income.
27
Table of Contents
Interest Expense
2010 versus 2009
Interest expense for the year ended December 31, 2010 decreased $11.3 million, or 39.2%
from 2009. This decrease was mainly due to a 66 basis point decrease in the Corporation’s average
cost of deposits and an $88.9 million decrease in average borrowings. The decrease in the
Corporation’s cost of deposits was largely attributable to maturities of higher yielding time
deposit accounts. For the year ended December 31, 2010, interest expense on time deposits decreased $7.3 million. For the year ended December 31,
2010, average deposits increased by $30.5 million with increases in average regular savings of
$92.0 million and interest-bearing checking of $16.1 million partially offset by decreases in
average time deposits of $75.4 million. The Corporation’s focus on growing low cost core deposits
and the lower interest rate environment has resulted in a shift in customer deposits from time
deposits to savings accounts. In addition, the average balance of time deposits decreased, in
part, from a reduction of brokered deposits due to the Corporation’s reduced reliance on
wholesale funding sources. Interest on other short-term borrowings mainly includes interest paid
on federal funds purchased and short-term FHLB borrowings. In addition, the Bank offers an
automated cash management checking account that sweeps funds daily into a repurchase agreement
account. Interest expense on other short-term borrowings decreased $1.2 million for the year
ended December 31, 2010 compared to 2009 due to a decrease in average volume of $50.1 million
partially offset by an average rate increase of 91 basis points. Interest on long-term debt,
which consists of long-term FHLB borrowings, decreased by $1.5 million mainly due to a decline in
average volume of $43.6 million, resulting from reclasses from long-term FHLB debt to short-term
borrowings as the remaining term to maturity became one year or less.
2009 versus 2008
Interest expense for the year ended December 31, 2009 decreased $13.6 million, or 32.1%
from 2008 primarily due to a 95 basis point decrease in the Corporation’s average cost of
deposits. The average rate paid on money market savings decreased 159 basis points and the
average volume decreased $104.5 million; contributing to a $7.1 million decrease in interest
expense. The decrease in money market savings was primarily due to a $92.6 million short-term
deposit received from one customer during the first six months of 2008, and migration to higher
yielding savings accounts. Interest expense on regular savings decreased $1.4 million due to an
average rate decrease of 73 basis-points; partially offset by an average volume increase of $76.8
million. Interest on time deposits decreased $3.5 million, due to a 90 basis-point decrease in
average rate, partially offset by a $24.5 million average increase in volume.
Interest on other short-term borrowings increased $2.1 million primarily due to volume
increases of $51.3 million. Interest on long-term debt decreased $2.6 million due to an average
volume decrease of $51.5 million and an 89 basis-point decrease in the average rate paid.
Interest expense on Subordinated Capital Notes and Trust Preferred Securities decreased $439
thousand mainly due to pay-downs on the Subordinated Capital Notes.
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 and leases are
also reviewed for impairment based on discounted cash flows using the loans’ initial effective
interest rates or the fair value of the collateral for certain collateral dependent loans. Any of
the above criteria may cause the reserve to fluctuate. The provision for the years ended December
31, 2010, 2009 and 2008 was $21.6 million, $20.9 million and $8.8 million, respectively. The
increase in provision was primarily due to the migration of loans to higher-risk ratings as a
result of deterioration of underlying collateral and economic factors that began to manifest in
June 2009.
Noninterest Income
Non-interest income consists of trust department fee income, service charges on deposit
accounts, commission income, net gains (losses) on sales of securities and loans, net gains
(losses) on mortgage banking activities, net gains (losses) on interest rate swaps 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 interchange 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. Other non-interest income includes gains (losses) on
investments in partnerships, gains (losses) on sales of other real estate owned, reinsurance
income and other miscellaneous income.
28
Table of Contents
The following table presents noninterest income as of the dates indicated:
| $ Change | % Change | |||||||||||||||||||||||||||
| For the Years Ended December 31, | 2010 to | 2009 to | 2010 to | 2009 to | ||||||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Trust fee income
|
$ | 6,080 | $ | 5,536 | $ | 6,004 | $ | 544 | $ | (468 | ) | 9.8 | % | (7.8 | )% | |||||||||||||
|
Service charges on deposit accounts
|
6,693 | 7,036 | 6,808 | (343 | ) | 228 | (4.9 | ) | 3.3 | |||||||||||||||||||
|
Investment advisory commission and fee income
|
4,626 | 3,427 | 2,374 | 1,199 | 1,053 | 35.0 | 44.4 | |||||||||||||||||||||
|
Insurance commission and fee income
|
7,694 | 7,081 | 5,723 | 613 | 1,358 | 8.7 | 23.7 | |||||||||||||||||||||
|
Other service fee income
|
5,046 | 3,410 | 3,484 | 1,636 | (74 | ) | 48.0 | (2.1 | ) | |||||||||||||||||||
|
Bank owned life insurance income
|
1,270 | 1,321 | 2,791 | (51 | ) | (1,470 | ) | (3.9 | ) | (52.7 | ) | |||||||||||||||||
|
Other-than-temporary impairment on equity securities
|
(62 | ) | (1,708 | ) | (1,251 | ) | 1,646 | (457 | ) | 96.4 | (36.5 | ) | ||||||||||||||||
|
Other-than-temporary impairment on other long lived assets
|
— | (500 | ) | — | 500 | (500 | ) | N/M | N/M | |||||||||||||||||||
|
Net gain on sales of securities
|
432 | 1,150 | 280 | (718 | ) | 870 | (62.4 | ) | N/M | |||||||||||||||||||
|
Net gain on mortgage banking activities
|
2,960 | 2,378 | 82 | 582 | 2,296 | 24.5 | N/M | |||||||||||||||||||||
|
Net (loss) gain on interest rate swap
|
(1,072 | ) | 641 | — | (1,713 | ) | 641 | N/M | N/M | |||||||||||||||||||
|
Net loss on dispositions of fixed assets
|
(11 | ) | (144 | ) | (40 | ) | 133 | (104 | ) | 92.4 | N/M | |||||||||||||||||
|
Other
|
762 | 289 | 360 | 473 | (71 | ) | N/M | (19.7 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total noninterest income
|
$ | 34,418 | $ | 29,917 | $ | 26,615 | $ | 4,501 | $ | 3,302 | 15.0 | 12.4 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
2010 versus 2009
Total non-interest income increased $4.5 million, or 15.0% for the year ended December
31, 2010 compared to 2009 primarily due to increased income from trust fees, investment advisory
commissions and fees, insurance commissions and fees, other service fee income, a higher net gain
of mortgage banking activities and a litigation settlement. Additionally, the year ended December
31, 2009 was impacted by other-than-temporary impairments of $1.7 million on equity securities
and $500 thousand on other long-lived assets compared to $62 thousand of other-than-temporary
impairments recorded in the year ended December 31, 2010. These favorable variances were
partially offset by a decline in service charges on deposit accounts in part due to Regulation E,
a reduction in the net gain on sales of securities and a net loss on the interest rate swap of
$1.1 million during 2010 compared to a net gain of $641 thousand during the same period in the
prior year.
Investment advisory commissions and fee income, the primary source of income for Univest
Investments, Inc., increased $1.2 million for the year December 31, 2010 over 2009 primarily due
to an increase in the market value of client assets as well as higher business volume. Insurance
commission and fee income, the primary source of income for Univest Insurance, Inc., increased by
$613 thousand during the year ended December 31, 2010 primarily attributable to increased volume.
Other service fee income increased during the year ended December 31, 2010 primarily attributable
to increases in Mastermoney interchange fees and mortgage servicing fee income.
Service charges on deposit accounts decreased $343 thousand during the year ended December
31, 2010 over 2009 mainly due to decreased levels of insufficient fund charges. In November 2009,
the Federal Reserve Board issued a final rule that, effective July 1, 2010, in accordance with
Regulation E, prohibits financial institutions from charging consumers fees for paying overdrafts
on automated teller machine and one-time debit card transactions, unless a consumer consents, or
opts in, to the overdraft service for those types of transactions. Consumers must be provided a
notice that explains the financial institution’s overdraft services, including the fees
associated with the service, and the consumer’s choices. The Corporation implemented the
provisions of Regulation E in the third quarter of 2010.
The Corporation realized other-than-temporary impairment charges of $62 thousand on its
equity portfolio during the year ended December 31, 2010 as compared to $1.7 million for the same
period in the prior year. The Corporation carefully monitors all of its equity securities and has
not taken impairment losses on certain other under-water securities, at this time, as the
financial performance and near-term prospects of the underlying companies are not indicative of
the market deterioration of their stock. The Corporation has the positive intent and ability to
hold these securities until recovery to the Corporation’s cost basis occurs.
29
Table of Contents
During the year ended December 31, 2010, approximately $14.6 million of available for sale
securities were sold recognizing a net gain of $432 thousand. During the year ended December 31,
2009, approximately $50.8 million of securities were sold recognizing a net gain of $1.2 million.
For the year ended December 31, 2010, the Corporation recognized a net gain on mortgage
banking activities of $3.0 million compared to a net gain of $2.4 million for the same period in
2009. These gains consist of gains on sales of mortgages held for sale and fair value
adjustments on interest-rate locks and forward loan commitments. The increase in the net gain was
primarily due to an increase in volume.
For the year ended December 31, 2010, the Corporation recognized a loss of $1.1 million
related to fair value adjustments on an interest rate swap for a commercial real estate loan, due
to the decline in interest rates during 2010. This interest rate swap was terminated during the
third quarter of 2010 due to the forecasted low interest rate environment. The underlying
commercial loan had a positive fair value adjustment at the termination date of $859 thousand
which is being amortized through a reduction of interest income over the life of the loan. Fair
value adjustments on the interest rate swap for the year ended December 31, 2009 resulted in a
net gain of $641 thousand.
Other income increased by $473 thousand for the year ended December 31, compared to the same
period in the prior year mostly as a result of a litigation settlement during the first quarter
of 2010.
2009 versus 2008
Total noninterest income increased $3.3 million, or 12.4% during the year ended
December 31, 2009 compared to 2008 primarily due to increased mortgage-banking activities, and
increased investment advisory commission and fee income and insurance commission and fee income
resulting from the Trollinger and Liberty acquisitions. These increases were partially offset by
decreases in bank owned life insurance income, trust fees and increases in other than temporary
impairments on securities and other long-lived assets.
Trust fee income decreased for the year ended December 31, 2009 over 2008 primarily due to a
decrease in the market value of managed accounts. Service charges on deposit accounts increased
primarily due to non-sufficient funds fees. Investment advisory commissions and fee income
increased by $1.1 million in 2009 over 2008 due to the acquisition of the Trollinger Consulting
Group in December 2008. Insurance commissions and fee income increased by $1.4 million during the
year ended December 31, 2009 over the same period in 2008 primarily due to the acquisitions of
Liberty Benefits, Inc. and Trollinger Consulting Group in December 2008. Bank owned
life insurance income decreased by $1.5 million during 2009 primarily due to additional income
resulting from death benefit claims of $1.9 million received in 2008 partially offset by positive
changes in the cash surrender value of the underlying investments due to market conditions.
The Corporation realized impairment charges of $1.7 million on its equity portfolio during
the year ended December 31, 2009 as compared to $1.3 million for the same period in the prior
year. The Corporation determined that there was an increased severity and duration of the decline
in fair values during 2009 due to a decline in the financial stability of the underlying
companies. At December 31, 2009, the Corporation held certain equity investments for which it was
restricted from trading and had been carried at cost. During 2009, the Corporation recorded
other-than-temporary impairments on these long-lived assets of $500 thousand. The Corporation
determined that it was probable that these long-lived assets would not regain market value
equivalent to the Corporation’s cost basis within a reasonable period of time due to a decline in
the financial stability of the underlying company.
During the year ended December 31, 2009, approximately $50.8 million of securities were sold
recognizing a net gain of $1.2 million. During the year ended December 31, 2008, approximately
$58.9 million of securities were sold recognizing a net gain of $280 thousand.
The net gain on mortgage banking activities increased by $2.3 million during the year ended
December 31, 2009 due to increased volume. Sales of $142.5 million in loans held for sale during
the year ended December 31, 2009 resulted in gains of $2.2 million compared to sales of $4.4
million with gains of $82 thousand for the year ended December 31, 2008.
30
Table of Contents
Noninterest Expense
The operating costs of the Corporation are known as noninterest expense, and include,
but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense
control is very important to the management of the Corporation, and every effort is made to
contain and minimize the growth of operating expenses, and to provide technological innovation
whenever practical, as operations change or expand.
The following table presents noninterest expense as of the dates indicated:
| $ Change | % Change | |||||||||||||||||||||||||||
| For the Years Ended December 31, | 2010 to | 2009 to | 2010 to | 2009 to | ||||||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
|
Salaries and benefits
|
$ | 38,034 | $ | 37,422 | $ | 32,413 | $ | 612 | $ | 5,009 | 1.6 | % | 15.5 | % | ||||||||||||||
|
Net occupancy
|
5,476 | 5,274 | 5,230 | 202 | 44 | 3.8 | 0.8 | |||||||||||||||||||||
|
Equipment
|
3,811 | 3,438 | 3,247 | 373 | 191 | 10.8 | 5.9 | |||||||||||||||||||||
|
Marketing and advertising
|
2,318 | 1,840 | 1,499 | 478 | 341 | 26.0 | 22.7 | |||||||||||||||||||||
|
Deposit insurance premiums
|
2,670 | 3,185 | 767 | (515 | ) | 2,418 | (16.2 | ) | N/M | |||||||||||||||||||
|
Other
|
15,040 | 14,165 | 14,069 | 875 | 96 | 6.2 | 0.7 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total noninterest expense
|
$ | 67,349 | $ | 65,324 | $ | 57,225 | $ | 2,025 | $ | 8,099 | 3.1 | 14.2 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
2010 versus 2009
Total non-interest expense increased $2.0 million, or 3.1% for the year ended December
31, 2010 compared to 2009. Salaries and benefits increased $612 thousand for the year ended
December 31, 2010 as compared to the same period in the prior year mainly due to additional
personnel to grow the commercial lending and mortgage banking businesses, higher restricted stock
expense and increased incentive awards partially offset by reduced pension plan expenses and
higher deferred loan origination costs. The reduction in pension plan expenses was primarily a
result of the Corporation’s conversion to a cash balance plan effective December 31, 2009 as well
as a change in the valuation of the Corporation non-qualified pension plans associated with
projecting future changes in the Consumer Price Index. The Corporation implemented higher
deferred loan origination costs commencing during the fourth quarter of 2010 based upon an
in-depth study performed which incorporated management’s additional review time spent on loan
credits as a result of increased scrutiny of loan credits. Additionally, as more loan approvals
are currently being approved at the Committee level as opposed to individual relationship
managers, as the Corporation proactively manages its credit risk given the current economic
environment, a higher level of costs are being incurred in connection with the loan approval
process and as a result a higher level of costs are being deferred. Equipment expense increased
$373 thousand primarily as a result of increased computer software contract expenses. Marketing
and advertising expenses increased $478 thousand mainly to support a major brand campaign to
position the Corporation to take advantage of the disruption in its markets. Deposit insurance
premiums decreased $515 thousand primarily due to the FDIC special assessment which affected all
banks and resulted in an additional charge of $947 thousand to the Corporation in the second
quarter of 2009 partially offset by higher deposit insurance premiums in 2010 due to the growth
in deposits. Other expenses increased $875 thousand primarily due to increased director fees
resulting mainly from fair value adjustments on directors’ deferred fees, increased legal fees
resulting from non-performing loan activity, increased audit expenses and increased interchange
expenses.
2009 versus 2008
Total non-interest expense increased $8.1 million, or 14.2% during the year ended
December 31, 2009 compared to 2008. Salaries and benefits increased $5.0 million primarily due to
salary and benefit expenses associated with the acquisitions of Liberty Benefits, Inc. and the
Trollinger Consulting Group in December 2008, additional personnel to grow the mortgage banking
business, normal base pay increases and pension plan expense of $1.2 million. Net occupancy costs
and equipment expense increased due to expansion of the Corporation’s mortgage banking business,
the acquisition of Liberty and Trollinger, and new equipment purchases and upgrades. Marketing
and advertising expenses increased mainly due to increased brand advertising. Deposit insurance
premiums increased $2.4 million due to a special assessment of five basis points on each
FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009,
which equated to $947 thousand, credits that were utilized by the Corporation in 2008 and a 7
basis point increase in rates. Other expenses increased primarily due to an increase in the
amortization of customer-related intangibles of $759 thousand as a result of the acquisitions
stated above, partially offset by expenses associated with a claim under a rent-a-captive arrangement of $349 thousand and fee expense of $257 thousand
associated with student loans, both recognized in the 2008 period and which were not recurring in
nature.
31
Table of Contents
Tax Provision
The provision for income taxes was $3.3 million, $563 thousand and $5.8 million for the
years ended December 31, 2010, 2009 and 2008, respectively at effective rates of 17.2%, 5.0% and
21.9%, respectively. The effective tax rates reflect tax-exempt income from investments in
municipal securities, loans and bank-owned life insurance. Additionally 2009 and 2008 reflect the
benefits of tax credits generated from investments in low-income housing projects. The increase
in the effective tax rate between the years of 2010 and 2009 was primarily due to a larger
percentage of tax-exempt income to pre-tax income in 2009. The decrease in the effective tax rate
between the years of 2009 and 2008 was primarily due to a larger percentage of tax-exempt income
to pre-tax income in 2009.
Financial Condition
During 2010, total assets increased primarily due to growth in investment securities
and loans and leases partially offset by a reduction in cash and other short-term
interest-earning deposits. Detailed explanations of these fluctuations are discussed below.
ASSETS
The following table presents assets as of the dates indicated:
| At December 31, | ||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
|
||||||||||||||||
|
Cash and interest-earning deposits
|
$ | 29,187 | $ | 68,597 | $ | (39,410 | ) | (57.5 | )% | |||||||
|
Investment securities
|
467,024 | 420,045 | 46,979 | 11.2 | ||||||||||||
|
Loans held for sale
|
4,178 | 1,693 | 2,485 | N/M | ||||||||||||
|
Total loans and leases
|
1,471,186 | 1,425,980 | 45,206 | 3.2 | ||||||||||||
|
Reserve for loan and lease losses
|
(30,898 | ) | (24,798 | ) | (6,100 | ) | (24.6 | ) | ||||||||
|
Premises and equipment, net
|
34,605 | 34,201 | 404 | 1.2 | ||||||||||||
|
Goodwill and other intangibles, net
|
56,797 | 55,970 | 827 | 1.5 | ||||||||||||
|
Bank owned life insurance
|
48,010 | 46,740 | 1,270 | 2.7 | ||||||||||||
|
Accrued interest and other assets
|
53,804 | 56,993 | (3,189 | ) | (5.6 | ) | ||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 2,133,893 | $ | 2,085,421 | $ | 48,472 | 2.3 | |||||||||
|
|
||||||||||||||||
Cash and Interest-earning Deposits
Cash and interest-earning deposits decreased as of December 31, 2010 as compared to
December 31, 2009 primarily due to a decrease in cash maintained at the Federal Reserve Bank
which was utilized to purchase investment securities held for sale.
Investment Securities
The investment portfolio is managed as part of the overall asset and liability
management process to provide liquidity to the Bank, optimize income and market performance over
an entire interest rate cycle while mitigating risk. Activity in this portfolio is undertaken
primarily to manage liquidity and interest rate risk and to take advantage of market conditions
that create more economically attractive returns on these investments. The securities portfolio
consists primarily of U.S. Government agency, residential mortgage-backed and municipal
securities. Total investments increased primarily due to purchases of U.S. Government agency
securities partially offset by maturities, sales and calls of mortgage-backed securities.
32
Table of Contents
Table 3 — Investment Securities
The following table shows the carrying amount of investment securities as of the dates
indicated. Held-to-maturity and available-for-sale portfolios are combined.
| At December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
U.S. treasury
|
$ | — | $ | — | $ | 5,862 | ||||||
|
U.S. government corporations and agencies
|
188,100 | 119,992 | 98,844 | |||||||||
|
State and political subdivisions
|
108,048 | 107,566 | 100,350 | |||||||||
|
Residential mortgage-backed securities
|
85,116 | 101,376 | 131,261 | |||||||||
|
Commercial mortgage obligations
|
73,091 | 79,454 | 80,205 | |||||||||
|
Asset-backed securities
|
— | 573 | 1,211 | |||||||||
|
Other securities
|
9,684 | 9,160 | 11,625 | |||||||||
|
Equity securities
|
2,985 | 1,924 | 2,908 | |||||||||
|
|
||||||||||||
|
Total investment securities
|
$ | 467,024 | $ | 420,045 | $ | 432,266 | ||||||
|
|
||||||||||||
Table 4 — Investment Securities (Yields)
The following table shows the maturity distribution and weighted average yields of the
investment securities as of 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; hence the stated yield may not be recognized in future periods. Equity
securities 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, | ||||||||||||||||||||||||
| 2010 | 2010 | 2009 | 2009 | 2008 | 2008 | |||||||||||||||||||
| (Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
1 Year or less
|
$ | 12,205 | 1.58 | % | $ | 14,495 | 1.91 | % | $ | 10,626 | 0.67 | % | ||||||||||||
|
After 1 Year to 5 Years
|
195,127 | 1.89 | 125,349 | 3.01 | 113,380 | 4.43 | ||||||||||||||||||
|
After 5
Years to 10 Years
|
38,812 | 4.12 | 54,795 | 4.48 | 37,888 | 4.80 | ||||||||||||||||||
|
After 10 Years
|
217,895 | 4.10 | 223,482 | 4.48 | 267,464 | 5.07 | ||||||||||||||||||
|
No stated maturity
|
2,985 | 1.39 | 1,924 | 2.42 | 2,908 | 4.76 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 467,024 | 3.10 | $ | 420,045 | 3.94 | $ | 432,266 | 4.77 | |||||||||||||||
|
|
||||||||||||||||||||||||
Loans and Leases
Total gross loans and leases increased at December 31, 2010 as compared to December 31,
2009 primarily due to increases of $16.0 million in commercial, financial and agricultural loans,
$28.9 million in commercial real estate and $27.9 million in construction loans. These increases
were partially offset by a decrease of $21.4 million in residential real estate loans. Loans to
individuals decreased by $2.7 million and lease financings, net of unearned income, decreased
$3.5 million.
At December 31, 2010 there were no concentrations of loans or leases exceeding 10% of total
loans and leases other than as disclosed in Table 5.
33
Table of Contents
Table 5 — Loan and Lease Portfolio
The following table presents the composition of the loan and lease portfolio as of the
dates indicated:
| At December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
|
||||||||||||||||||||
|
Commercial, financial and agricultural
|
$ | 463,518 | $ | 447,495 | $ | 424,649 | $ | 381,826 | $ | 442,182 | ||||||||||
|
Real estate — commercial
|
516,546 | 487,688 | 399,003 | 393,686 | 352,596 | |||||||||||||||
|
Real estate — construction
|
119,769 | 91,891 | 153,506 | 134,448 | 136,331 | |||||||||||||||
|
Real estate — residential
|
245,210 | 266,622 | 316,039 | 310,571 | 305,306 | |||||||||||||||
|
Loans to individuals
|
44,087 | 46,761 | 54,212 | 72,476 | 89,217 | |||||||||||||||
|
Lease financings
|
92,617 | 95,678 | 110,095 | 68,100 | 30,186 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total gross loans and leases
|
1,481,747 | 1,436,135 | 1,457,504 | 1,361,107 | 1,355,818 | |||||||||||||||
|
Less: Unearned income
|
(10,561 | ) | (10,155 | ) | (7,612 | ) | (5,665 | ) | (2,137 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Total loans and leases
|
$ | 1,471,186 | $ | 1,425,980 | $ | 1,449,892 | $ | 1,355,442 | $ | 1,353,681 | ||||||||||
|
|
||||||||||||||||||||
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, 2010:
| Due in One | Due after One | |||||||||||||||
| Year or | Year | Due after | ||||||||||||||
| (Dollars in thousands) | Total | Less | to Five Years | Five Years | ||||||||||||
|
|
||||||||||||||||
|
Commercial, financial and agricultural
|
$ | 463,518 | $ | 319,619 | $ | 123,947 | $ | 19,952 | ||||||||
|
Real estate — commercial
|
516,546 | 202,080 | 285,678 | 28,788 | ||||||||||||
|
Real estate — construction
|
119,769 | 83,798 | 30,757 | 5,214 | ||||||||||||
|
Real estate — residential
|
245,210 | 97,044 | 46,036 | 102,130 | ||||||||||||
|
Loans to individuals
|
44,087 | 14,665 | 10,084 | 19,338 | ||||||||||||
|
Leases financings
|
82,056 | 36,235 | 45,773 | 48 | ||||||||||||
|
|
||||||||||||||||
|
Total gross loans and leases
|
$ | 1,471,186 | $ | 753,441 | $ | 542,275 | $ | 175,470 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Loans and leases with fixed predetermined interest rates
|
$ | 736,573 | $ | 168,643 | $ | 416,187 | $ | 151,743 | ||||||||
|
Loans and leases with variable or floating interest rates
|
734,613 | 584,798 | 126,088 | 23,727 | ||||||||||||
|
|
||||||||||||||||
|
Total gross loans and leases
|
$ | 1,471,186 | $ | 753,441 | $ | 542,275 | $ | 175,470 | ||||||||
|
|
||||||||||||||||
The commercial mortgages and Industrial Development Authority mortgages that are
presently being written at both fixed and floating rates of interest primarily include loans
written for three or five-year terms with a monthly payment based on a fifteen-year amortization
schedule. At each three-year or five-year anniversary date of the mortgages, the interest rate is
renegotiated and the term of the loan is extended for an additional three or five years. At each
three-year or five-year anniversary date of the mortgages, the Bank also has the right to require
payment in full. These 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 loan officers. A number of factors regarding the borrower, such as overall
financial strength, collateral values and repayment ability, are considered in deciding what
actions should be taken when determining the collectability of interest for accrual purposes.
When a loan or lease, including a loan or lease impaired, is classified as nonaccrual, the
accrual of interest on such a loan or lease is discontinued. A loan or lease is classified as
nonaccrual when the contractual payment of principal or interest has become 90 days past due or
management has serious doubts about the further collectability of principal or interest, even
though the loan or lease is currently performing. A loan or lease may remain on accrual status if
it is in the process of collection and is either guaranteed or well secured. When a loan or lease
is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest
received on nonaccrual loans and leases is either applied against principal or reported as interest
income, according to management’s judgment as to the collectability of principal.
34
Table of Contents
Loans or leases are usually restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable period of time,
and the ultimate collectability of the total contractual principal and interest is no longer in
doubt.
Total
cash basis, troubled debt restructured and nonaccrual loans and leases totaled $45.8 million at
December 31, 2010, $37.1 million at December 31, 2009, and $5.4 million at December 31, 2008; the
balance at December 31, 2010 and 2009 primarily consisted of commercial real estate, construction
and commercial, financial and agricultural loans. For the years ended December 31, 2010, 2009,
and 2008, nonaccrual loans and leases resulted in lost interest income of $2.1 million, $969
thousand, and $685 thousand, respectively. The Corporation’s ratio of nonperforming assets to
total loans and leases and other real estate owned was 3.32% as of December 31, 2010, 2.89% as of
December 31, 2009, and 0.48% as of December 31, 2008. The ratio of nonperforming assets to total
assets was 2.29% at December 31, 2010, 1.98% at December 31, 2009, and 0.33% at December 31,
2008.
At December 31, 2010, the recorded investment in loans and leases that are considered to be
impaired was $45.8 million, all of which were on a nonaccrual basis or troubled debt
restructured. The related reserve for loan and lease losses for those loans was $1.6 million. At
December 31, 2009, the recorded investment in loans and leases that were considered to be
impaired was $37.1 million, all of which were on a nonaccrual basis or troubled debt
restructured. The related reserve for loan and lease losses for those loans was $1.4 million. The
amount of the specific reserve needed for these credits could change in future periods subject to
changes in facts and judgments related to these credits. Specific reserves have been established
based on current facts and management’s judgments about the ultimate outcome of these credits.
Impaired loans and leases increased $8.7 million during 2010 mainly consisting of increases in
commercial real estate of $12.8 million, commercial, financial and agricultural of $4.3 million
partially offset by a decrease in construction loans of $8.0 million. The increase in impaired
loans was primarily due to the migration of five relationships to non-accrual status during the
third and fourth quarters of 2010. These relationships were not concentrated in any one industry
and consisted of hotel/office space; investment commercial real estate; a construction company;
and a manufacturing company. The related specific reserve for these credits was $460 thousand at
December 31, 2010 to cover deficiencies in the underlying real estate value under current market
conditions. The decrease in impaired construction loans during 2010 was largely due to a payoff
of a $6.7 million construction loan during the second quarter of 2010. Impaired loans at December
31, 2009 included two large commercial/construction real estate credits which went on non-accrual
during the third quarter of 2009. One credit was a Shared National Credit to a continuing care
retirement community in which the Corporation participated. The parent company of the community
came under financial difficulty and as a result, the parent company and all communities declared
bankruptcy. This credit was paid off in the second quarter of 2010 as discussed previously. The
second credit is for four separate facilities to a local commercial real estate developer/home
builder which aggregated to $14.6 million at December 31, 2010. There is a specific allowance on
this credit of $177 thousand at December 31, 2010 to cover deficiencies in the underlying real
estate value under current market conditions. The borrower does not have the resources to develop
these properties themselves; therefore, the properties must be sold. The Corporation will
continue to closely monitor this credit relationship and may have to provide additional reserve
in future quarters related to this credit.
During 2009, the Corporation acquired five other real estate owned properties, four of which
were sold during 2010. Two other real estate owned properties were acquired in 2010, one of which
was sold during the fourth quarter of 2010. At December 31, 2010, the Corporation owned two other
real estate owned properties which were commercial properties. One of the commercial properties
was written down by $359 thousand during the first quarter of 2010. The other real estate owned
balance was $2.4 million and $3.4 million at December 31, 2010 and 2009, respectively.
35
Table of Contents
Table 7 — Nonaccrual, Past
Due and Troubled Debt Restructured Loans and Leases, and Other Real Estate
Owned
The following
table details the aggregate principal balance of loans and leases
classified as nonaccrual, past due and troubled debt restructured as of the dates indicated:
| At December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Nonaccruing loans and leases:
|
||||||||||||||||||||
|
Commercial, financial and agricultural
|
$ | 7,627 | $ | 3,275 | $ | 520 | $ | 3,473 | $ | 4,480 | ||||||||||
|
Real estate — commercial
|
28,183 | 14,005 | 1,758 | 1,036 | 1,794 | |||||||||||||||
|
Real estate — construction
|
6,874 | 14,872 | 1,640 | 2,308 | 2,169 | |||||||||||||||
|
Real estate — residential
|
1,625 | 572 | 813 | — | — | |||||||||||||||
|
Loans to individuals
|
21 | — | — | — | — | |||||||||||||||
|
Leases financings
|
902 | 774 | 298 | 61 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total nonaccruing loans and leases
|
45,232 | 33,498 | 5,029 | 6,878 | 8,443 | |||||||||||||||
|
Troubled debt restructured loans and leases, not included above
|
550 | 3,611 | 380 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total impaired loans and leases
|
$ | 45,782 | $ | 37,109 | $ | 5,409 | $ | 6,878 | $ | 8,443 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Accruing loans and leases 90 days or more past due:
|
||||||||||||||||||||
|
Commercial, financial and agricultural
|
$ | — | $ | 134 | $ | 315 | $ | 1,147 | $ | 48 | ||||||||||
|
Real estate — commercial
|
— | — | 299 | 243 | — | |||||||||||||||
|
Real estate — residential
|
314 | 273 | 175 | 401 | 227 | |||||||||||||||
|
Loans to individuals
|
382 | 319 | 356 | 126 | 485 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total accruing loans and leases, 90 days or more past due
|
$ | 696 | $ | 726 | $ | 1,145 | $ | 1,917 | $ | 760 | ||||||||||
|
|
||||||||||||||||||||
|
Total non-performing loans and leases
|
$ | 46,478 | $ | 37,835 | $ | 6,554 | $ | 8,795 | $ | 9,203 | ||||||||||
|
|
||||||||||||||||||||
|
Other real estate owned
|
$ | 2,438 | $ | 3,428 | $ | 346 | $ | — | $ | — | ||||||||||
|
|
||||||||||||||||||||
|
Total non-performing assets
|
$ | 48,916 | $ | 41,263 | $ | 6,900 | $ | 8,795 | $ | 9,203 | ||||||||||
|
|
||||||||||||||||||||
Reserve for Loan and Lease Losses
Management believes the reserve for loan and lease losses is maintained at a level that
is adequate to absorb known and inherent losses in the loan and lease portfolio. Management’s
methodology to determine the adequacy of and the provision 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 losses is determined through a monthly evaluation of reserve
adequacy. This analysis takes into consideration the growth of the loan and lease portfolio, the
status of past-due loans and leases, current economic conditions, various types of lending
activity, policies, real estate and other loan commitments, and significant changes in charge-off
activity. Nonaccrual loans and leases, and those which are troubled
debt restructured, are evaluated
individually. All other loans and leases are evaluated as pools. Based on historical loss
experience, loss factors are determined giving consideration to the areas noted in the first
paragraph and applied to the pooled loan and lease categories to develop the general or allocated
portion of the reserve. Loans are also reviewed for impairment based on discounted cash flows
using the loans’ initial effective interest rate or the fair value of the collateral for certain
collateral-dependent loans. Management also reviews the activity within the reserve to determine
what actions, if any, should be taken to address differences between estimated and actual losses.
Any of the above factors may cause the provision to fluctuate.
Wholesale leasing portfolios are purchased by the Bank’s subsidiary, Univest Capital. Credit
losses on these purchased portfolios are largely the responsibility of the seller up to pre-set
dollar amounts initially equal to 10 to 20 percent of the portfolio purchase amount. The dollar
amount of recourse for purchased portfolios is inclusive of cash holdbacks and purchase
discounts. Purchased wholesale leasing portfolios outstanding equaled $9.4 million at December
31, 2010.
36
Table of Contents
The reserve for loan and lease losses is based on management’s evaluation of the loan or
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 and lease, in the case of
non-collateral dependent borrowings, will not be realized. Certain impaired loans are reported at
the present value of expected future cash flows using the loan’s initial effective interest rate,
or at the loan’s observable market price or the fair value of the collateral, less cost to sell,
if the loan is collateral dependent.
The reserve for loan and lease losses consists of allocated reserve and unallocated reserve
categories. The allocated reserve is comprised of reserves established on specific loans and
leases, and class reserves based on historical loan and lease loss experience, current trends,
and management assessments. The unallocated reserve is based on both general economic conditions
and other risk factors in the Corporation’s individual markets and portfolios and is to account
for a level of imprecision in management’s estimation process and the potential volatility in the
aforementioned markets and portfolios.
The specific reserve element is based on a regular analysis of impaired commercial and real
estate loans. For these loans, the specific reserve established is based on an analysis of
related collateral value, cash flow considerations and, if applicable, guarantor capacity.
The class reserve element is determined by an internal loan and lease grading process in
conjunction with associated allowance factors. The Corporation revises the class allowance
factors whenever necessary, but no less than quarterly, in order to address improving or
deteriorating credit quality trends or specific risks associated with a given loan or lease pool
classification.
The Corporation maintains a reserve in other liabilities for off-balance sheet credit
exposures that currently are unfunded in categories with historical loss experience.
Table 8 — Allocated, Other Loan and Lease Loss Reserves
The reserve for loan and lease losses is made up of the allocated reserve and the
unallocated portion. The following table summarizes the two categories as of the dates indicated:
| At December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Allocated
|
$ | 29,479 | $ | 23,744 | $ | 12,387 | ||||||
|
Unallocated
|
1,419 | 1,054 | 731 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 30,898 | $ | 24,798 | $ | 13,118 | ||||||
|
|
||||||||||||
Allocated reserves at December 31, 2010 increased by $5.7 million compared to December
31, 2009 primarily due to an increase in the historical loss factor related to non-criticized
commercial real estate/construction loans partially offset by a decrease in the allocated
reserves for commercial, financial and agricultural loans resulting from a decrease in the level
of criticized loans and a decrease in the adjusted historical loss factor related to criticized
loans. Allocated reserves at December 31, 2009 increased by $11.4 million compared to December
31, 2008 mainly due to the migration of commercial, financial, agricultural loans and commercial
real estate/construction loans to higher-risk ratings including criticized and non-performing
loan categories as a result of deterioration of underlying collateral and economic factors.
Unallocated reserves increased in 2010 by $365 thousand and in 2009 by $323 thousand primarily
due to economic volatility. As a result, the allowance for loan and lease losses as a percentage
of total loans and leases increased to 2.10% at December 31, 2010 from 1.74% at December 31, 2009
and from 0.90% at December 31, 2008. The allowance for loan and lease losses to nonperforming
loans and leases equaled 66.48% at December 31, 2010, 65.54% at December 31, 2009, and 200.15% at
December 31, 2008. At December 31, 2010 the specific allowance on impaired loans was $1.6
million, or 3.5% of the balance of impaired loans of $45.8 million. At December 31, 2009, the
specific allowance on impaired loans was $1.4 million, or 3.8% of the impaired loan balance of
$37.1 million. At December 31, 2008 the specific allowance on impaired loans was $36 thousand, or
0.64% of the balance of impaired loans of $5.4 million. Management closely monitors the credit
worthiness and the value of underlying collateral as a commercial credit becomes past-due. These
factors along with historical and economic trends, and management’s assumptions, are taken into
consideration in providing the allowance for loan and lease losses. When the loan becomes
impaired and is placed on non-accrual, a specific allowance is created for the impaired loan.
37
Table of Contents
Table 9 — Summary of Loan and Lease Loss Experience
The following table presents average loans and leases and summarizes loan and
lease loss experience as of the dates indicated:
| For the Years Ended December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Average amount of loans and leases outstanding
|
$ | 1,442,085 | $ | 1,453,174 | $ | 1,401,971 | $ | 1,367,017 | $ | 1,317,711 | ||||||||||
|
Loan and lease loss reserve at beginning of period
|
$ | 24,798 | $ | 13,118 | $ | 13,086 | $ | 13,283 | $ | 13,363 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial, financial and agricultural loans
|
3,436 | 4,116 | 6,194 | 1,143 | 2,034 | |||||||||||||||
|
Real estate loans
|
10,565 | 2,167 | 1,392 | 499 | — | |||||||||||||||
|
Loans to individuals
|
891 | 1,470 | 1,217 | 1,272 | 959 | |||||||||||||||
|
Lease financings
|
2,213 | 2,695 | 502 | 106 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total charge-offs
|
17,105 | 10,448 | 9,305 | 3,020 | 2,993 | |||||||||||||||
|
|
||||||||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial, financial and agricultural loans
|
129 | 332 | 134 | 225 | 171 | |||||||||||||||
|
Real estate loans
|
772 | 33 | 28 | 95 | 168 | |||||||||||||||
|
Loans to individuals
|
227 | 434 | 315 | 337 | 359 | |||||||||||||||
|
Lease financings
|
512 | 443 | 91 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total recoveries
|
1,640 | 1,242 | 568 | 657 | 698 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net charge-offs
|
15,465 | 9,206 | 8,737 | 2,363 | 2,295 | |||||||||||||||
|
Provisions to loan and lease loss reserve
|
21,565 | 20,886 | 8,769 | 2,166 | 2,215 | |||||||||||||||
|
|
||||||||||||||||||||
|
Loan and lease loss reserve at end of period
|
$ | 30,898 | $ | 24,798 | $ | 13,118 | $ | 13,086 | $ | 13,283 | ||||||||||
|
|
||||||||||||||||||||
|
Ratio of net charge-offs to average loans and leases
|
1.07 | % | 0.63 | % | 0.62 | % | 0.17 | % | 0.17 | % | ||||||||||
|
|
||||||||||||||||||||
The increase in charge-offs during 2010 compared to 2009 was primarily due to the
increase in real estate loans charge-offs due to the prolonged down economic cycle and were not
concentrated in any one industry. The increase in charge-offs during 2009 compared to 2008 was
mainly due to the increase in lease financings charge-offs due to the deterioration in the
economy impacting small businesses, the primary customer base of the leasing portfolio. These
increases were offset by a reduction of charge-off activity for commercial, financial and
agricultural loans. Loans and leases that are charged-off are considered to be permanently
impaired.
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 as of
the dates indicated:
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial, financial
and agricultural
loans
|
$ | 9,630 | 31.5 | % | $ | 12,148 | 31.4 | % | $ | 6,432 | 29.3 | % | $ | 6,295 | 28.2 | % | $ | 6,963 | 32.6 | % | ||||||||||||||||||||
|
Real estate loans
|
17,165 | 59.9 | 9,534 | 59.3 | 4,800 | 59.9 | 4,836 | 61.9 | 4,266 | 58.7 | ||||||||||||||||||||||||||||||
|
Loans to individuals
|
734 | 3.0 | 887 | 3.3 | 581 | 3.7 | 730 | 5.3 | 1,005 | 6.6 | ||||||||||||||||||||||||||||||
|
Lease financings
|
1,950 | 5.6 | 1,175 | 6.0 | 574 | 7.1 | 356 | 4.6 | 171 | 2.1 | ||||||||||||||||||||||||||||||
|
Unallocated
|
1,419 | N/A | 1,054 | N/A | 731 | N/A | 869 | N/A | 878 | N/A | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 30,898 | 100.0 | % | $ | 24,798 | 100.0 | % | $ | 13,118 | 100.0 | % | $ | 13,086 | 100.0 | % | $ | 13,283 | 100.0 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
The ratio of the reserve for loan and lease losses to total loans and leases was 2.10%
at December 31, 2010. The allocation of the allowance for real estate loans increased by $7.6
million at December 31, 2010 compared to December 31, 2009 mainly due to an increase in the
historical loss factor related to non-criticized commercial real estate/construction loans which
incorporated the Corporation’s higher level of net charge-offs during 2010 relative to its
previous historical average for these types of loans. In addition, the allowance was impacted
slightly by increased volume of non-criticized commercial real estate/construction loans.
Allocated reserves for lease financings increased by $775 thousand at December 31, 2010 compared
to December 31, 2009 mainly due to an increase in the historical loss factor based upon the
Corporation’s continued higher level of net charge-offs. Allocated reserves for commercial,
financial and agricultural loans decreased by $2.5 million at December 31, 2010 from December 31,
2009 primarily due to a decrease in the level of criticized loans as well as a decrease in the
adjusted historical loss factor related to criticized loans.
38
Table of Contents
The ratio of the reserve for loan and lease losses to total loans and leases was 1.74% at
December 31, 2009. The allocation of the allowance for commercial, financial and agricultural
loans increased by $5.7 million at December 31, 2009 compared to December 31, 2008 mainly due to the migration of loans to
higher risk categories including criticized and non-performing loan categories as a result of
deterioration of underlying collateral and economic factors. Allocated reserves for real estate
loans increased by $4.7 million at December 31, 2009 compared to December 31, 2008 primarily due
to the migration of commercial real estate/construction loans to higher-risk ratings including
criticized and non-performing loan categories as a result of deterioration of underlying
collateral and economic factors. Allocated reserves for lease financings increased by $601
thousand at December 31, 2009 from December 31, 2008 mostly due to an increase in the historical
loss factor which incorporated the Corporation’s higher level of net charge-offs during 2009
relative to its previous historical average for lease financings.
Goodwill and Other Intangible Assets
The Corporation has completed the 2010 and 2009 annual impairment tests on goodwill and
other intangible assets and no impairment was noted. There can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
Goodwill and other intangible assets have been recorded on the books of the Corporation in
connection with acquisitions. The Corporation has covenants not to compete, intangible assets due
to branch acquisitions, core deposit intangibles, customer-related intangibles and mortgage
servicing rights, which are not deemed to have an indefinite life and therefore will continue to
be amortized over their useful life using the present value of projected cash flows. The
amortization for these intangible assets was $1.5 million for the years ended December 31, 2010
and 2009 and $642 thousand for the year ended December 31, 2008. The Corporation also
has goodwill of $51.3 million, which is deemed to be an indefinite intangible asset and is not
amortized.
Accrued Interest and Other Assets
The FDIC Board implemented an institutional prepaid FDIC assessment to recapitalize the
Deposit Insurance Fund in the Fourth Quarter of 2009. The amount was paid on December 30, 2009
for the Fourth Quarter 2009, and for all of 2010, 2011 and 2012. This assessment was based on an
estimated 5% annual growth rate in deposits during 2010, 2011 and 2012; and a 3 basis-point
increase in the base assessment rate at September 30, 2009 to be applied in 2011 and 2012. The
Bank paid $9.0 million to the FDIC on December 30, 2009. At December 31, 2010, $6.1 million
remained in a prepaid asset account. The prepaid amount of $6.1 million has a zero percent
risk-weighting for risk-based capital ratio calculations. The remaining prepaid amount will be
expensed over the 2011 though 2012 period as the actual FDIC assessment is determined for each
interim quarterly period. Any excess prepaid amounts may be utilized up to December 30, 2014 at
which time any excess will be returned to the Bank.
At December 31, 2010 and 2009, the Bank held $3.3 million in Federal Reserve Bank stock as
required by the Federal Reserve Bank. The Bank is required to hold stock in the FHLB in relation
to the level of outstanding borrowings. The Bank held FHLB stock of $7.1 million and $7.4 million
as of December 31, 2010 and 2009, respectively. On December 23, 2008, the FHLB announced that it
would be suspending the payment of dividends and the repurchase of excess capital stock in-order
to rebuild its capital levels. This is due to the other-than-temporary impairment write down
required on their private-label mortgage portfolio which could reduce their capital below
required levels. Additionally, the FHLB might require its members to increase its capital stock
requirement. On October 29, 2010, the FHLB repurchased a limited amount of excess capital stock.
The FHLB will make decisions on future repurchases of excess capital stock on a quarterly basis.
Based on current information from the FHLB, Management believes that if there is any impairment
in the stock it is temporary. Therefore, as of December 31, 2010, the FHLB stock is recorded at
cost.
LIABILITIES
The following table presents liabilities as of the dates indicated:
| At December 31, | ||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
|
||||||||||||||||
|
Deposits
|
$ | 1,686,270 | $ | 1,564,257 | $ | 122,013 | 7.8 | % | ||||||||
|
Short-term borrowings
|
114,871 | 183,379 | (68,508 | ) | (37.4 | ) | ||||||||||
|
Long-term borrowings
|
28,994 | 30,684 | (1,690 | ) | (5.5 | ) | ||||||||||
|
Accrued expenses and other liabilities
|
37,534 | 39,294 | (1,760 | ) | (4.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Total liabilities
|
$ | 1,867,669 | $ | 1,817,614 | $ | 50,055 | 2.8 | |||||||||
|
|
||||||||||||||||
39
Table of Contents
Deposits
Total deposits increased during 2010 primarily due to increases in savings deposits of
$67.1 million, noninterest-bearing demand deposits of $28.4 million and interest-bearing demand
deposits of $59.3 million. These increases were partially offset by decreases in time deposits of
$32.8 million. Deposit growth resulted mainly from the Corporation’s successful marketing
strategy to take advantage of the disruption in its market place. The Corporation’s focus on
growing low cost core deposits and the lower interest rate environment has resulted in a shift in
customer deposits from time deposits to savings accounts.
Table 10 — Deposits
The following table summarizes the average amount of deposits for the periods
indicated:
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Noninterest-bearing demand deposits
|
$ | 259,303 | $ | 224,417 | $ | 223,353 | ||||||
|
Interest-bearing checking deposits
|
178,679 | 162,615 | 144,415 | |||||||||
|
Money market savings
|
303,012 | 305,113 | 409,586 | |||||||||
|
Regular savings
|
445,721 | 353,748 | 276,908 | |||||||||
|
Time deposits
|
432,919 | 508,337 | 483,872 | |||||||||
|
|
||||||||||||
|
Total average deposits
|
$ | 1,619,634 | $ | 1,554,230 | $ | 1,538,134 | ||||||
|
|
||||||||||||
The following table summarizes the maturities of time deposits with balances of $100
thousand or more at December 31, 2010:
| Due Over | ||||||||||||||||
| Three | Due Over Six | |||||||||||||||
| Due Three | Months to | Months to | Due Over | |||||||||||||
| Months or | Six | Twelve | Twelve | |||||||||||||
| (Dollars in thousands) | Less | Months | Months | Months | ||||||||||||
|
|
||||||||||||||||
|
Time deposits
|
$ | 31,340 | $ | 45,403 | $ | 32,452 | $ | 41,520 | ||||||||
Borrowings
Long-term borrowings at December 31, 2010, included $3.4 million in Subordinated
Capital Notes, $20.6 million of Trust Preferred Securities and $5.0 million in long-term
borrowings from the FHLB. Short-term borrowings typically include securities sold under agreement
to repurchase, federal funds purchased, Federal Reserve Bank discount window borrowings and
short-term FHLB borrowings. Short-term borrowings decreased mainly due to FHLB maturities of
$87.0 million partially offset by an increase in federal funds purchased of $24.6 million. At
December 31, 2010, the Bank also had outstanding short-term letters of credit with the FHLB
totaling $15.0 million which were utilized to collateralize seasonal public funds deposits.
Table 11 — Short Term Borrowings
The following table details key information pertaining to securities sold under
agreement to repurchase on an overnight basis as of the dates indicated:
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Balance at December 31
|
$ | 90,271 | $ | 95,624 | $ | 81,230 | ||||||
|
Weighted average interest rate at year end
|
0.30 | % | 0.50 | % | 0.49 | % | ||||||
|
Maximum amount outstanding at any month’s end
|
$ | 109,712 | $ | 133,140 | $ | 92,962 | ||||||
|
Average amount outstanding during the year
|
$ | 97,667 | $ | 91,390 | $ | 84,254 | ||||||
|
Weighted average interest rate during the year
|
0.40 | % | 0.60 | % | 1.12 | % | ||||||
40
Table of Contents
SHAREHOLDERS’ EQUITY
The following table presents the shareholders’ equity as of the dates indicated:
| At December 31, | ||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
|
||||||||||||||||
|
Common stock
|
$ | 91,332 | $ | 91,332 | $ | — | — | % | ||||||||
|
Additional paid-in capital
|
59,080 | 60,126 | (1,046 | ) | (1.7 | ) | ||||||||||
|
Retained earnings
|
151,978 | 150,507 | 1,471 | 1.0 | ||||||||||||
|
Accumulated other comprehensive loss
|
(6,766 | ) | (524 | ) | (6,242 | ) | N/M | |||||||||
|
Treasury stock
|
(29,400 | ) | (33,634 | ) | 4,234 | 12.6 | ||||||||||
|
|
||||||||||||||||
|
Total shareholders’ equity
|
$ | 266,224 | $ | 267,807 | $ | (1,583 | ) | (0.6 | ) | |||||||
|
|
||||||||||||||||
Total shareholders’ equity decreased slightly since December 31, 2009 primarily due to
an increase in other comprehensive loss of $6.2 million, of which $4.5 million is a reduction in
unrealized gains on available for sale securities. This decrease was partially offset by
issuances of treasury stock of $4.4 million in connection with the Corporation’s employee stock
purchase, dividend reinvestment and stock incentive plans.
Treasury stock decreased primarily due to shares issued for the employee stock purchase
plan, the dividend reinvestment plan and restricted stock awards. There is a buyback program in
place that allows the Corporation to purchase an additional 643,782 shares of its outstanding
common stock in the open market or in negotiated transactions.
Accumulated other comprehensive income related to securities of $884 thousand and $5.4
million, net of taxes, is included in shareholders’ equity at December 31, 2010 and 2009,
respectively. Accumulated other comprehensive income (loss) related to securities is the
unrealized gain (loss), or difference between the book value and fair value, on the
available-for-sale investment portfolio, net of taxes. The period-to-period loss in accumulated
other comprehensive income (loss) was a result of decreases in the fair values of municipal bonds
and other mortgage-backed securities.
Accumulated other comprehensive income related to an interest rate swap, net of taxes,
amounted to $320 thousand and $1.1 million at December 31, 2010 and 2009, respectively.
Accumulated other comprehensive income (loss) related to an interest-rate swap reflects the
current fair value of the swap used for cash flow hedging purposes, net of taxes.
Accumulated other comprehensive loss related to pension and other post-retirement benefits,
net of taxes, amounted to $8.0 million and $7.0 million at December 31, 2010 and 2009,
respectively. The change in the accumulated other comprehensive income loss related to pension
and other post-retirement benefits represent the changes in the actuarial gains and losses and
the prior service costs and credits that arise during the period.
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, 2010, the Corporation had a Tier 1 capital ratio of 14.17% and
total risked-based capital ratio of 15.47%. At December 31, 2009, the Corporation had a Tier 1
capital ratio of 14.41% and total risked-based capital ratio of 15.76%. The Corporation continues
to be in the “well-capitalized” category under regulatory standards. Details on the capital
ratios can be found in Note 20 “Regulatory Matters” of this Form 10-K along with a discussion on
dividend and other restrictions.
The decrease in the Corporation’s risk-based capital ratios is attributable to asset growth
which was funded by increased deposits.
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.
41
Table of Contents
The Corporation uses both an interest-sensitivity gap analysis and a simulation model to
quantify its exposure to interest rate risk. The Corporation uses the gap analysis to identify
and monitor long-term rate exposure and uses a simulation model to measure the short-term rate
exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of
declining or rising interest rates on the net interest margin over a one-year horizon. The
simulation uses existing portfolio rate and repricing information, combined with assumptions
regarding future loan and deposit growth, future spreads, prepayments on residential mortgages,
and the discretionary pricing of non-maturity assets and liabilities.
On March 24, 2009, the Corporation entered into a $22.0 million notional interest rate swap,
which had been classified as a fair value hedge on a real estate-commercial loan. Under the terms
of the swap agreement, the Corporation paid a fixed rate of 6.49% and received a floating rate
which is based on the one month LIBOR with a 357 basis point spread and a maturity date of April
1, 2019. The Corporation performed an assessment of the hedge at inception, and at
re-designation. During the fourth quarter of 2009, the Corporation participated $5.0 million of
the hedged real estate-commercial loan and de-designated the hedge relationship. During the first
quarter of 2010, the Corporation re-designated $17.0 million of the interest rate swap. Upon
re-designation, $17.0 million of the swap had some ineffectiveness and the $5.0 million remained
undesignated. During the third quarter of 2010, the Corporation terminated the swap. At December
31, 2009, the interest rate swap had a positive fair value of $1.2 million which was classified
on the balance sheet in other assets. The underlying commercial loan had a positive fair value
adjustment on the termination date of $859 thousand which is being amortized through a reduction
of interest income over the remaining life. At December 31, 2009, the underlying commercial loan
had a negative fair value adjustment of $431 thousand, which was classified on the balance sheet
as a component of loans and leases. For this interest rate swap, the Corporation recognized fair
value adjustments which resulted in a loss of $1.1 million and a gain of $641 thousand for the
years ended December 31, 2010 and 2009, respectively. The fair value gains and losses related to
this interest rate swap are classified as a component of net (loss) gain on interest rate swap in
the Corporation’s consolidated statements of income.
On December 23, 2008, the Corporation entered into a cash flow hedge with a notional amount
of $20.0 million that had the effect of converting the variable rates on trust preferred
securities to a fixed rate. Under the terms of the swap agreement, the Corporation pays a fixed
rate of 2.65% and receives a floating rate based on the three month LIBOR with a maturity date of
January 7, 2019. At December 31, 2010, the interest rate swap had a positive fair value of $492
thousand, which was classified on the balance sheet as a component of other assets, and was
determined to be highly effective in offsetting the changes in the cash flows of the hedged item.
The fair value of the interest rate swap, net of taxes, of $320 thousand was recorded as a
component of accumulated other comprehensive loss on the balance sheet. At December 31, 2009, the
interest rate swap had a positive fair value of $1.8 million, which was classified on the balance
sheet as a component of other assets, and was determined to be highly effective in offsetting the
value of the hedged item. The fair value of the interest rate swap, net of taxes, of $1.1 million
was recorded as a component of accumulated other comprehensive loss on the balance sheet. The
cash payments on the interest rate swap of $468 thousand and $377 thousand for the years ended
December 31, 2010 and 2009, respectively, were recorded as a component of interest expense on the
income statement. The Corporation expects that approximately $469 thousand of the net gain in
accumulated other comprehensive loss will be reclassified as a reduction of interest expense
within the next twelve months. Interest rate swaps in which the Corporation pays a floating rate
and receives a fixed rate are used to reduce the impact of changes in interest rates on the
Corporation’s net income.
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 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.
42
Table of Contents
The Corporation focuses on both assessing the borrower’s capacity and willingness to repay
and on obtaining sufficient collateral. Commercial and industrial loans are generally secured by
the borrower’s assets and by personal guarantees. Commercial real estate loans are originated
primarily within the Eastern 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 residential mortgage loans that
are secured by the underlying 1- to 4-family residential properties. 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 and credit card 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 at origination are generally limited to 80%. Other
credit considerations may warrant higher combined loan-to-value ratios and are generally insured
by private mortgage insurance.
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 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 leases and deposit
withdrawals. The Corporation manages its liquidity risk by measuring and monitoring its liquidity
sources and estimated funding needs. The Corporation has a contingency funding plan in place to
address liquidity needs in the event of an institution-specific or a systemic financial crisis.
Sources of Funds
Core deposits and cash management repurchase agreements (Repos) have historically been
the most significant funding sources for the Corporation. These deposits and Repos are generated
from a base of consumer, business and public customers primarily located in Bucks and Montgomery
counties, Pennsylvania. The Corporation faces increased competition for these deposits from a
large array of financial market participants, including banks, thrifts, mutual funds, security
dealers and others.
The Corporation supplements its core funding with money market funds it holds for the
benefit of various trust accounts. These funds are fully collateralized by the Bank’s investment
portfolio and are at current money market mutual fund rates. This funding source is subject to
changes in the asset allocations of the trust accounts.
The Bank may purchase Certificates from the Pennsylvania Local Government Investment Trust
(PLGIT) to augment its short-term fixed funding sources. The PLGIT deposits are public funds
collateralized with a letter of credit that PLGIT maintains with the FHLB; therefore, Univest
National Bank is not required to provide collateral on these deposits. At December 31, 2010 and
2009, the Bank had no PLGIT deposits.
43
Table of Contents
The Corporation, through the Bank, has short-term and long-term credit facilities with the
FHLB with a maximum borrowing capacity of approximately $387.9 million. At December 31, 2010 and
2009, total outstanding short-term and long-term borrowings with the FHLB totaled $5.0 million
and $92.0 million, respectively. At December 31, 2010, the Bank also had outstanding
short-term letters of credit with the FHLB totaling $15.0 million which were utilized to
collateralize seasonal public funds deposits. The maximum borrowing capacity 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 credit lines with several correspondent banks totaling $82.0
million at December 31, 2010 and 2009. Outstanding borrowings under these lines totaled $24.6
million at December 31, 2010; there were no outstanding balances at December 31, 2009. 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, 2010 and 2009, the Corporation had no outstanding
borrowings under this line.
Cash Requirements
The Corporation has cash requirements including various financial obligations,
including contractual obligations and commitments that require cash payments. The following
contractual obligations and commitments table presents, as of December 31, 2010, significant
fixed and determinable contractual obligations to third parties. The most significant obligation,
in both the under and over one year time period, is for the Bank to repay its certificates of
deposit Short-term borrowings consisting of securities sold under agreements to repurchase
constitute the next largest payment obligation. The Bank anticipates meeting these obligations by
continuing to provide convenient depository and cash management services through its branch
network, thereby replacing these contractual obligations with similar fund sources at rates that
are competitive in our market.
The table also shows the amounts and expected maturities of significant commitments as of
December 31, 2010. 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 a party to financial instruments with off-balance sheet risk in the
normal course of business to manage the Corporation’s exposure to fluctuation in interest rates.
These financial instruments include commitments to extend credit, standby and commercial letters
of credit and forward contracts. These financial instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract or notional amounts of these financial instruments reflect the
extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation’s exposure to credit loss in the event of non-performance by the other party
to the financial instrument for commitments to extend credit and standby and commercial letters
of credit is represented by the contractual amount of those instruments. The Corporation uses the
same credit policies in making commitments and conditional obligations as it does for on-balance
sheet instruments. Unless noted otherwise, the Corporation does not require and is not required
to pledge collateral or other security to support financial instruments with credit risk. These
commitments expire over time as detailed in Table 12. For further information regarding the
Corporation’s commitments, refer to Footnote 16 of the Consolidated Financial Statements, herein.
44
Table of Contents
Table 12 — Contractual Obligations
The following table sets forth contractual obligations and other commitments
representing required and potential cash outflows, including interest payable, as of December 31,
2010:
| Payments Due by Period | ||||||||||||||||||||
| Due after | ||||||||||||||||||||
| Due in One | Due after | Four | ||||||||||||||||||
| Year or | One Year to | Years to | Due in Over | |||||||||||||||||
| (Dollars in thousands) | Total | Less | Three Years | Five Years | Five Years | |||||||||||||||
|
|
||||||||||||||||||||
|
Securities sold under agreement to repurchase(a)
|
$ | 90,271 | $ | 90,271 | $ | — | $ | — | $ | — | ||||||||||
|
Other short-term borrowings
|
24,601 | 24,601 | — | — | — | |||||||||||||||
|
Long-term debt(b)
|
5,380 | 188 | 5,192 | — | — | |||||||||||||||
|
Subordinated capital notes(c)
|
3,446 | 1,172 | 2,274 | — | — | |||||||||||||||
|
Trust preferred securities(d)
|
36,291 | 688 | 1,377 | 1,377 | 32,849 | |||||||||||||||
|
Time deposits(e)
|
435,591 | 264,812 | 84,364 | 37,039 | 49,376 | |||||||||||||||
|
Operating leases
|
28,781 | 2,092 | 3,644 | 3,435 | 19,610 | |||||||||||||||
|
Standby and commercial letters of credit
|
63,808 | 62,099 | 1,681 | 28 | — | |||||||||||||||
|
Commitments to extend credit (f)
|
430,817 | 153,441 | 31,323 | 11,849 | 234,204 | |||||||||||||||
|
Derivative loan commitments (g)
|
799 | 799 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total contractual obligations
|
$ | 1,119,785 | $ | 600,163 | $ | 129,855 | $ | 53,728 | $ | 336,039 | ||||||||||
|
|
||||||||||||||||||||
|
Notes:
|
||
| (a) |
Includes interest on variable rate obligations. The interest expense is based
upon the fourth quarter average interest rate. 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.
|
|
| (b) |
Interest expense is projected based upon the weighted average interest rate of
long-term debt.
|
|
| (c) |
Includes interest on both fixed and variable rate obligations. The interest
expense associated with the variable rate obligations is based upon interest rates in
effect at December 31, 2010. 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.
|
|
| (d) |
Includes interest on variable rate obligations. The interest expense is based
upon interest rates in effect at December 31, 2010. 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. The trust preferred securities mature in 2033 and
interest is calculated to this maturity date. The first non-penalized call date was
in 2008. The Corporation may choose to call these securities as a result of interest
rate fluctuations and capital needs without penalty for the remainder of the term.
|
|
| (e) |
Includes interest on both fixed and variable rate obligations. The interest
expense is based upon the fourth quarter average interest rate. 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.
|
|
| (f) |
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.
|
|
| (g) |
Includes the fair value of these contractual arrangements at December 31,
2010.
|
|
| 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
course of its lending, leasing and deposit taking activities, the Corporation is subject to
changes in the economic value and/or earnings potential of these assets and liabilities due to
changes in interest rates. The Corporation’s Investment Asset/Liability Management Committee
manages 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 uses both an interest-rate sensitivity gap analysis and a simulation model
to quantify its exposure to interest rate risk. The Corporation uses the gap analysis to identify
and monitor long-term rate exposure and uses a simulation model to measure the short-term rate
exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of
declining or rising interest rates on the net interest margin over a one-year horizon. The
simulation uses existing portfolio rate and repricing information, combined with assumptions
regarding future loan and deposit growth, future spreads, prepayments on residential mortgages,
and the discretionary pricing of non-maturity assets and liabilities. The Corporation is
permitted to use interest-rate swaps and interest-rate caps/floors with indices that correlate to on-balance sheet
instruments, to modify its indicated net interest sensitivity to levels deemed to be appropriate
based on the Corporation’s current economic outlook.
45
Table of Contents
At December 31, 2010, the simulation, based upon forward-looking assumptions, projects that
the Corporation’s greatest interest margin exposure to interest-rate risk would occur if interest
rates decreased from present levels. Given the assumptions, a 200 basis point parallel shift in
the yield curve applied on a ramp-up basis would cause the Corporation’s net interest margin,
over a 1-year horizon, to be approximately 2.28% more than it would be if market rates would
remain unchanged. A 100 basis point (a 200 basis point ramp down would not be relevant in the
current market conditions) parallel shift in the yield curve applied on a ramp-down basis would
cause the Corporation’s net interest margin, over a 1-year horizon, to be approximately 2.31%
less than it would be if market rates would remain unchanged. Policy limits have been established
which allow a tolerance for no more than approximately a 5.0% negative impact to the interest
margin resulting from a 200 basis point parallel yield curve shift over a forward looking
12-month period. See Management’s Discussion and Analysis of Financial Condition and Results of
Operations — “Net Interest Income” and “Asset/Liability Management, Liquidity” and Table 13.
Table 13 — Interest Sensitivity Analysis
Interest Sensitivity Analysis at December 31, 2010:
| After | ||||||||||||||||||||||||
| Three | After | |||||||||||||||||||||||
| Within | Months to | One Year | Over | |||||||||||||||||||||
| Three | Twelve | to Five | Five | Non-Rate | ||||||||||||||||||||
| (Dollars in thousands) | Months | Months | Years | Years | Sensitive | Total | ||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Cash and due from banks
|
$ | — | $ | — | $ | — | $ | — | $ | 11,624 | $ | 11,624 | ||||||||||||
|
Interest-earning deposits with other
banks
|
17,563 | — | — | — | — | 17,563 | ||||||||||||||||||
|
Investment securities
|
62,392 | 65,879 | 207,862 | 130,891 | — | 467,024 | ||||||||||||||||||
|
Loans held for sale
|
4,178 | — | — | — | — | 4,178 | ||||||||||||||||||
|
Loans and leases, net of reserve for
loan and lease losses:
|
654,395 | 221,958 | 472,030 | 122,803 | (30,898 | ) | 1,440,288 | |||||||||||||||||
|
Other assets
|
— | — | — | — | 193,216 | 193,216 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 738,528 | $ | 287,837 | $ | 679,892 | $ | 253,694 | $ | 173,942 | $ | 2,133,893 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Liabilities and shareholders’ equity:
|
||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | — | $ | — | $ | — | $ | — | $ | 271,125 | $ | 271,125 | ||||||||||||
|
Demand deposits — interest-bearing
|
344,799 | 29,535 | 155,550 | — | — | 529,884 | ||||||||||||||||||
|
Savings deposits
|
26,903 | 70,310 | 370,298 | — | — | 467,511 | ||||||||||||||||||
|
Time deposits
|
52,895 | 131,521 | 186,887 | 46,447 | — | 417,750 | ||||||||||||||||||
|
Borrowed funds
|
138,115 | — | 5,750 | — | — | 143,865 | ||||||||||||||||||
|
Other liabilities
|
— | — | — | — | 37,534 | 37,534 | ||||||||||||||||||
|
Shareholders’ equity
|
— | — | — | — | 266,224 | 266,224 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and
shareholders’ equity
|
$ | 562,712 | $ | 231,366 | $ | 718,485 | $ | 46,447 | $ | 574,883 | $ | 2,133,893 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Incremental gap
|
$ | 175,816 | $ | 56,471 | $ | (38,593 | ) | $ | 207,247 | $ | (400,941 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Cumulative gap
|
$ | 175,816 | $ | 232,287 | $ | 193,694 | $ | 400,941 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cumulative gap as a percentage of
interest-earning assets
|
8.97 | % | 11.85 | % | 9.88 | % | 20.46 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Footnote 1,
“Summary of Significant Accounting Policies” of this Form 10-K.
46
Table of Contents
| 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 | ||||
| 48 | ||||
|
|
||||
| 49 | ||||
|
|
||||
| 50 | ||||
|
|
||||
| 51 | ||||
|
|
||||
| 52 | ||||
|
|
||||
| 54 | ||||
47
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Univest Corporation of Pennsylvania:
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, 2010 and 2009, and the related consolidated
statements of income, changes in shareholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2010. 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, 2010 and 2009, and the
results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2010, 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,
2010, based on criteria established in
Internal Control — Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March
4, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
Philadelphia, PA
March 4, 2011
March 4, 2011
48
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA
| At December 31, | ||||||||
| (Dollars in thousands, except share data) | 2010 | 2009 | ||||||
|
|
||||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$ | 11,624 | $ | 20,535 | ||||
|
Interest-earning deposits with other banks
|
17,563 | 48,062 | ||||||
|
Investment securities held-to-maturity (fair value $32 and $108 at
December 31, 2010 and 2009, respectively)
|
32 | 103 | ||||||
|
Investment securities available-for-sale
|
466,992 | 419,942 | ||||||
|
Loans held for sale
|
4,178 | 1,693 | ||||||
|
Loans and leases
|
1,471,186 | 1,425,980 | ||||||
|
Less: Reserve for loan and lease losses
|
(30,898 | ) | (24,798 | ) | ||||
|
|
||||||||
|
Net loans and leases
|
1,440,288 | 1,401,182 | ||||||
|
|
||||||||
|
Premises and equipment, net
|
34,605 | 34,201 | ||||||
|
Goodwill
|
51,320 | 50,393 | ||||||
|
Other intangibles, net of accumulated amortization of $9,495 and $8,015 at
December 31, 2010 and 2009, respectively
|
5,477 | 5,577 | ||||||
|
Bank owned life insurance
|
48,010 | 46,740 | ||||||
|
Accrued interest and other assets
|
53,804 | 56,993 | ||||||
|
|
||||||||
|
Total assets
|
$ | 2,133,893 | $ | 2,085,421 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES
|
||||||||
|
Demand deposits, noninterest-bearing
|
$ | 271,125 | $ | 242,691 | ||||
|
Demand deposits, interest-bearing
|
529,884 | 470,572 | ||||||
|
Savings deposits
|
467,511 | 400,452 | ||||||
|
Time deposits
|
417,750 | 450,542 | ||||||
|
|
||||||||
|
Total deposits
|
1,686,270 | 1,564,257 | ||||||
|
|
||||||||
|
Securities sold under agreements to repurchase
|
90,271 | 95,624 | ||||||
|
Other short-term borrowings
|
24,600 | 87,755 | ||||||
|
Accrued expenses and other liabilities
|
37,534 | 39,294 | ||||||
|
Long-term debt
|
5,000 | 5,190 | ||||||
|
Subordinated notes
|
3,375 | 4,875 | ||||||
|
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding junior subordinated debentures of Univest
(Trust Preferred Securities)
|
20,619 | 20,619 | ||||||
|
|
||||||||
|
Total liabilities
|
1,867,669 | 1,817,614 | ||||||
|
|
||||||||
|
SHAREHOLDERS’ EQUITY
|
||||||||
|
Common stock, $5 par value; 48,000,000 shares authorized at
December 31, 2010
and 2009; 18,266,404 shares issued at December 31, 2010 and
and 2009, respectively; and 16,648,303 and 16,465,083 shares
outstanding at
December 31, 2010 and 2009, respectively
|
91,332 | 91,332 | ||||||
|
Additional paid-in capital
|
59,080 | 60,126 | ||||||
|
Retained earnings
|
151,978 | 150,507 | ||||||
|
Accumulated other comprehensive loss, net of tax benefit
|
(6,766 | ) | (524 | ) | ||||
|
Treasury stock, at cost; 1,618,101 shares and 1,801,321 shares at
December 31, 2010 and 2009, respectively
|
(29,400 | ) | (33,634 | ) | ||||
|
|
||||||||
|
Total shareholders’ equity
|
266,224 | 267,807 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 2,133,893 | $ | 2,085,421 | ||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
49
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Interest income
|
||||||||||||
|
Interest and fees on loans and leases:
|
||||||||||||
|
Taxable
|
$ | 71,661 | $ | 74,002 | $ | 82,874 | ||||||
|
Exempt from federal income taxes
|
4,339 | 3,815 | 3,742 | |||||||||
|
|
||||||||||||
|
Total interest and fees on loans and leases
|
76,000 | 77,817 | 86,616 | |||||||||
|
|
||||||||||||
|
Interest and dividends on investment securities:
|
||||||||||||
|
Taxable
|
10,377 | 14,014 | 16,762 | |||||||||
|
Exempt from federal income taxes
|
4,554 | 4,512 | 4,269 | |||||||||
|
Interest on federal funds sold and securities purchased
under agreements to resell
|
— | — | 394 | |||||||||
|
Other interest income
|
72 | 16 | 16 | |||||||||
|
|
||||||||||||
|
Total interest income
|
91,003 | 96,359 | 108,057 | |||||||||
|
|
||||||||||||
|
Interest expense
|
||||||||||||
|
Interest on demand deposits
|
1,302 | 1,981 | 9,324 | |||||||||
|
Interest on savings deposits
|
2,555 | 2,955 | 4,348 | |||||||||
|
Interest on time deposits
|
10,054 | 17,371 | 20,894 | |||||||||
|
Interest on short-term borrowings
|
2,116 | 3,481 | 1,744 | |||||||||
|
Interest on long-term borrowings
|
1,442 | 2,935 | 6,000 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
17,469 | 28,723 | 42,310 | |||||||||
|
|
||||||||||||
|
Net interest income
|
73,534 | 67,636 | 65,747 | |||||||||
|
Provision for loan and lease losses
|
21,565 | 20,886 | 8,769 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for loan and lease losses
|
51,969 | 46,750 | 56,978 | |||||||||
|
|
||||||||||||
|
Noninterest income
|
||||||||||||
|
Trust fee income
|
6,080 | 5,536 | 6,004 | |||||||||
|
Service charges on deposit accounts
|
6,693 | 7,036 | 6,808 | |||||||||
|
Investment advisory commission and fee income
|
4,626 | 3,427 | 2,374 | |||||||||
|
Insurance commission and fee income
|
7,694 | 7,081 | 5,723 | |||||||||
|
Other service fee income
|
5,046 | 3,410 | 3,484 | |||||||||
|
Bank owned life insurance income
|
1,270 | 1,321 | 2,791 | |||||||||
|
Other-than-temporary impairment on equity securities
|
(62 | ) | (1,708 | ) | (1,251 | ) | ||||||
|
Other-than-temporary impairment on other long lived assets
|
— | (500 | ) | — | ||||||||
|
Net gain on sales of securities
|
432 | 1,150 | 280 | |||||||||
|
Net gain on mortgage banking activities
|
2,960 | 2,378 | 82 | |||||||||
|
Net (loss) gain on interest rate swap
|
(1,072 | ) | 641 | — | ||||||||
|
Net loss on dispositions of fixed assets
|
(11 | ) | (144 | ) | (40 | ) | ||||||
|
Other
|
762 | 289 | 360 | |||||||||
|
|
||||||||||||
|
Total noninterest income
|
34,418 | 29,917 | 26,615 | |||||||||
|
|
||||||||||||
|
Noninterest expense
|
||||||||||||
|
Salaries and benefits
|
38,034 | 37,422 | 32,413 | |||||||||
|
Net occupancy
|
5,476 | 5,274 | 5,230 | |||||||||
|
Equipment
|
3,811 | 3,438 | 3,247 | |||||||||
|
Marketing and advertising
|
2,318 | 1,840 | 1,499 | |||||||||
|
Deposit insurance premiums
|
2,670 | 3,185 | 767 | |||||||||
|
Other
|
15,040 | 14,165 | 14,069 | |||||||||
|
|
||||||||||||
|
Total noninterest expense
|
67,349 | 65,324 | 57,225 | |||||||||
|
|
||||||||||||
|
Income before income taxes
|
19,038 | 11,343 | 26,368 | |||||||||
|
Applicable income taxes
|
3,282 | 563 | 5,778 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | ||||||
|
|
||||||||||||
|
Net income per share:
|
||||||||||||
|
Basic
|
$ | 0.95 | $ | 0.75 | $ | 1.60 | ||||||
|
Diluted
|
0.95 | 0.75 | 1.60 | |||||||||
|
Dividends declared
|
0.80 | 0.80 | 0.80 | |||||||||
See accompanying notes to consolidated financial statements.
50
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||
| Common | Other | Additional | ||||||||||||||||||||||||||
| Shares | Comprehensive | Common | Paid-in | Retained | Treasury | |||||||||||||||||||||||
| (Dollars in thousands, except share and per share data) | Outstanding | (Loss) Income | Stock | Capital | Earnings | Stock | Total | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2007
|
12,830,609 | $ | (1,768 | ) | $ | 74,370 | $ | 22,211 | $ | 143,066 | $ | (39,153 | ) | $ | 198,726 | |||||||||||||
|
Cumulative effect of adoption of a new accounting
principle on January 1, 2008
|
(1,550 | ) | (1,550 | ) | ||||||||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||||||
|
Net Income for 2008
|
20,590 | 20,590 | ||||||||||||||||||||||||||
|
Other comprehensive loss, net of income tax benefit
of $3,689:
|
||||||||||||||||||||||||||||
|
Unrealized gain on investment securities
available-for-sale
|
382 | 382 | ||||||||||||||||||||||||||
|
Unrealized loss on swap
|
(149 | ) | (149 | ) | ||||||||||||||||||||||||
|
Unrecognized pension costs
|
(7,084 | ) | (7,084 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
13,739 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cash dividends declared ($0.80 per share)
|
(10,302 | ) | (10,302 | ) | ||||||||||||||||||||||||
|
Stock issued under dividend reinvestment and
employee stock purchase plans and other employee
benefit programs
|
85,415 | 64 | 1,950 | 2,014 | ||||||||||||||||||||||||
|
Exercise of stock options,
|
87,134 | (88 | ) | 12 | 1,904 | 1,828 | ||||||||||||||||||||||
|
Tax benefits on stock based compensation
|
204 | 204 | ||||||||||||||||||||||||||
|
Purchases of treasury stock
|
(69,235 | ) | (1,614 | ) | (1,614 | ) | ||||||||||||||||||||||
|
Restricted stock awards granted
|
4,591 | (94 | ) | 94 | — | |||||||||||||||||||||||
|
Vesting of restricted stock awards
|
162 | 162 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2008
|
12,938,514 | (8,619 | ) | 74,370 | 22,459 | 151,816 | (36,819 | ) | 203,207 | |||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||||||
|
Net Income for 2009
|
10,780 | 10,780 | ||||||||||||||||||||||||||
|
Other comprehensive income, net of income tax
of $4,359:
|
||||||||||||||||||||||||||||
|
Unrealized gain on investment securities
available-for-sale
|
3,092 | 3,092 | ||||||||||||||||||||||||||
|
Unrealized gain on swap
|
1,299 | 1,299 | ||||||||||||||||||||||||||
|
Unrecognized pension benefits
|
3,704 | 3,704 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
18,875 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cash dividends declared ($0.80 per share)
|
(11,786 | ) | (11,786 | ) | ||||||||||||||||||||||||
|
Stock issued under dividend reinvestment and
employee stock purchase plans and other employee
benefit programs
|
95,973 | 27 | (344 | ) | 2,375 | 2,058 | ||||||||||||||||||||||
|
Issuance of common stock
|
3,392,500 | 16,962 | 38,635 | 55,597 | ||||||||||||||||||||||||
|
Exercise of stock options
|
2,547 | (10 | ) | 43 | 60 | 93 | ||||||||||||||||||||||
|
Purchases of treasury stock
|
(11,642 | ) | (370 | ) | (370 | ) | ||||||||||||||||||||||
|
Restricted stock awards granted
|
47,191 | (1,118 | ) | (2 | ) | 1,120 | — | |||||||||||||||||||||
|
Vesting of restricted stock awards
|
133 | 133 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
16,465,083 | (524 | ) | 91,332 | 60,126 | 150,507 | (33,634 | ) | 267,807 | |||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||||||
|
Net Income for 2010
|
15,756 | 15,756 | ||||||||||||||||||||||||||
|
Other comprehensive loss, net of income
tax benefit of $3,362:
|
||||||||||||||||||||||||||||
|
Unrealized loss on investment securities
available-for-sale
|
(4,489 | ) | (4,489 | ) | ||||||||||||||||||||||||
|
Unrealized loss on swap
|
(830 | ) | (830 | ) | ||||||||||||||||||||||||
|
Unrecognized pension costs
|
(923 | ) | (923 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
9,514 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cash dividends declared ($0.80 per share)
|
(13,284 | ) | (13,284 | ) | ||||||||||||||||||||||||
|
Stock issued under dividend reinvestment and
employee stock purchase plans and other employee
benefit programs
|
123,750 | (605 | ) | 2,794 | 2,189 | |||||||||||||||||||||||
|
Purchases of treasury stock
|
(8,512 | ) | (153 | ) | (153 | ) | ||||||||||||||||||||||
|
Restricted stock awards granted
|
67,982 | (1,206 | ) | (396 | ) | 1,593 | (9 | ) | ||||||||||||||||||||
|
Vesting of restricted stock awards
|
160 | 160 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2010
|
16,648,303 | $ | (6,766 | ) | $ | 91,332 | $ | 59,080 | $ | 151,978 | $ | (29,400 | ) | $ | 266,224 | |||||||||||||
|
|
||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
51
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | ||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Provision for loan and lease losses
|
21,565 | 20,886 | 8,769 | |||||||||
|
Depreciation of premises and equipment
|
2,517 | 2,357 | 2,246 | |||||||||
|
Other-than-temporary impairment on equity securities
|
62 | 1,708 | 1,251 | |||||||||
|
Other-than-temporary impairment on other long-lived assets
|
— | 500 | — | |||||||||
|
Net gain on sales of investment securities
|
(432 | ) | (1,150 | ) | (280 | ) | ||||||
|
Net gain on mortgage banking activities
|
(2,960 | ) | (2,378 | ) | (82 | ) | ||||||
|
Net loss (gain) on interest rate swap
|
1,072 | (641 | ) | — | ||||||||
|
Net gain on sales of loans and leases held for investment
|
— | — | (116 | ) | ||||||||
|
Net loss on dispositions of fixed assets
|
11 | 144 | 40 | |||||||||
|
Net loss (gain) on sales and write-downs of other real estate owned
|
377 | 207 | (9 | ) | ||||||||
|
Bank owned life insurance income
|
(1,270 | ) | (1,321 | ) | (2,791 | ) | ||||||
|
Net (accretion) amortization on investment securities
|
(18 | ) | 97 | (339 | ) | |||||||
|
Amortization, fair market value adjustments and capitalization of other intangibles
|
100 | 238 | 642 | |||||||||
|
Premium accretion on deposits and FHLB borrowings
|
(190 | ) | (447 | ) | (453 | ) | ||||||
|
Deferred tax benefit
|
(2,247 | ) | (4,480 | ) | (124 | ) | ||||||
|
Other adjustments to reconcile net income to cash provided by operating activities
|
— | (115 | ) | 47 | ||||||||
|
Originations of loans held for sale
|
(170,266 | ) | (143,615 | ) | (4,976 | ) | ||||||
|
Proceeds from the sale of loans held for sale
|
170,098 | 144,688 | 4,514 | |||||||||
|
Decrease (Increase) in interest receivable and other assets
|
3,734 | (10,168 | ) | (3,352 | ) | |||||||
|
(Decrease) increase in accrued expenses and other liabilities
|
(3,063 | ) | 2,893 | (3,389 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
34,846 | 20,183 | 22,188 | |||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Net cash paid due to acquisitions, net of cash acquired
|
(927 | ) | (157 | ) | (9,720 | ) | ||||||
|
Net capital expenditures
|
(2,932 | ) | (3,289 | ) | (6,752 | ) | ||||||
|
Proceeds from maturities of securities held-to-maturity
|
72 | 336 | 44,971 | |||||||||
|
Proceeds from maturities of securities available-for-sale
|
69,478 | 58,424 | 167,768 | |||||||||
|
Proceeds from the sales and calls of securities held-to-maturity
|
— | 930 | 28,800 | |||||||||
|
Proceeds from sales and calls of securities available-for-sale
|
231,023 | 198,835 | 152,186 | |||||||||
|
Purchases of investment securities held-to-maturity
|
— | — | (73,275 | ) | ||||||||
|
Purchases of investment securities available-for-sale
|
(352,989 | ) | (242,202 | ) | (337,295 | ) | ||||||
|
Purchases of lease financings
|
(4,816 | ) | (4,178 | ) | (49,671 | ) | ||||||
|
Net (increase) decrease loans and leases
|
(55,800 | ) | 15,153 | (56,524 | ) | |||||||
|
Proceeds from sales of loans and leases
|
— | — | 2,679 | |||||||||
|
Decrease (increase) in interest-bearing deposits
|
30,499 | (42,796 | ) | (4,764 | ) | |||||||
|
Proceeds from sales of other real estate owned
|
1,843 | 304 | — | |||||||||
|
Net decrease in federal funds sold
|
— | — | 11,748 | |||||||||
|
Proceeds from bank owned life insurance
|
— | — | 3,984 | |||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(84,549 | ) | (18,640 | ) | (125,865 | ) | ||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net increase (decrease) in deposits
|
122,013 | 36,929 | (5,269 | ) | ||||||||
|
Net (decrease) increase in short-term borrowings
|
(68,508 | ) | (97,162 | ) | 75,954 | |||||||
|
Issuance of long-term debt
|
— | — | 30,000 | |||||||||
|
Repayment of subordinated debt
|
(1,500 | ) | (1,875 | ) | (1,500 | ) | ||||||
|
Issuance of common stock
|
— | 55,597 | — | |||||||||
|
Purchases of treasury stock
|
(153 | ) | (370 | ) | (1,614 | ) | ||||||
|
Stock issued under dividend reinvestment and employee stock purchase plans
|
2,189 | 2,058 | 2,014 | |||||||||
|
Proceeds from exercise of stock options, including tax benefits
|
— | 93 | 2,032 | |||||||||
|
Cash dividends paid
|
(13,249 | ) | (11,078 | ) | (10,275 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by (used in) financing activities
|
40,792 | (15,808 | ) | 91,342 | ||||||||
|
|
||||||||||||
|
Net decrease in cash and due from banks
|
(8,911 | ) | (14,265 | ) | (12,335 | ) | ||||||
|
Cash and due from banks at beginning of year
|
20,535 | 34,800 | 47,135 | |||||||||
|
|
||||||||||||
|
Cash and due from banks at end of year
|
$ | 11,624 | $ | 20,535 | $ | 34,800 | ||||||
|
|
||||||||||||
52
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Supplemental disclosures of cash flow information
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | 21,202 | $ | 30,440 | $ | 44,593 | ||||||
|
Income taxes, net of refunds received
|
2,730 | 5,080 | 8,180 | |||||||||
|
Assets acquired through acquisition
|
— | — | 159 | |||||||||
|
Goodwill and other intangibles due to acquisitions
|
927 | 157 | 9,561 | |||||||||
See accompanying notes to consolidated financial statements.
53
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA
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”.)
Organization
Univest Corporation of Pennsylvania (the Corporation) through its wholly owned
subsidiary, Univest National 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. and Univest Insurance,
Inc., provides financial planning, investment management, insurance products and brokerage
services. Univest Investments, Univest Insurance, Univest Capital and Univest Reinsurance
Company, a wholly owned subsidiary of the Corporation, were formed to enhance the traditional
banking and trust services provided by the Bank. Univest Investments, Univest Insurance, Univest
Capital and Univest Reinsurance do not currently meet the quantitative thresholds for separate
disclosure provided as a business segment. Therefore, the Corporation currently has one
reportable segment, “Community Banking,” and strategically is how the Corporation operates and
has positioned itself in the marketplace. The Corporation’s activities are interrelated, each
activity is dependent, and performance is assessed based on how each of these activities
supports the others. Accordingly, significant operating decisions are based upon analysis of the
Corporation as one Community Banking operating segment. The Bank serves Montgomery, Bucks,
Chester and Lehigh counties of Pennsylvania through thirty-two banking offices and provides
banking and trust services to the residents and employees of twelve retirement communities, a
work site office which performs a payroll check cashing service and an express banking center
located in the Montgomery Mall. Banking services are also available on-line at the Corporation’s
websites at www.univest.net and www.univestdirect.com.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its
wholly owned subsidiaries, the Bank, Univest Delaware, Inc. and Univest Reinsurance Company. All
significant intercompany balances and transactions have been eliminated in consolidation and
certain prior period amounts have been reclassified to conform to current-year presentation. The
Corporation’s former subsidiary, Univest Realty Corporation, was liquidated during the fourth
quarter of 2010 and the net assets were transferred to the Corporation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles 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.
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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 as of December, 31, 2010 or 2009. 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 accumulated 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 effective yield method for mortgage-backed securities
and the constant yield method for all other securities.
Management evaluates debt securities, which comprise of U. S. Government, Government
Sponsored Agencies, municipalities and other issuers, for other-than-temporary impairment and
considers the current economic conditions, the length of time and the extent to which the fair
value has been less than cost, interest rates and the bond rating of each security. All of the
debt securities are rated as investment grade and Management believes that it will not incur any
losses. The unrealized losses on the Corporation’s investments in debt securities are temporary
in nature since they are primarily related to market interest rates and are not related to the
underlying credit quality of the issuers within our investment portfolio. The Corporation does
not have the intent to sell the debt securities and believes it is more likely than not, that it
will not have to sell the securities before recovery of their cost basis. The 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 has not recognized any
other-than-temporary impairment charges on debt securities during 2008 through 2010.
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 certain equity securities will not regain market value equivalent 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. The Corporation has the positive intent to hold
these securities and believes it is more likely than not, that it will not have to sell these
securities until recovery to the Corporation’s cost basis occurs.
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 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 an impaired loan or lease, 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 in the
current year is reversed. Interest received on nonaccrual loans and leases is either applied
against principal or reported as interest income, according to management’s judgment as to the
collectability of principal. 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.
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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 adequate to absorb known and inherent losses in the loan and lease portfolio.
Management’s methodology to determine the adequacy of and the provision 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 losses is determined through a monthly evaluation of reserve
adequacy. This analysis takes into consideration the growth of the loan and lease portfolio, the
status of past-due loans and leases, current economic conditions, various types of lending
activity, policies, real estate and other loan commitments, and significant changes in
charge-off activity. Nonaccrual loans and leases, and those which are troubled debt restructured, are
evaluated individually. All other loans and leases are evaluated as pools. Based on historical
loss experience, loss factors are determined giving consideration to the areas noted in the
first paragraph and applied to the pooled loan and lease categories to develop the general or
allocated portion of the reserve. Loans are also reviewed for impairment based on discounted
cash flows using the loans’ initial effective interest rate or the fair value of the collateral
for certain collateral-dependent loans. Management also reviews the activity within the reserve
to determine what actions, if any, should be taken to address differences between estimated and
actual losses. Any of the above factors may cause the provision to fluctuate.
The reserve for loan and lease losses is based on management’s evaluation of the loan and
lease portfolio under current economic conditions and such other factors, which deserve
recognition in estimating loan and lease losses. This evaluation is inherently subjective, as it
requires estimates including the amounts and timing of future cash flows expected to be received
on impaired loans 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, in the case of non-collateral dependent
borrowings, will not be realized. Certain impaired loans and leases are reported at the present
value of expected future cash flows using the loan’s or lease’s initial effective interest rate,
or at the loan’s or lease’s observable market price or the fair value of the collateral if the
loan or lease is collateral dependent. For commercial impaired loans
which are collateral dependent, the fair value of collateral is based
on appraisals performed by qualified licensed appraisals hired by the
Corporation less management’s costs to sell. Appraisals are
updated at least 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 fully collateral dependent loan, a
charge-off to the reserve for loan 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, current trends,
and management assessments. The unallocated reserve is based on both general economic conditions
and other risk factors in the Corporation’s individual markets and portfolios, and is to account
for a level of imprecision in management’s estimation process.
The specific reserve element is based on a regular analysis of impaired commercial and real
estate loans and leases. The specific reserve established for these loans and leases is based on
a careful 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 in order to address improving or deteriorating credit quality trends
or specific risks associated with a given loan or lease pool classification.
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The Corporation maintains an unallocated reserve to recognize the existence of credit
exposures that are within the loan and lease portfolio although currently undetected. There are
many factors considered such as
the inherent delay in obtaining information regarding a customer’s financial condition or
changes in their business condition, the judgmental nature of loan and lease evaluations, the
delay in the interpretation of economic trends and the judgmental nature of collateral
assessments. The Corporation also maintains a reserve in other liabilities for off-balance sheet
credit exposures that currently are unfunded. 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 bank 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.
Business Combinations and Intangible Assets
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. The Corporation completes annual impairment tests
for goodwill and other intangible assets. Identifiable intangible assets are evaluated for
impairment if events and circumstances indicate a possible impairment. There can be no assurance
that future goodwill impairment tests will not result in a charge to earnings. Customer related
intangibles are being amortized over their estimated useful lives of five to twelve years. Core
deposit intangibles are being amortized over their average estimated useful lives of eight
years. The covenants not to compete are being amortized over their three- to five-year
contractual lives.
Mortgage servicing rights (MSRs) are recognized as separate assets when mortgage loans are
sold and the rights are retained. Capitalized MSRs are reported in other assets 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. MSRs are evaluated for impairment based
upon the fair value of the rights as compared to amortized cost. The Corporation estimates the
fair value of MSRs 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. MSRs 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 (BOLI) at the net cash surrender
value of the policy. 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 on
the statement of cash flows under investing activities.
On January 1, 2008, the Corporation recognized a cumulative-effect adjustment to retained
earnings totaling $1.6 million related to accounting for certain endorsement split-dollar life
insurance arrangements in connection with the adoption of new authoritative accounting guidance.
The new accounting guidance requires the Corporation to recognize a liability for the future
death benefit for agreements that provide an employee with a death benefit in a postretirement/
termination period.
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Other Real Estate Owned
Other real estate owned represents properties acquired through customers’ loan
defaults and is included in accrued interest and 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
hedged item 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 a
third party’s pricing models that incorporate assumptions about market conditions and risks that
are current as of the reporting date.
The Corporation may use interest-rate swap agreements to modify the interest rate
characteristics from variable to fixed or fixed to floating in order to reduce the impact of
interest rate changes on future net interest income. 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 the
statement of operations, 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 sheets with the corresponding gain or loss
being recognized in current earnings. The 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 statement of operations. 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-backed securities to or from third-party investors
to hedge the effect of changes in interest rates on the value of the interest rate locks.
Forward sales 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
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 end of the period.
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 operations.
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.
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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 non-interest expense in
the year they are assessed and paid and are treated as a non-deductible expense for tax
purposes. Interest is recorded in non-interest expense in the year it is assessed and paid and
is treated as a deductible expense for tax purposes.
Retirement Plan, Supplemental Plans and Other Postretirement Benefit Plans
Substantially all employees who were hired before December 8, 2009 are covered by a
noncontributory retirement plan. Effective December 31, 2009, the benefits under the
noncontributory retirement plan, in its current form, was 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. Additionally, employees hired on or after December 8, 2009 are no longer 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 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 also 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.
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 will continue to serve and realizing that if these
employees would enter into competition with the Corporation, it would suffer severe financial
loss. The SNQPP was established prior to the existence of a 401(k) Deferred Savings Plan, the
Employee Stock Purchase Plan and the Long-Term Incentive Plans and therefore is not actively
offered to new participants. These non-qualified plans are accounted for under guidance for
deferred compensation arrangements. These plans were previously combined with other pension
plans in the Corporation’s footnote disclosures in its historical filings of Form 10-Q and 10-K
reports. Commencing with December, 31, 2010, the disclosures for the SNQPP are separately
disclosed for all presentation periods and did not have a material impact on the disclosures.
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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 fair value of restricted stock is equivalent to the fair
value on the date of grant and is amortized over the vesting period.
Dividend Reinvestment and Employee Stock Purchase Plans
The Univest Dividend Reinvestment Plan (the Reinvestment Plan) allows for the issuance
of 1,968,750 shares of common stock. During 2010 and 2009, 98,158 and 75,936 shares,
respectively, were issued under the Reinvestment Plan, with 941,376 shares available for future
purchase as of December 31, 2010.
The 1996 Employee Stock Purchase Plan (the Purchase Plan) allows for the issuance of
984,375 shares of common stock. Employees may elect to make contributions to the Purchase Plan
in an aggregate amount not less than 2% nor more than 10% of such employee’s total compensation.
These contributions are then used to purchase stock during an offering period determined by the
Corporation’s Administrative Committee. The purchase price of the stock is based solely on the
market price of the shares at the date of purchase. Compensation expense is recognized if the
discount is greater than 5% of the fair value. During 2010 and 2009, 25,514 and 14,412 shares,
respectively, were issued under the Purchase Plan, with 818,289 shares available for future
purchase as of December 31, 2010.
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 represents income available to common shareholders divided by
the weighted-average number of common shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been outstanding if option common shares
had been issued, 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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Variable Interest Entities
Variable interest entities (VIE’s) are certain legal entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support. A company must consolidate a VIE if the company has a variable
interest or interests that provide the corporation with a controlling financial interest in
the VIE which includes the power to direct the activities of a VIE that most significantly
impact the VIE’S economic performance, the obligation to absorb expected losses of the VIE that
could potentially be significant to the VIE and the right to receive expected benefits of the
VIE that could potentially be significant to the VIE.
The accounting standards related to Subsidiary Trusts, as interpreted by the SEC, disallow
consolidation of Subsidiary Trusts in the financial statements of the Corporation. As a result,
securities that were issued by the trusts (Trust Preferred Securities) are not included on the
Corporation’s consolidated balance sheets. The junior subordinated debentures issued by the
Parent Company to the Subsidiary Trusts, which have the same total balance and rate as the
combined equity securities and trust preferred securities issued by the Subsidiary Trusts remain
in long-term debt.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued an Accounting
Standards Codification Update to clarify when an entity is to perform Step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts. Goodwill is tested
for impairment using a two-step approach. In Step 1, the fair value of the reporting unit is
compared to its carrying amount. Step 2 is used to measure the amount of the goodwill
impairment, if any, by comparing the carrying amount of the reporting unit’s goodwill to its
implied fair value. This update requires an entity with reporting units with zero or negative
carrying amounts, to perform Step 2 of the goodwill impairment test if it is more likely than
not that a goodwill impairment exists. In determining whether it is more likely than not that
goodwill impairment exists, an entity should consider whether there are any adverse qualitative
factors indicating that impairment may exist. The qualitative factors are consistent with the
existing guidance, which requires that goodwill of a reporting unit be tested for impairment
between annual tests if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. The amendments in this
update are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2010. Early adoption is not permitted. The adoption of this update is not expected
to materially impact the Corporation’s goodwill impairment testing.
In July 2010, the FASB issued an Accounting Standards Codification Update for improving
disclosures about the credit quality of financing receivables and the allowance for credit
losses. This update requires entities to provide disclosures designed to facilitate financial
statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio
of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the
allowance for credit losses and (iii) the changes and reasons for the changes in the allowance
for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an
entity develops and documents a systematic method for determining its allowance for credit
losses, and class of financing receivable. The required disclosures include, among other things,
a rollforward of the allowance for credit losses as well as information about modified,
impaired, nonaccrual and past due loans and credit quality indicators. The update will be
effective for the Corporation’s financial statements as of December 31, 2010, as it relates to
disclosures required as of the end of a reporting period. Disclosures that relate to activity
during a reporting period will be required for financial statements that include periods
beginning on or after January 1, 2011, or March 31, 2011 for the Corporation. The application of
the provisions of these standards did not have a material impact on the Corporation’s financial
statements although it resulted in expanded disclosures effective December 31, 2010, which are
included under Note 5, “Credit Quality of Loans and Leases and the Reserve for Loans and Lease
Losses.” In January 2011, the FASB issued an Accounting Standards Codification Update to defer
the effective date of the disclosure requirements for public entities about troubled debt
restructurings which was included as part of the previously discussed disclosures required for
improving the credit quality of financing receivables and the allowance for credit losses. The
guidance related to troubled debt restructurings is anticipated to be effective for interim and
annual periods ending after June 15, 2011, in order to be concurrent with the effective date of
guidance under a proposed Accounting Standards Update clarifying what constitutes a troubled
debt restructuring.
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In January 2010, the FASB issued an Accounting Standard Codification Update for improving
disclosures about fair value measurements. This update requires companies to disclose, and
provide the reasons for, all transfers of assets and liabilities between the Level 1 and 2 fair
value categories. It also clarifies that companies should provide fair value measurement
disclosures for classes of assets and liabilities which are subsets of line items within the
balance sheet, if necessary. In addition, the update clarifies that companies provide
disclosures about the fair value techniques and inputs for assets and liabilities classified
within Level 2 or 3 categories. The disclosure requirements prescribed by this update are
effective for fiscal years
beginning after December 31, 2009, and for interim periods within those fiscal years, or
March 31, 2010 for the Corporation. This update also requires companies to reconcile changes in
Level 3 assets and liabilities by separately providing information about Level 3 purchases,
sales, issuances and settlements on a gross basis. This provision of this update is effective
for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal
years, or March 31, 2011 for the Corporation. The adoption of this update did not materially
impact the Corporation’s current fair value measurement disclosures.
In June 2009, the FASB issued standards for accounting for transfers of financial assets
and amendments to guidance relating to consolidation of variable interest entities. The
standards change off-balance-sheet accounting of financial instruments including the way
entities account for securitizations and special-purpose entities. The standards relating to
accounting for transfers of financial assets require more information about sales of securitized
financial assets and similar transactions, particularly if the seller retains some risk relating
to the assets. They eliminate the concept of a “qualifying special purpose entity,” change the
requirement for derecognizing financial assets, and require sellers of the assets to make
additional disclosures about them. The guidance relating to consolidation of variable interest
entities alters how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting should be consolidated. A company has to determine whether it
should provide consolidated reporting of any entity based upon the entity’s purpose and design
and the parent company’s ability to direct the entity’s actions. The standards are effective at
the start of the first fiscal year beginning after November 15, 2009. The adoption of the
standards did not have a material impact on the Corporation’s financial statements.
The Bank maintains reserve balances under Federal Reserve Bank requirements. The
reserve requirement at December 31, 2010 and 2009 was $5.8 million and $4.4 million,
respectively, and was satisfied by vault cash held at the Bank’s branches. No additional
reserves were required to be maintained at the Federal Reserve Bank of Philadelphia in excess of
the required $25 thousand clearing balance requirement. The average balances at the Federal
Reserve Bank of Philadelphia were $47.9 million and $26.5 million for the years ended December
31, 2010 and 2009, respectively.
62
Table of Contents
The following table shows the amortized cost and the approximate fair value of the
held-to-maturity securities and available-for-sale securities at December 31, 2010 and 2009, by
maturity within each type:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
| (Dollars in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Securities Held-to-Maturity
|
||||||||||||||||||||||||||||||||
|
Residential mortgage-backed
securities:
|
||||||||||||||||||||||||||||||||
|
Within 1 year
|
$ | 15 | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
After 1 year to 5 years
|
— | — | — | — | 87 | 5 | — | 92 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
15 | — | — | 15 | 87 | 5 | — | 92 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Other securities:
|
||||||||||||||||||||||||||||||||
|
Within 1 year
|
17 | — | — | 17 | — | — | — | — | ||||||||||||||||||||||||
|
After 1 year to 5 years
|
— | — | — | — | 16 | — | — | 16 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
17 | — | — | 17 | 16 | — | — | 16 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 32 | $ | — | $ | — | $ | 32 | $ | 103 | $ | 5 | $ | — | $ | 108 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Securities Available-for-Sale
|
||||||||||||||||||||||||||||||||
|
U.S. government corporations
and agencies:
|
||||||||||||||||||||||||||||||||
|
Within 1 year
|
$ | 7,000 | $ | — | $ | — | $ | 7,000 | $ | 7,000 | $ | — | $ | — | $ | 7,000 | ||||||||||||||||
|
After 1 year to 5 years
|
182,585 | 515 | (2,000 | ) | 181,100 | 112,937 | 293 | (238 | ) | 112,992 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
189,585 | 515 | (2,000 | ) | 188,100 | 119,937 | 293 | (238 | ) | 119,992 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
State and political subdivisions:
|
||||||||||||||||||||||||||||||||
|
Within 1 year
|
451 | — | — | 451 | — | — | — | — | ||||||||||||||||||||||||
|
After 1 year to 5 years
|
8,801 | 281 | — | 9,082 | 8,287 | 262 | (2 | ) | 8,547 | |||||||||||||||||||||||
|
After 5 years to 10 years
|
14,042 | 281 | (69 | ) | 14,254 | 28,894 | 636 | (23 | ) | 29,507 | ||||||||||||||||||||||
|
Over 10 years
|
86,315 | 639 | (2,693 | ) | 84,261 | 68,560 | 1,200 | (248 | ) | 69,512 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
109,609 | 1,201 | (2,762 | ) | 108,048 | 105,741 | 2,098 | (273 | ) | 107,566 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Residential mortgage-backed
securities:
|
||||||||||||||||||||||||||||||||
|
Within 1 year
|
— | — | — | — | 1,461 | 18 | — | 1,479 | ||||||||||||||||||||||||
|
After 1 year to 5 years
|
— | — | — | — | 6 | — | — | 6 | ||||||||||||||||||||||||
|
After 5 years to 10 years
|
14,709 | 743 | — | 15,452 | 15,865 | 452 | — | 16,317 | ||||||||||||||||||||||||
|
Over 10 years
|
66,919 | 3,222 | (492 | ) | 69,649 | 80,464 | 3,852 | (829 | ) | 83,487 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
81,628 | 3,965 | (492 | ) | 85,101 | 97,796 | 4,322 | (829 | ) | 101,289 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Commercial mortgage obligations:
|
||||||||||||||||||||||||||||||||
|
After 5 years to 10 years
|
8,855 | 252 | — | 9,107 | 8,644 | 327 | — | 8,971 | ||||||||||||||||||||||||
|
Over 10 years
|
63,827 | 1,321 | (1,164 | ) | 63,984 | 68,440 | 2,043 | — | 70,483 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
72,682 | 1,573 | (1,164 | ) | 73,091 | 77,084 | 2,370 | — | 79,454 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Asset backed securities:
|
||||||||||||||||||||||||||||||||
|
After 1 year to 5 years
|
— | — | — | — | 564 | 9 | — | 573 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
— | — | — | — | 564 | 9 | — | 573 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Other securities:
|
||||||||||||||||||||||||||||||||
|
Within 1 year
|
4,692 | 30 | — | 4,722 | 5,968 | 48 | — | 6,016 | ||||||||||||||||||||||||
|
After 1 year to 5 years
|
4,988 | — | (43 | ) | 4,945 | 2,996 | 132 | — | 3,128 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
9,680 | 30 | (43 | ) | 9,667 | 8,964 | 180 | — | 9,144 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||||||||||
|
No stated maturity
|
2,447 | 680 | (142 | ) | 2,985 | 1,589 | 363 | (28 | ) | 1,924 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
2,447 | 680 | (142 | ) | 2,985 | 1,589 | 363 | (28 | ) | 1,924 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 465,631 | $ | 7,964 | $ | (6,603 | ) | $ | 466,992 | $ | 411,675 | $ | 9,635 | $ | (1,368 | ) | $ | 419,942 | ||||||||||||||
|
|
||||||||||||||||||||||||||||||||
Expected maturities will differ from contractual maturities because debt issuers may
have the right to call or prepay obligations without call or prepayment penalties.
63
Table of Contents
Securities with a fair value of $347.3 million and $300.7 million at December 31, 2010 and
2009, respectively, were pledged to secure public deposits and for other purposes as required by
law.
During the year ended December 31, 2010, available-for-sale securities with a fair value at
the date of sale of $14.6 million were sold; $50.8 million were sold in 2009; and $58.9 million
were sold in 2008. Gross realized gains on such sales totaled $453 thousand during 2010, $1.2
million during 2009, and $282 thousand during 2008. Gross realized losses on sales totaled $21
thousand in 2010, $28 thousand in 2009, and $2 thousand in 2008. Tax expense related to net
realized gains from the sales of investment securities for the years ended December 31, 2010,
2009, and 2008 were $151 thousand, $403 thousand, and $99 thousand, respectively. Accumulated
other comprehensive income related to securities of $884 thousand and $5.4 million, net of
taxes, has been included in shareholders’ equity at December 31, 2010 and 2009, respectively.
Unrealized losses in investment securities at December 31, 2010 and 2009 do not represent
other-than-temporary impairments.
The Corporation realized other-than-temporary impairment charges of $62 thousand and $1.7
million, respectively, to noninterest income on its equity portfolio during the years ended
December 31, 2010 and 2009. The Corporation determined that it was probable that certain equity
securities would not regain market value equivalent to the Corporation’s cost basis within a
reasonable period of time due to a decline in the financial stability of the underlying
companies. The Corporation carefully monitors all of its equity securities and has not taken
impairment losses on certain other under-water equity securities, at this time, as the financial
performance of the underlying companies is not indicative of the market deterioration of their
stock and it is probable that the market value of the equity securities will recover to the
Corporation’s cost basis in the individual securities in a reasonable amount of time. The equity
securities within the following table consist of common stocks of other financial institutions,
which have experienced recent declines in value consistent with the industry as a whole.
Management evaluated the near-term prospects of the issuers in relation to the severity and
duration of the impairment. The Corporation has the positive intent and ability to hold these
securities and believes it is more likely than not, that it will not have to sell these
securities until recovery to the Corporation’s cost basis occurs. The Corporation does not
consider those investments to be other-than-temporarily impaired at December 31, 2010.
At December 31, 2010 and 2009, there were no investments in any single non-federal issuer
representing more than 10% of shareholders’ equity.
The following table shows the amount of securities that were in an unrealized loss position
at December 31, 2010 and 2009:
| At December 31, 2010 | ||||||||||||||||||||||||
| Less than Twelve | Twelve Months or | |||||||||||||||||||||||
| Months | Longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| (Dollars in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
U.S. government corporations and agencies
|
$ | 107,978 | $ | (2,000 | ) | $ | — | $ | — | $ | 107,978 | $ | (2,000 | ) | ||||||||||
|
State and political subdivisions
|
52,531 | (2,589 | ) | 1,589 | (173 | ) | 54,120 | (2,762 | ) | |||||||||||||||
|
Residential mortgage-backed securities
|
10,096 | (38 | ) | 4,419 | (454 | ) | 14,515 | (492 | ) | |||||||||||||||
|
Commercial mortgage obligations
|
19,322 | (1,164 | ) | — | — | 19,322 | (1,164 | ) | ||||||||||||||||
|
Other securities
|
4,945 | (43 | ) | — | — | 4,945 | (43 | ) | ||||||||||||||||
|
Equity securities
|
951 | (140 | ) | 17 | (2 | ) | 968 | (142 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 195,823 | $ | (5,974 | ) | $ | 6,025 | $ | (629 | ) | $ | 201,848 | $ | (6,603 | ) | |||||||||
|
|
||||||||||||||||||||||||
64
Table of Contents
| At December 31, 2009 | ||||||||||||||||||||||||
| Less than Twelve | Twelve Months or | |||||||||||||||||||||||
| Months | Longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| (Dollars in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
U.S. government corporations and
agencies
|
$ | 47,057 | $ | (238 | ) | $ | — | $ | — | $ | 47,057 | $ | (238 | ) | ||||||||||
|
State and political subdivisions
|
16,378 | (248 | ) | 1,141 | (25 | ) | 17,519 | (273 | ) | |||||||||||||||
|
Residential mortgage-backed securities
|
— | — | 5,323 | (829 | ) | 5,323 | (829 | ) | ||||||||||||||||
|
Commercial mortgage obligations
|
— | — | — | — | — | — | ||||||||||||||||||
|
Other securities
|
— | — | — | — | — | — | ||||||||||||||||||
|
Equity securities
|
128 | (15 | ) | 95 | (13 | ) | 223 | (28 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 63,563 | $ | (501 | ) | $ | 6,559 | $ | (867 | ) | $ | 70,122 | $ | (1,368 | ) | |||||||||
|
|
||||||||||||||||||||||||
The following is a summary of the major loan and lease categories:
| At December 31, | ||||||||
| (Dollars in thousands) | 2010 | 2009 | ||||||
|
|
||||||||
|
Commercial, financial and agricultural
|
$ | 463,518 | $ | 447,495 | ||||
|
Real estate-commercial
|
516,546 | 487,688 | ||||||
|
Real estate-construction
|
119,769 | 91,891 | ||||||
|
Real estate-residential secured for business purpose
|
42,459 | 45,588 | ||||||
|
Real estate-residential secured for personal purpose
|
121,876 | 139,561 | ||||||
|
Real estate-home equity secured for personal purpose
|
80,875 | 81,473 | ||||||
|
Loans to individuals
|
44,087 | 46,761 | ||||||
|
Lease financings
|
92,617 | 95,678 | ||||||
|
|
||||||||
|
Total gross loans and leases
|
1,481,747 | 1,436,135 | ||||||
|
Less: Unearned income
|
(10,561 | ) | (10,155 | ) | ||||
|
|
||||||||
|
Total loans and leases, net of unearned income
|
$ | 1,471,186 | $ | 1,425,980 | ||||
|
|
||||||||
Net unamortized deferred loan and lease origination fees, which are recorded within
each loan category, for the years ended December 31, 2010 and 2009, were $228 thousand and $1.1
million, respectively. Overdraft deposits are re-classified as loans and are included in the
total loans and leases on the balance sheet. For the years ended December 31, 2010 and 2009,
overdrafts were $199 thousand and $495 thousand, respectively.
The Corporation is a lessor of primarily small-ticket equipment under agreements expiring
at various dates through the Year 2016. At December 31, 2010, the schedule of minimum lease
payments is as follows:
| (Dollars in thousands) | ||||
|
2011
|
$ | 42,310 | ||
|
2012
|
27,071 | |||
|
2013
|
13,595 | |||
|
2014
|
7,460 | |||
|
2015
|
2,132 | |||
|
Thereafter
|
49 | |||
|
|
||||
|
Total future minimum lease payments receivable
|
92,617 | |||
|
Less: Unearned income
|
(10,561 | ) | ||
|
|
||||
|
Total lease financing receivables, net of unearned income
|
$ | 82,056 | ||
|
|
||||
65
Table of Contents
Age Analysis of Past Due Loans and Leases
The following presents, by class of loans and leases, an aging of past due loans and
leases, loans and leases which are current and the recorded investment in loans greater than 90
days past due which are accruing interest at December 31, 2010 and 2009:
| Recorded | ||||||||||||||||||||||||||||
| Investment | ||||||||||||||||||||||||||||
| Greater than | ||||||||||||||||||||||||||||
| Greater | 90 Days | |||||||||||||||||||||||||||
| Than | Past Due | |||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days | Total | Total Loans | and Accruing | |||||||||||||||||||||||
| (Dollars in thousands) | Past Due* | Past Due* | Past Due* | Past Due* | Current* | and Leases | Interest* | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
At December 31, 2010
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Commercial, financial and
agricultural
|
$ | 924 | $ | — | $ | — | $ | 924 | $ | 454,792 | $ | 463,518 | $ | — | ||||||||||||||
|
Real estate-commercial
real estate and construction:
|
||||||||||||||||||||||||||||
|
Commercial real estate
|
3,836 | — | — | 3,836 | 484,527 | 516,546 | — | |||||||||||||||||||||
|
Construction
|
156 | — | — | 156 | 112,739 | 119,769 | — | |||||||||||||||||||||
|
Real estate-residential and
home equity:
|
||||||||||||||||||||||||||||
|
Residential secured for
business purpose
|
— | — | — | — | 42,008 | 42,459 | — | |||||||||||||||||||||
|
Residential secured for
personal purpose
|
92 | — | 270 | 362 | 120,250 | 121,876 | 270 | |||||||||||||||||||||
|
Home equity secured for
personal purpose
|
118 | 74 | 44 | 236 | 80,639 | 80,875 | 44 | |||||||||||||||||||||
|
Loans to individuals
|
537 | 153 | 382 | 1,072 | 42,934 | 44,087 | 382 | |||||||||||||||||||||
|
Lease financings
|
1,071 | 421 | — | 1,492 | 79,437 | 82,056 | — | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
$ | 6,734 | $ | 648 | $ | 696 | $ | 8,078 | $ | 1,417,326 | $ | 1,471,186 | $ | 696 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
At December 31, 2009
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Commercial, financial and
agricultural
|
$ | 969 | $ | 1,022 | $ | 134 | $ | 2,125 | $ | 441,895 | $ | 447,495 | $ | 134 | ||||||||||||||
|
Real estate-commercial
real estate and construction:
|
||||||||||||||||||||||||||||
|
Commercial real estate
|
3,307 | 765 | — | 4,072 | 468,265 | 487,688 | — | |||||||||||||||||||||
|
Construction
|
— | — | — | — | 77,019 | 91,891 | — | |||||||||||||||||||||
|
Real estate-residential and
home equity:
|
||||||||||||||||||||||||||||
|
Residential secured for
business purpose
|
57 | — | — | 57 | 44,644 | 45,588 | — | |||||||||||||||||||||
|
Residential secured for
personal purpose
|
784 | 151 | 172 | 1,107 | 137,192 | 139,561 | 172 | |||||||||||||||||||||
|
Home equity secured for
personal purpose
|
508 | 75 | 101 | 684 | 80,540 | 81,473 | 101 | |||||||||||||||||||||
|
Loans to individuals
|
811 | 168 | 319 | 1,298 | 45,399 | 46,761 | 319 | |||||||||||||||||||||
|
Lease financings
|
1,129 | 76 | — | 1,205 | 83,369 | 85,523 | — | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total
|
$ | 7,565 | $ | 2,257 | $ | 726 | $ | 10,548 | $ | 1,378,323 | $ | 1,425,980 | $ | 726 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
| * |
Excludes impaired loans and leases.
|
66
Table of Contents
Nonaccrual and Troubled Debt Restructured Loans and Leases
The following presents by class of loans and leases, nonaccrual loans and leases, and
accruing troubled debt restructured loans and leases at December 31, 2010 and 2009:
| At December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
| Accruing | Accruing | |||||||||||||||||||||||
| Troubled | Troubled | |||||||||||||||||||||||
| Debt | Total | Debt | Total | |||||||||||||||||||||
| Nonaccrual | Restructured | Impaired | Nonaccrual | Restructured | Impaired | |||||||||||||||||||
| Loans and | Loans and | Loans and | Loans and | Loans and | Loans and | |||||||||||||||||||
| (Dollars in thousands) | Leases | Leases | Leases | Leases | Leases | Leases | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial, financial and agricultural
|
$ | 7,627 | $ | 175 | $ | 7,802 | $ | 3,275 | $ | 200 | $ | 3,475 | ||||||||||||
|
Real estate-commercial real estate
and construction:
|
||||||||||||||||||||||||
|
Commercial real estate
|
28,183 | — | 28,183 | 14,005 | 1,346 | 15,351 | ||||||||||||||||||
|
Construction
|
6,874 | — | 6,874 | 14,872 | — | 14,872 | ||||||||||||||||||
|
Real estate-residential and home equity:
|
||||||||||||||||||||||||
|
Residential secured for business purpose
|
361 | 90 | 451 | 323 | 564 | 887 | ||||||||||||||||||
|
Residential secured for personal purpose
|
1,264 | — | 1,264 | — | 1,262 | 1,262 | ||||||||||||||||||
|
Home equity secured for personal purpose
|
— | — | — | 249 | — | 249 | ||||||||||||||||||
|
Loans to individuals
|
21 | 60 | 81 | — | 64 | 64 | ||||||||||||||||||
|
Lease financings
|
902 | 225 | 1,127 | 774 | 175 | 949 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 45,232 | $ | 550 | $ | 45,782 | $ | 33,498 | $ | 3,611 | $ | 37,109 | ||||||||||||
|
|
||||||||||||||||||||||||
Credit Quality Indicators
The following tables present by class, the recorded investment in loans and leases by
credit quality indicator at December 31, 2010 and 2009.
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; loan 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
|
67
Table of Contents
Commercial Credit Exposure Credit Risk by Internally Assigned Grades
| Real Estate–Residential | ||||||||||||||||||||||||||||||||
| Commercial, Financial | Secured for Business | |||||||||||||||||||||||||||||||
| and Agricultural | Real Estate – Commercial | Real Estate – Construction | Purpose | |||||||||||||||||||||||||||||
| (Dollars in | At December 31, | At December 31, | At December 31, | At December 31, | ||||||||||||||||||||||||||||
| thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Grade:
|
||||||||||||||||||||||||||||||||
|
1. Cash secured/
|
||||||||||||||||||||||||||||||||
|
2. Fully secured
|
$ | 2,714 | $ | 1,924 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
3. Strong
|
16,350 | 26,767 | 11,542 | 18,029 | 2,674 | 1,076 | 28 | 130 | ||||||||||||||||||||||||
|
4. Satisfactory
|
71,258 | 110,372 | 47,755 | 61,476 | 12,217 | 11,711 | 1,836 | 4,777 | ||||||||||||||||||||||||
|
5. Acceptable
|
254,422 | 186,506 | 261,520 | 216,942 | 78,116 | 24,221 | 24,987 | 24,391 | ||||||||||||||||||||||||
|
6. Pre-watch
|
70,259 | 60,346 | 109,493 | 102,531 | 11,296 | 23,393 | 6,322 | 5,432 | ||||||||||||||||||||||||
|
7. Special Mention
|
8,476 | 12,324 | 17,596 | 26,504 | 684 | 15,052 | 700 | 884 | ||||||||||||||||||||||||
|
8. Substandard
|
36,933 | 48,124 | 67,379 | 62,108 | 14,782 | 9,144 | 8,586 | 9,720 | ||||||||||||||||||||||||
|
9. Doubtful
|
3,106 | 1,040 | 1,261 | 98 | — | 7,294 | — | 254 | ||||||||||||||||||||||||
|
10.Loss
|
— | 92 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 463,518 | $ | 447,495 | $ | 516,546 | $ | 487,688 | $ | 119,769 | $ | 91,891 | $ | 42,459 | $ | 45,588 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
The Corporation monitors the credit risk profile by payment activity for the following
classifications of loans: residential real estate loans secured for a personal purpose, home
equity loans secured for a personal purpose, loans to individuals and lease financings by
payment activity. Nonperforming loans and leases are loans past due 90 days or more and loans
and leases on non-accrual of interest as well as troubled debt restructured loans. 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 are loans with a well-defined weakness as well as loans where
collection in-full is improbable.
Credit Exposure — Real Estate
-
Residential Secured for Personal Purpose, Real Estate
-
Home Equity
Secured for Personal Purpose, Loans to individuals, Lease Financing Credit Risk Profile by Payment Activity
| Real Estate – Home Equity | ||||||||||||||||||||||||||||||||
| Real Estate – Residential Secured for | Secured for | |||||||||||||||||||||||||||||||
| Personal Purpose | Personal Purpose | Loans to individuals | Lease Financing | |||||||||||||||||||||||||||||
| (Dollars in | At December 31, | At December 31, | At December 31, | At December 31, | ||||||||||||||||||||||||||||
| thousands) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Performing
|
$ | 120,342 | $ | 138,127 | $ | 80,831 | $ | 81,123 | $ | 43,624 | $ | 46,378 | $ | 80,929 | $ | 84,574 | ||||||||||||||||
|
Nonperforming
|
1,534 | 1,434 | 44 | 350 | 463 | 383 | 1,127 | 949 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 121,876 | $ | 139,561 | $ | 80,875 | $ | 81,473 | $ | 44,087 | $ | 46,761 | $ | 82,056 | $ | 85,523 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
Risks associated with lending activities include, among other things, the impact of
changes in interest rates and economic conditions, which may adversely impact the ability of
borrowers to repay outstanding loans, and impact the value of the associated collateral.
Commercial, financial and agricultural loans, commercial real estate loans, construction
loans and residential real estate loans with a business purpose are generally perceived as
having more risk of default than residential real estate loans with a personal purpose and
consumer loans. These types of loans involve larger loan balances to a single borrower or groups
of related borrowers. Commercial real estate loans may be affected to a greater extent than
residential loans by adverse conditions in real estate markets or the economy because commercial
real estate borrowers’ ability to repay their loans depends on successful development of their
properties, as well as the 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.
68
Table of Contents
Risk of loss on a construction loan depends largely upon whether our initial estimate of
the property’s value at completion of construction equals or exceeds the cost of the property
construction (including interest). During the construction phase, a number of factors can result
in delays and cost overruns. If estimates of value are inaccurate or if actual construction
costs exceed estimates, the value of the property securing the loan may be insufficient to
ensure full repayment when completed through a permanent loan or by seizure of collateral.
Included in real estate-construction is track development financing. Risk factors related to
track development financing include the demand for residential housing and the real estate
valuation market. When projects move slower than anticipated, the properties may have
significantly lower values than when the original underwriting was completed, resulting in lower
collateral values to support the loan. Extended time frames also cause the interest carrying
cost for a project to be higher than the builder projected, negatively impacting the builder’s
profit and cash flow and, therefore, their ability to make principal and interest payments.
Commercial real estate loans and residential real estate loans with a business purpose
secured by owner-occupied properties are dependent upon the successful operation of the
borrower’s business. If the operating company suffers difficulties in terms of sales volume
and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by
properties where repayment is dependent upon payment of rent by third party tenants or the sale
of the property may be impacted by loss of tenants, lower lease rates needed to attract new
tenants or the inability to sell a completed project in a timely fashion and at a profit.
Commercial, financial and agricultural loans, commercial real estate loans, construction
loans and residential real estate loans secured for a business purpose are more susceptible to a
risk of loss during a downturn in the business cycle. The Corporation has strict underwriting,
review, and monitoring procedures in place, however, these procedures cannot eliminate all of
the risks related to these loans.
The Corporation focuses on both assessing the borrower’s capacity and willingness to repay
and on obtaining sufficient collateral. Commercial, financial and agricultural loans are
generally secured by the borrower’s assets and by personal guarantees. Commercial real estate
and residential real estate loans secured for a business purpose are originated primarily within
the Eastern Pennsylvania market area at conservative loan-to-value ratios and often by a
guarantee of the borrowers. Management closely monitors the composition and quality of the total
commercial loan portfolio to ensure that any credit concentrations by borrower or industry are
closely monitored.
The Corporation originates fixed-rate and adjustable-rate real estate-residential mortgage
loans that are secured by the underlying 1- to 4-family residential properties for personal
purposes. Credit risk exposure in this area of lending is minimized by the evaluation of the
credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence
to underwriting policies that emphasize conservative loan-to-value ratios of generally no more
than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion
are generally insured by private mortgage insurance.
In the real estate-home equity loan portfolio secured for a personal purpose, combined
loan-to-value ratios at origination are generally limited to 80%. Other credit considerations
may warrant higher combined loan-to-value ratios and are generally insured by private mortgage
insurance.
Credit risk in the loans to individuals portfolio, which includes, direct consumer loans
and credit cards, is controlled by strict adherence to conservative underwriting standards that
consider debt-to-income levels and the creditworthiness of the borrower and, if secured,
collateral values.
The primary risks that are involved with lease financing receivables are credit
underwriting and borrower industry concentrations. The Corporation has strict underwriting,
review, and monitoring procedures in place to mitigate this risk. Risk also lies in the
residual value of the underlying equipment. Residual values are subject to judgments as to the
value of the underlying equipment that can be affected by changes in economic and market
conditions and the financial viability of the residual guarantors and insurers. To the extent
not guaranteed or assumed by a third party, or otherwise insured against, the Corporation bears
the risk of ownership of the leased assets. This includes the risk that the actual value of the
leased assets at the end of the lease term will be less than the residual value. The Corporation
greatly reduces this risk 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.
69
Table of Contents
Reserve for Loan and Lease Losses and Recorded Investment in Loans and Leases
The following presents, by portfolio segment, the balance in the reserve for loan and
leases losses disaggregated on the basis of impairment method and the recorded investment in
loans and leases disaggregated on the basis of impairment method for the years ended December
31, 2010 and 2009.
| Real Estate– | ||||||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||||||
| Real Estate– | and | |||||||||||||||||||||||||||||||
| Commercial, | Real Estate - | Residential | Home Equity | |||||||||||||||||||||||||||||
| Financial | Commercial | Secured for | Secured for | Loans | ||||||||||||||||||||||||||||
| and | and | Business | Personal | to | Lease | |||||||||||||||||||||||||||
| (Dollars in thousands) | Agricultural | Construction | Purpose | Purpose | Individuals | Financings | Unallocated | Total | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
For the Year Ended December 31, 2010
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Reserve for loan and lease losses:
|
||||||||||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 470 | $ | 1,122 | $ | 29 | $ | 2 | $ | — | $ | — | $ | N/A | $ | 1,623 | ||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
9,160 | 14,166 | 1,304 | 542 | 734 | 1,950 | 1,419 | 29,275 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Ending balance
|
$ | 9,630 | $ | 15,288 | $ | 1,333 | $ | 544 | $ | 734 | $ | 1,950 | $ | 1,419 | $ | 30,898 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans and leases:
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 7,802 | $ | 35,057 | $ | 451 | $ | 1,264 | $ | 81 | $ | 1,127 | $ | 45,782 | ||||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
455,716 | 601,258 | 42,008 | 201,487 | 44,006 | 80,929 | 1,425,404 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Ending balance
|
$ | 463,518 | $ | 636,315 | $ | 42,459 | $ | 202,751 | $ | 44,087 | $ | 82,056 | $ | 1,471,186 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
For the Year Ended December 31, 2009
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Reserve for loan and lease losses:
|
||||||||||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 558 | $ | 813 | $ | 53 | $ | — | $ | — | $ | — | $ | N/A | $ | 1,424 | ||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
11,590 | 7,162 | 1,005 | 501 | 887 | 1,175 | $ | 1,054 | 23,374 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Ending balance
|
$ | 12,148 | $ | 7,975 | $ | 1,058 | $ | 501 | $ | 887 | $ | 1,175 | $ | 1,054 | $ | 24,798 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Loans and leases:
|
||||||||||||||||||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | 3,475 | $ | 30,223 | $ | 887 | $ | 1,511 | $ | 64 | $ | 949 | $ | 37,109 | ||||||||||||||||||
|
Ending balance: collectively evaluated for impairment
|
444,020 | 549,356 | 44,701 | 219,523 | 46,697 | 84,574 | 1,388,871 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Ending balance
|
$ | 447,495 | $ | 579,579 | $ | 45,588 | $ | 221,034 | $ | 46,761 | $ | 85,523 | $ | 1,425,980 | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
A summary of the activity in the reserve for loan and lease losses is as follows:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Balance at beginning of year
|
$ | 24,798 | $ | 13,118 | $ | 13,086 | ||||||
|
Provision for loan and lease losses
|
21,565 | 20,886 | 8,769 | |||||||||
|
Loans and leases charged off
|
(17,105 | ) | (10,448 | ) | (9,305 | ) | ||||||
|
Recoveries
|
1,640 | 1,242 | 568 | |||||||||
|
|
||||||||||||
|
Balance at end of year
|
$ | 30,898 | $ | 24,798 | $ | 13,118 | ||||||
|
|
||||||||||||
70
Table of Contents
Impaired Loans and Leases
The following presents, by class of loans and leases, the recorded investment and unpaid
principal balance of impaired loans and leases, the amounts of the impaired loans and leases 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, 2010 and 2009.
| Unpaid | ||||||||||||
| Recorded | Principal | Related | ||||||||||
| (Dollars in thousands) | Investment | Balance | Allowance | |||||||||
|
|
||||||||||||
|
At December 31, 2010
|
||||||||||||
|
|
||||||||||||
|
Impaired loans and leases with no related allowance recorded:
|
||||||||||||
|
Commercial, financial and agricultural
|
$ | 4,761 | $ | 5,074 | ||||||||
|
Real estate-commercial real estate
|
21,403 | 23,094 | ||||||||||
|
Real estate-construction
|
6,225 | 8,025 | ||||||||||
|
Real estate-residential secured for business purpose
|
361 | 730 | ||||||||||
|
Real estate-residential secured for personal purpose
|
632 | 632 | ||||||||||
|
Loans to individuals
|
81 | 81 | ||||||||||
|
Lease financings
|
1,127 | 1,127 | ||||||||||
|
|
||||||||||||
|
Total impaired loans and leases with no related allowance recorded
|
$ | 34,590 | $ | 38,763 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Impaired loans and leases with an allowance recorded:
|
||||||||||||
|
Commercial, financial and agricultural
|
$ | 3,041 | $ | 3,058 | $ | 650 | ||||||
|
Real estate-commercial real estate
|
6,780 | 8,321 | 909 | |||||||||
|
Real estate-construction
|
648 | 649 | 33 | |||||||||
|
Real estate-residential secured for business purpose
|
90 | 90 | 29 | |||||||||
|
Real estate-residential secured for personal purpose
|
632 | 632 | 2 | |||||||||
|
|
||||||||||||
|
Total impaired loans leases with an allowance recorded
|
$ | 11,192 | $ | 12,750 | $ | 1,623 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total impaired loans and leases:
|
||||||||||||
|
Commercial, financial and agricultural
|
$ | 7,802 | $ | 8,132 | $ | 650 | ||||||
|
Real estate-commercial real estate
|
28,183 | 31,415 | 909 | |||||||||
|
Real estate-construction
|
6,874 | 8,674 | 33 | |||||||||
|
Real estate-residential secured for business purpose
|
451 | 820 | 29 | |||||||||
|
Real estate-residential secured for personal purpose
|
1,264 | 1,264 | 2 | |||||||||
|
Loans to individuals
|
81 | 81 | — | |||||||||
|
Lease financings
|
1,127 | 1,127 | — | |||||||||
|
|
||||||||||||
|
Total impaired loans and leases
|
$ | 45,782 | $ | 51,513 | $ | 1,623 | ||||||
|
|
||||||||||||
71
Table of Contents
| Unpaid | ||||||||||||
| Recorded | Principal | Related | ||||||||||
| (Dollars in thousands) | Investment | Balance | Allowance | |||||||||
|
|
||||||||||||
|
At December 31, 2009
|
||||||||||||
|
|
||||||||||||
|
Impaired loans and leases with no related allowance recorded:
|
||||||||||||
|
Commercial, financial and agricultural
|
$ | 2,120 | $ | 2,882 | ||||||||
|
Real estate–commercial real estate
|
15,052 | 15,075 | ||||||||||
|
Real estate–construction
|
7,236 | 8,629 | ||||||||||
|
Real estate–residential secured for business purpose
|
628 | 843 | ||||||||||
|
Real estate–residential secured for personal purpose
|
1,262 | 1,262 | ||||||||||
|
Real estate–home equity secured for personal purpose
|
249 | 249 | ||||||||||
|
Loans to individuals
|
64 | 64 | ||||||||||
|
Lease financings
|
949 | 949 | ||||||||||
|
|
||||||||||||
|
Total impaired loans and leases with no related allowance recorded
|
$ | 27,560 | $ | 29,953 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Impaired loans and leases with an allowance recorded:
|
||||||||||||
|
Commercial, financial and agricultural
|
$ | 1,355 | $ | 1,355 | $ | 558 | ||||||
|
Real estate–commercial real estate
|
299 | 299 | 8 | |||||||||
|
Real estate–construction
|
7,636 | 7,736 | 805 | |||||||||
|
Real estate–commercial residential
|
259 | 259 | 53 | |||||||||
|
|
||||||||||||
|
Total impaired loans leases with an allowance recorded
|
$ | 9,549 | $ | 9,649 | $ | 1,424 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total impaired loans and leases:
|
||||||||||||
|
Commercial, financial and agricultural
|
$ | 3,475 | $ | 4,237 | $ | 558 | ||||||
|
Real estate–commercial real estate
|
15,351 | 15,374 | 8 | |||||||||
|
Real estate–construction
|
14,872 | 16,365 | 805 | |||||||||
|
Real estate–residential secured for business purpose
|
887 | 1,102 | 53 | |||||||||
|
Real estate–residential secured for personal purpose
|
1,262 | 1,262 | — | |||||||||
|
Real estate–home equity secured for personal purpose
|
249 | 249 | — | |||||||||
|
Loans to individuals
|
64 | 64 | — | |||||||||
|
Lease financings
|
949 | 949 | — | |||||||||
|
|
||||||||||||
|
Total impaired loans and leases
|
$ | 37,109 | $ | 39,602 | $ | 1,424 | ||||||
|
|
||||||||||||
Additional information with respect to impaired loans and leases is as follows:
| December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Average recorded investment in impaired loans and leases
|
$ | 35,717 | $ | 16,570 | $ | 7,135 | ||||||
|
Interest income recognized
|
25 | 79 | 11 | |||||||||
|
Interest income that would have been recognized under original terms
|
2,149 | 969 | 685 | |||||||||
Any income accrued on one-to-four family residential properties after the loan becomes
90 days past due is held in a reserve for uncollected interest. The reserve for uncollected
interest was $42 thousand and $29 thousand at December 31, 2010 and 2009, respectively. Other
real estate owned was $2.4 million and $3.4 million at December 31, 2010 and 2009, respectively.
The Bank maintains a reserve in other liabilities for off-balance sheet credit exposures
that currently are unfunded. The reserve for off-balance sheet credits was $178 thousand and
$145 thousand at December 31, 2010 and 2009, respectively.
72
Table of Contents
The following table reflects the components of premises and equipment:
| At December 31, | ||||||||
| (Dollars in thousands) | 2010 | 2009 | ||||||
|
Land and land improvements
|
$ | 8,906 | $ | 8,270 | ||||
|
Premises and improvements
|
35,449 | 34,493 | ||||||
|
Furniture and equipment
|
18,042 | 17,307 | ||||||
|
|
||||||||
|
Total cost
|
62,397 | 60,070 | ||||||
|
Less: accumulated depreciation
|
(27,792 | ) | (25,869 | ) | ||||
|
|
||||||||
|
Net book value
|
$ | 34,605 | $ | 34,201 | ||||
|
|
||||||||
The Corporation has completed an annual impairment test for the intangible asset
category. There were no impairments in 2010 and 2009. There can be no assurance that future
impairment tests will not result in a charge to earnings.
The Corporation has covenants not to compete, intangible assets due to branch acquisitions,
core deposit intangibles, customer-related intangibles and mortgage servicing rights, which are
not deemed to have an indefinite life and therefore will continue to be amortized over their
useful life using the present value of projected cash flows. The amortization for these
intangible assets was: $1.5 million for the year ended December 31, 2010; $1.5 million for the
year ended December 31, 2009; and $642 thousand for the year ended December 31, 2008. The
Corporation also has goodwill with a net carrying amount of $51.3 million, which is deemed to be
an indefinite intangible asset and is not amortized. On December 31, 2008, the Corporation
completed the acquisition of the Trollinger Consulting Group and related entities, an
independent actuarial, administrative, consulting/compliance, and investment counseling firm
that exclusively serves Municipal Pension Plan clients. The Corporation recorded $2.9 million in
goodwill and $3.0 million in customer related intangibles as a result of the Trollinger
Consulting Group acquisition. On December 29, 2008, the Corporation completed the acquisition of
Liberty Benefits, Inc., a full service employee benefits brokerage and consulting firm
specializing in providing comprehensive employee benefits packages to businesses both large and
small. The Corporation recorded $2.8 million in goodwill and $740 thousand in customer related
intangibles as a result of the Liberty Benefits, Inc. acquisition. On July 27, 2006, the
Corporation completed the acquisition of B. G. Balmer & Company, Inc., a full-service insurance
agency. In connection with this acquisition, $3.1 million was recorded to goodwill, $1.5 million
was recorded to a customer-related intangible and $100 thousand was recorded for a covenant not
to compete. The Corporation recorded additional goodwill of $925 thousand at December 31, 2010
for an earn-out payment related to the acquisition of Trollinger Consulting Group for meeting
minimum operating results. The Corporation recorded additional goodwill of $157 thousand in 2009
related to its 2008 acquisition of Trollinger Consulting Group.
Changes in the carrying amount of the Corporation’s goodwill for the years ended December
31, 2010 and 2009 were as follows:
| (Dollars in thousands) | ||||
|
Balance as of December 31, 2008
|
$ | 50,236 | ||
|
Additions:
|
||||
|
Trollinger Consulting Group
|
157 | |||
|
|
||||
|
Balance as of December 31, 2009
|
$ | 50,393 | ||
|
Additions:
|
||||
|
Trollinger Consulting Group
|
927 | |||
|
|
||||
|
Balance as of December 31, 2010
|
$ | 51,320 | ||
|
|
||||
73
Table of Contents
The following table reflects the components of intangible assets as of the dates
indicated:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Amortization | Amortization | |||||||||||||||||||||||
| Gross | and | Net | Gross | and | Net | |||||||||||||||||||
| Carrying | Fair Value | Carrying | Carrying | Fair Value | Carrying | |||||||||||||||||||
| (Dollars in thousands) | Amount | Adjustments | Amount | Amount | Adjustments | Amount | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Amortized intangible assets:
|
||||||||||||||||||||||||
|
Covenants not to compete
|
$ | 320 | $ | 308 | $ | 12 | $ | 320 | $ | 288 | $ | 32 | ||||||||||||
|
Branch acquisitions
|
2,951 | 2,951 | — | 2,951 | 2,951 | — | ||||||||||||||||||
|
Core deposit intangibles
|
2,201 | 2,007 | 194 | 2,201 | 1,786 | 415 | ||||||||||||||||||
|
Customer related intangibles
|
5,302 | 2,472 | 2,830 | 5,302 | 1,609 | 3,693 | ||||||||||||||||||
|
Mortgage servicing rights, net
|
4,198 | 1,757 | 2,441 | 2,818 | 1,381 | 1,437 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total amortized intangible assets
|
$ | 14,972 | $ | 9,495 | $ | 5,477 | $ | 13,592 | $ | 8,015 | $ | 5,577 | ||||||||||||
|
|
||||||||||||||||||||||||
The estimated aggregate amortization expense includes covenants not to compete, core
deposit intangibles and customer related intangibles for each of the five succeeding fiscal
years is as follows:
| Year | Amount | |||||||
| (Dollars in thousands) | ||||||||
|
2011
|
$ | 893 | ||||||
|
2012
|
671 | |||||||
|
2013
|
498 | |||||||
|
2014
|
380 | |||||||
|
2015
|
263 | |||||||
|
Thereafter
|
331 | |||||||
The Corporation has originated mortgage servicing rights which are included in other
intangible assets on the consolidated balance sheets. Mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing income on a basis similar to the
interest method using an accelerated amortization method and are subject to periodic impairment
testing.
Changes in the mortgage servicing rights balance are summarized as follows:
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Beginning balance
|
$ | 1,437 | $ | 418 | $ | 512 | ||||||
|
Servicing rights capitalized
|
1,380 | 1,280 | 51 | |||||||||
|
Amortization of servicing rights
|
(425 | ) | (178 | ) | (27 | ) | ||||||
|
Changes in valuation
|
49 | (83 | ) | (118 | ) | |||||||
|
|
||||||||||||
|
Ending balance
|
$ | 2,441 | $ | 1,437 | $ | 418 | ||||||
|
|
||||||||||||
|
Mortgage loans serviced for others
|
$ | 306,403 | $ | 174,066 | $ | 55,138 | ||||||
|
|
||||||||||||
Activity in the valuation allowance for mortgage servicing rights was as follows:
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Beginning balance
|
$ | (250 | ) | $ | (167 | ) | $ | (49 | ) | |||
|
Additions
|
49 | (83 | ) | (118 | ) | |||||||
|
Reductions
|
— | — | — | |||||||||
|
Direct write-downs
|
— | — | — | |||||||||
|
|
||||||||||||
|
Ending balance
|
$ | (201 | ) | $ | (250 | ) | $ | (167 | ) | |||
|
|
||||||||||||
74
Table of Contents
The estimated amortization expense of mortgage servicing rights for each of the five
succeeding fiscal years is as follows:
| Year | Amount | |||||||
| (Dollars in thousands) | ||||||||
|
2011
|
$ | 385 | ||||||
|
2012
|
335 | |||||||
|
2013
|
288 | |||||||
|
2014
|
249 | |||||||
|
2015
|
215 | |||||||
|
Thereafter
|
969 | |||||||
The balance of mortgage servicing rights, net of fair value adjustments and
accumulated amortization, or fair value, included in other intangibles at December 31, 2010 was
$2.4 million and at December 31, 2009 was $1.4 million. The aggregate fair value of these rights
was $2.9 million and $1.4 million at December 31, 2010 and 2009, respectively. The fair value of
mortgage servicing rights was determined using discount rates ranging from 3.5% to 6.3% for
2010. Amortization of mortgage servicing rights of approximately $425 thousand was recorded
during 2010, $178 thousand during 2009, and $27 thousand during 2008. The cumulative unfavorable
fair value adjustments were $201 thousand, $250 thousand and $167 thousand at December 31, 2010,
2009 and 2008, respectively.
The following table provides the details of accrued interest and other assets:
| At December 31, | ||||||||
| (Dollars in thousands) | 2010 | 2009 | ||||||
|
|
||||||||
|
Other real estate owned
|
$ | 2,438 | $ | 3,428 | ||||
|
Accrued interest receivable
|
7,206 | 7,613 | ||||||
|
Accrued income and other receivables
|
2,843 | 2,772 | ||||||
|
Fair market value of derivative financial instruments
|
1,291 | 3,124 | ||||||
|
Prepaid FDIC insurance assessments
|
6,132 | 8,427 | ||||||
|
Other prepaid expenses
|
7,256 | 9,145 | ||||||
|
Federal Reserve Bank stock, Federal Home Loan Bank stock and other not readily marketable equity securities
|
10,457 | 11,910 | ||||||
|
Net deferred tax assets
|
15,557 | 9,947 | ||||||
|
Other
|
624 | 627 | ||||||
|
|
||||||||
|
Total accrued interest and other assets
|
$ | 53,804 | $ | 56,993 | ||||
|
|
||||||||
On September 28, 2009, the FDIC Board implemented an institutional prepaid FDIC
assessment to recapitalize the Deposit Insurance Fund which was finalized in the Fourth Quarter
of 2009. The amount was paid on December 30, 2009 for the Fourth Quarter 2009, and for all of
2010, 2011 and 2012. This assessment was based on an estimated 5% annual growth rate in deposits
during 2010, 2011 and 2012; and a 3 basis-point increase in the base assessment rate at
September 30, 2009 to be applied in 2011 and 2012. The Bank paid $9.0 million to the FDIC on
December 30, 2009. At December 31, 2010 $6.1 million remained in a prepaid asset account. The
prepaid amount of $6.1 million has a zero percent risk-weighting for risk-based capital ratio
calculations. The remaining prepaid amount will be expensed over the 2011 though 2012 period as
the actual FDIC assessment are determined for each interim quarterly period. Any excess prepaid
amounts may be utilized up to December 30, 2014 at which time any excess will be returned to the
Bank.
At December 31, 2010 and 2009, the Bank held $3.3 million in Federal Reserve Bank stock as
required by the Federal Reserve Bank. The Bank is required to hold stock in the Federal Home
Loan Bank of Pittsburgh (FHLB) in relation to the level of outstanding borrowings. The Bank held
FHLB stock of $7.1 million and $7.4 million as of December 31, 2010 and 2009, respectively.
During 2008, the FHLB suspended the payment of dividends and the repurchase of excess capital
stock in-order to rebuild its capital levels. This is due to the other-than-temporary impairment
write down required on their private-label mortgage portfolio which could reduce their capital
below required levels. Additionally, the FHLB might require its members to increase its capital
stock requirement. On October 29, 2010 the FHLB repurchased a limited amount of excess capital
stock. The FHLB will make decisions on future repurchases of excess capital stock on a quarterly
basis. Based on current information from the FHLB, Management believes that if there is any
impairment in the stock it is temporary. Therefore, as of December 31, 2010, the FHLB stock is
recorded at cost.
75
Table of Contents
At December 31, 2009, the Corporation held certain equity investments for which it was
restricted from trading and had been carried at cost. During 2009, the Corporation recorded an
other-than-temporary impairment on these long-lived assets of $500 thousand. The Corporation
determined that it was probable that these long-lived assets would not regain market value
equivalent to the Corporation’s cost basis within a reasonable period of time due to a decline
in the financial stability of the underlying company. During the first quarter of 2010, due to
increased market activity and removal of underlying restrictions from selling, these thinly
traded equities were marked to fair value and reclassified to investment securities available
for sale.
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) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 5,142 | $ | 5,057 | $ | 5,727 | ||||||
|
State
|
387 | (14 | ) | 175 | ||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(2,162 | ) | (4,543 | ) | (124 | ) | ||||||
|
State
|
(85 | ) | 63 | — | ||||||||
|
|
||||||||||||
|
|
$ | 3,282 | $ | 563 | $ | 5,778 | ||||||
|
|
||||||||||||
The provision for income taxes differs from the expected statutory provision as
follows:
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Expected provision at statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Difference resulting from:
|
||||||||||||
|
Tax exempt interest income
|
(16.0 | ) | (25.0 | ) | (9.9 | ) | ||||||
|
Increase in value of bank owned life insurance assets
|
(2.3 | ) | (4.1 | ) | (3.7 | ) | ||||||
|
Other, including state income taxes, valuation allowance and rate differential
|
0.5 | (0.9 | ) | 0.5 | ||||||||
|
|
||||||||||||
|
|
17.2 | % | 5.0 | % | 21.9 | % | ||||||
|
|
||||||||||||
During the years ended December 31, 2010 and 2009, the Corporation did not record any
tax benefits resulting from the exercise of employee stock options and restricted stock to
additional paid-in capital.
As of December 31, 2010 the Corporation had no material unrecognized tax benefits, accrued
interest or penalties. Penalties are recorded in non-interest expense in the year they are
assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in
non-interest expense in the year it is assessed and is treated as a deductible expense for tax
purposes. The Corporation’s 2006 and 2007 federal tax returns were examined with some
adjustments, and tax years 2006 through 2009 remain subject to federal examination as well as
examination by state taxing jurisdictions.
Deferred income taxes reflect the tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amount 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. A valuation allowance at December 31, 2010 and
2009, 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 $9 thousand and $7 thousand were reversed and
charged to equity during the years ended December 31, 2010 and 2009, respectively, as a result
of unrecognizable restricted stock and non-qualified stock option expense. The Corporation had
state net operating loss carryforwards of $12.5 million which will begin to expire after
December 31, 2018 if not utilized.
76
Table of Contents
The assets and liabilities giving rise to the Corporation’s deferred tax assets and
liabilities are as follows:
| At December 31 , | ||||||||
| (Dollars in thousands) | 2010 | 2009 | ||||||
|
|
||||||||
|
Deferred tax assets:
|
||||||||
|
Loan and lease loss
|
$ | 10,941 | $ | 8,756 | ||||
|
Deferred compensation
|
2,531 | 2,426 | ||||||
|
Postretirement benefits
|
614 | 578 | ||||||
|
Actuarial adjustments on postretirement benefits*
|
4,292 | 3,794 | ||||||
|
Vacation accrual
|
370 | 366 | ||||||
|
State net operating losses
|
813 | 846 | ||||||
|
Other-than-temporary impairments on equity securities
|
1,279 | 1,315 | ||||||
|
Other
|
1,553 | 822 | ||||||
|
|
||||||||
|
Gross deferred tax assets
|
22,393 | 18,903 | ||||||
|
Valuation allowance
|
(1,281 | ) | (1,405 | ) | ||||
|
|
||||||||
|
Total deferred tax asset, net of valuation allowance
|
21,112 | 17,498 | ||||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
Market discount
|
1,276 | 691 | ||||||
|
Retirement plans
|
1,612 | 1,117 | ||||||
|
Depreciation
|
482 | 273 | ||||||
|
Deferred fees and expense
|
268 | 175 | ||||||
|
Prepaid expenses
|
406 | 371 | ||||||
|
Intangible assets
|
863 | 564 | ||||||
|
Net unrealized holding gains on securities available for sale and
swaps*
|
648 | 3,512 | ||||||
|
Other
|
— | 848 | ||||||
|
|
||||||||
|
Total deferred tax liabilities
|
5,555 | 7,551 | ||||||
|
|
||||||||
|
Net deferred tax assets
|
$ | 15,557 | $ | 9,947 | ||||
|
|
||||||||
| * |
Represents the amount of deferred taxes recorded in accumulated other comprehensive income
(loss).
|
Substantially all employees who were hired before December 8, 2009 are covered by a
noncontributory retirement plan. Effective December 31, 2009, the benefits under the
noncontributory retirement plan, in its current form, was 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. Additionally, employees hired on or after December 8, 2009 are no longer eligible to
participate in the noncontributory retirement plan. The Corporation experienced a reduction in
its benefit obligation of $2.7 million during 2009 as a result of the conversion to the cash
balance plan. The Corporation also provides supplemental executive retirement benefits, a
portion of which is in excess of limits imposed on qualified plans by federal tax law. These
plans are non-qualified benefit plans. Information on these plans are aggregated and reported
under “Retirement Plans” within this footnote.
The Corporation also provides certain postretirement healthcare and life insurance benefits
for retired employees. Information on these benefits is reported under “Other Postretirement
Benefits” within this footnote.
The Corporation sponsors a 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 defined by the
plan. Expense recorded by the Corporation for the 401(k) deferred salary savings plan
for the years ended December 31, 2010, 2009 and 2008 was $588 thousand, $536 thousand and $493
thousand, respectively.
77
Table of Contents
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 will continue to serve and realizing that if these
employees would enter into competition with the Corporation, it would suffer severe financial
loss. The SNQPP was established prior to the existence of a 401(k) Deferred Savings Plan, the
Employee Stock Purchase Plan and the Long-Term Incentive Plans and therefore is not actively
offered to new participants. Expense recorded by the Corporation for the SNQSPP for the years
ended December 31, 2010, 2009 and 2008 was $88 thousand, $576 thousand and $523 thousand,
respectively. The reduction in expense during 2010 was the result of a change in valuation
estimates associated with projecting future changes in the Consumer Price Index. The expense for
2010 was estimated using a weighted-average discount rate of 5.23%.
Information with respect to the Retirement and Supplemental Retirement Plans and Other
Postretirement Benefits follows:
| Other Postretirement | ||||||||||||||||
| Retirement Plans | Benefits | |||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
|
||||||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 29,386 | $ | 31,421 | $ | 1,636 | $ | 1,486 | ||||||||
|
Service cost
|
362 | 1,094 | 76 | 68 | ||||||||||||
|
Interest cost
|
1,708 | 1,700 | 115 | 91 | ||||||||||||
|
Plan amendment
|
— | (2,726 | ) | — | — | |||||||||||
|
Actuarial loss (gain)
|
2,239 | (683 | ) | 226 | 72 | |||||||||||
|
Benefits paid
|
(1,445 | ) | (1,420 | ) | (79 | ) | (81 | ) | ||||||||
|
|
||||||||||||||||
|
Benefit obligation at end of year
|
$ | 32,250 | $ | 29,386 | $ | 1,974 | $ | 1,636 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 21,606 | $ | 19,422 | $ | — | $ | — | ||||||||
|
Actual return on plan assets
|
2,145 | 3,543 | — | — | ||||||||||||
|
Benefits paid
|
(1,445 | ) | (1,420 | ) | (79 | ) | (81 | ) | ||||||||
|
Employer contribution and non-qualified benefit
payments
|
2,060 | 61 | 79 | 81 | ||||||||||||
|
|
||||||||||||||||
|
Fair value of plan assets at end of year
|
24,366 | 21,606 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Funded status
|
(7,884 | ) | (7,780 | ) | (1,974 | ) | (1,636 | ) | ||||||||
|
Unrecognized net actuarial gain
|
16,508 | 15,728 | 561 | 333 | ||||||||||||
|
Unrecognized prior service costs
|
(2,296 | ) | (2,531 | ) | (68 | ) | (88 | ) | ||||||||
|
Unrecognized transition asset
|
(2,443 | ) | (2,726 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Net amount recognized
|
$ | 3,885 | $ | 2,691 | $ | (1,481 | ) | $ | (1,391 | ) | ||||||
|
|
||||||||||||||||
Information for the pension plans with an accumulated benefit obligation in excess of
plan assets:
| At December 31, | ||||||||
| (Dollars in thousands) | 2010 | 2009 | ||||||
|
|
||||||||
|
Projected benefit obligation
|
$ | 31,718 | $ | 28,896 | ||||
|
Accumulated benefit obligation
|
29,679 | 26,615 | ||||||
|
Fair value of plan assets
|
24,366 | 21,606 | ||||||
78
Table of Contents
The retirement benefit cost includes the following components:
| Retirement Plans | Other Postretirement Benefits | |||||||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Service cost
|
$ | 362 | $ | 1,094 | $ | 890 | $ | 76 | $ | 68 | $ | 47 | ||||||||||||
|
Interest cost
|
1,708 | 1,700 | 1,664 | 115 | 91 | 75 | ||||||||||||||||||
|
Expected return on plan assets
|
(1,670 | ) | (1,545 | ) | (1,872 | ) | — | — | — | |||||||||||||||
|
Amortization of net loss
|
686 | 899 | 358 | 7 | 25 | 3 | ||||||||||||||||||
|
Amortization (accretion) of prior
service cost
|
47 | 47 | 46 | (20 | ) | (20 | ) | (20 | ) | |||||||||||||||
|
Accretion of transition asset
|
(283 | ) | — | — | — | — | — | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
$ | 850 | $ | 2,195 | $ | 1,086 | $ | 178 | $ | 164 | $ | 105 | ||||||||||||
|
|
||||||||||||||||||||||||
| Other | ||||||||
| Retirement | Postretirement | |||||||
| (Dollars in thousands) | Plans | Benefits | ||||||
|
Expected amortization expense for 2011:
|
||||||||
|
Amortization of net loss
|
$ | 730 | $ | 16 | ||||
|
Amortization (accretion) of prior service cost
|
42 | (20 | ) | |||||
|
Accretion of transition asset
|
(283 | ) | — | |||||
During 2011, the Corporation expects to contribute approximately $54 thousand to the
Retirement Plans and approximately $97 thousand to Other Postretirement Benefits.
The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid:
| Other | ||||||||
| (Dollars in thousands) | Postretirement | |||||||
| For the fiscal year ending: | Retirement Plans | Benefits | ||||||
|
2011
|
$ | 1,504 | $ | 97 | ||||
|
2012
|
1,610 | 105 | ||||||
|
2013
|
1,727 | 112 | ||||||
|
2014
|
1,715 | 123 | ||||||
|
2015
|
1,856 | 126 | ||||||
|
Years 2016-2020
|
8,099 | 710 | ||||||
Weighted-average assumptions used to determine benefit obligations at December 31,
2010 and 2009 were as follows:
| Other Postretirement | ||||||||||||||||
| Retirement Plans | Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Assumed discount rate for obligation
|
5.5 | % | 5.9 | % | 5.5 | % | 6.0 | % | ||||||||
|
Assumed salary increase rate
|
3.0 | 3.0 | — | — | ||||||||||||
Weighted-average assumptions used to determine net periodic costs for the years ended
December 31, 2010 and 2009 were as follows:
| Other Postretirement | ||||||||||||||||
| Retirement Plans | Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Assumed discount rate for obligation
|
6.0 | % | 5.9 | % | 6.0 | % | 5.9 | % | ||||||||
|
Assumed long-term rate of investment return
|
8.0 | 8.0 | — | — | ||||||||||||
|
Assumed salary increase rate
|
3.0 | 5.1 | — | — | ||||||||||||
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 | 2010 | 2009 | 2008 | |||||||||
|
Health care cost trend rate assumed for next year
|
6.5 | % | 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
|
2012 | 2011 | 2010 | |||||||||
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
|
$ | 5 | $ | (5 | ) | |||
|
Effect on postretirement benefit obligation
|
60 | (5 | ) | |||||
79
Table of Contents
The Corporation’s pension plan asset allocation at December 31, 2010 and 2009, by
asset category was as follows:
| Percentage of Plan | ||||||||
| Assets at December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Asset Category:
|
||||||||
|
Equity securities
|
52 | % | 50 | % | ||||
|
Debt securities
|
47 | 44 | ||||||
|
Other
|
1 | 6 | ||||||
|
|
||||||||
|
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
50%-equity-to-50%-fixed-income mix to achieve the overall expected long-term rate of return of
8.0%. Equity securities do not include any common stock of the Corporation.
The major categories of assets in the Corporation’s pension plan as of 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) | 2010 | 2009 | ||||||
|
|
||||||||
|
Level 1:
|
||||||||
|
Common stocks
|
$ | 8,119 | $ | 8,666 | ||||
|
Mutual funds:
|
||||||||
|
U.S. Mid Cap
|
1,043 | 1,092 | ||||||
|
U.S. Small Cap
|
1,068 | 1,100 | ||||||
|
International
|
2,421 | — | ||||||
|
Income
|
1,518 | 776 | ||||||
|
Short-term investments
|
395 | 1,324 | ||||||
|
Level 2:
|
||||||||
|
U.S. government obligations
|
2,482 | 2,156 | ||||||
|
Corporate bonds
|
4,422 | 4,219 | ||||||
|
Level 3:
|
||||||||
|
Certificates of deposit
|
2,898 | 2,273 | ||||||
|
|
||||||||
|
Total fair value of plan assets
|
$ | 24,366 | $ | 21,606 | ||||
|
|
||||||||
Investments in common stocks primarily include U.S. companies with large market
capitalizations and some foreign exposure in their markets. The common stock investments are
diversified amongst various industries including healthcare, utilities and other industries with
the primary objective of long-term capital appreciation and a secondary objective of current
income. Mutual fund investments in U.S. mid cap and small cap companies are comprised mainly of
growth and value equity funds with some foreign exposure in the companies’ markets. Mutual fund
investments in international funds are comprised of equities of companies located outside of the
U.S., including both developed and emerging markets. The common stock investments are
diversified across over 40 countries and include companies ranging from small to large. The
primary objective of international equity funds is long-term capital appreciation. 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.
80
Table of Contents
The following table provides a reconciliation of the beginning and ending balances for
measurements in hierarchy Level 3 at December 31, 2010 and 2009.
| Total | Total | |||||||||||||||||||||||
| Balance at | Unrealized | Realized | Balance at | |||||||||||||||||||||
| December 31, | (Losses) or | Gains or | Maturities/ | December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2009 | Gains | (Losses) | Purchases | Redemptions | 2010 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Certificates of deposit
|
$ | 2,273 | $ | — | $ | — | $ | 1,599 | $ | (974 | ) | $ | 2,898 | |||||||||||
|
|
||||||||||||||||||||||||
|
Total Level 3 assets
|
$ | 2,273 | $ | — | $ | — | $ | 1,599 | $ | (974 | ) | $ | 2,898 | |||||||||||
|
|
||||||||||||||||||||||||
| Total | Total | |||||||||||||||||||||||
| Balance at | Unrealized | Realized | Balance at | |||||||||||||||||||||
| December 31, | (Losses) or | Gains or | Maturities/ | December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2008 | Gains | (Losses) | Purchases | Redemptions | 2009 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Certificates of deposit
|
$ | 1,904 | $ | — | $ | — | $ | 754 | $ | 385 | $ | 2,273 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total Level 3 assets
|
$ | 1,904 | $ | — | $ | — | $ | 754 | $ | 385 | $ | 2,273 | ||||||||||||
|
|
||||||||||||||||||||||||
The Corporation has a shareholder-approved 2003 Long-Term Incentive Plan under which
the Corporation may grant options and share awards to employees up to 1,500,000 shares of common
stock. The plan provides for the issuance of options to purchase common shares at prices not
less than 100 percent of the fair market value at the date of option grant 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 restriction lapses over a three-year period
at 33.3 percent per year. There were 877,157 common shares available for future grants at
December 31, 2010 under the plan. At December 31, 2010 there were 428,032 options to purchase
common stock and 116,813 unvested restricted stock awards outstanding under the plan.
Following is a summary of the status of options granted under the 2003 Long-term Incentive
Plan during 2010:
| Weighted | Weighted | Aggregate | ||||||||||||||
| Average | Average | Intrinsic | ||||||||||||||
| Shares | Exercise | Remaining | Value at | |||||||||||||
| Under | Price Per | Contractual | December 31, | |||||||||||||
| (Dollars in thousands) | Option | Share | Life (Years) | 2010 | ||||||||||||
|
|
||||||||||||||||
|
Outstanding at December 31, 2009
|
405,532 | $ | 23.37 | |||||||||||||
|
Granted
|
22,500 | 17.58 | ||||||||||||||
|
Expired
|
— | — | ||||||||||||||
|
Forfeited
|
— | — | ||||||||||||||
|
Exercised
|
— | — | ||||||||||||||
|
|
||||||||||||||||
|
Outstanding at December 31, 2010
|
428,032 | 23.07 | 6.0 | $ | 40 | |||||||||||
|
|
||||||||||||||||
|
Exercisable at December 31, 2010
|
251,532 | 24.64 | 5.0 | — | ||||||||||||
|
|
||||||||||||||||
The total intrinsic values of options exercised during 2009 and 2008 were $25 thousand
and $1.1 million, respectively. There were no stock options exercised during 2010. 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 exchange allows the optionees to exercise
their vested options on a net basis without having to pay the exercise price and or related
taxes in cash. However, it will result in the executives acquiring fewer shares than the number
of options exercised. During 2009, optionees exchanged 1,586 shares, net shares acquired
amounted to 2,547 common shares.
81
Table of Contents
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 made for options granted during fiscal years 2010 and 2009; there were no
options granted in 2008:
| For the Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Expected option life in years
|
8.0 | 7.8 | — | |||||||||
|
Risk free interest rate
|
3.60 | % | 2.34 | % | — | |||||||
|
Expected dividend yield
|
4.55 | % | 3.60 | % | — | |||||||
|
Expected volatility
|
47.16 | % | 45.95 | % | — | |||||||
|
Fair value of options
|
$ | 5.81 | $ | 7.67 | — | |||||||
Following is a summary of nonvested restricted stock awards as of December 31, 2010
including changes during the year:
| Weighted | ||||||||
| Nonvested | Average | |||||||
| Share | Grant Date | |||||||
| (Dollars in thousands) | Awards | Fair Value | ||||||
|
|
||||||||
|
Nonvested share awards at December 31, 2009
|
56,024 | $ | 23.09 | |||||
|
Granted
|
67,982 | 17.62 | ||||||
|
Vested
|
(7,193 | ) | 22.24 | |||||
|
Forfeited
|
— | — | ||||||
|
|
||||||||
|
Nonvested share awards at December 31, 2010
|
116,813 | 19.96 | ||||||
|
|
||||||||
The fair value of 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 restricted stock awards
granted during 2010, 2009 and 2008 was $17.62, $23.08 and $26.00 per share, respectively. The
total intrinsic value of restricted stock awards that vested during 2010, 2009 and 2008 was $138
thousand, $112 thousand and $229 thousand, respectively. As of December 31, 2010,
there was $1.3 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 1.9 years.
During the years ended December 31, 2010, 2009 and 2008, the Corporation recognized
stock-based compensation expense of $211 thousand, $376 thousand and $449 thousand,
respectively, on stock options; $834 thousand, $445 thousand and $184 thousand during 2010, 2009
and 2008, respectively, on restricted stock awards; and $46 thousand, $32 thousand and $28
thousand during 2010, 2009 and 2008, respectively, on the Employee Stock Purchase Plan. During
the years ended December 31, 2010, 2009 and 2008, the Corporation recognized a tax benefit on
nonqualified stock option expense and restricted stock awards of $292 thousand, $171 thousand
and $125 thousand, respectively.
82
Table of Contents
During the year ended December 31, 2008, the Corporation accelerated the vesting of 5,000
options, respectively as permitted under the plan upon retirement. The accelerated options
became exercisable upon the date of retirement and are exercisable up to a two-year period
post-retirement; however incentive stock options become nonqualified after 90-days
post-retirement. As a result of these modifications, additional compensation expense of $38
thousand was recognized during 2008. During the year ended December 31, 2008, the Corporation
accelerated the vesting of 2,500 restricted stock awards as permitted under the plan upon
retirement. As a result of this modification, additional compensation expense of $53 thousand
was recognized in 2008. There were no modifications or accelerations to options or restricted
stock awards during 2009 or 2010.
During the years ended December 31, 2009 and 2008, cash proceeds from the exercise of stock
options were $93 thousand and $1.8 million, respectively; the tax benefit recognized and
recorded to additional paid in capital was $0 and $210 thousand, respectively. There were no
stock options exercised during 2010.
The Corporation typically issues shares for stock options exercises and grants of
restricted stock awards from its Treasury Stock.
The aggregate amount of time deposits in denominations of $100 thousand or more was
$150.7 million at December 31, 2010 and $128.7 million at December 31, 2009, with interest
expense of $2.9 million for 2010 and $4.4 million for 2009.
At December 31, 2010, the scheduled maturities of time deposits in denominations of $100
thousand or more are as follows:
| (Dollars in thousands) | ||||
|
Due in 2011
|
$ | 109,195 | ||
|
Due in 2012
|
9,181 | |||
|
Due in 2013
|
7,580 | |||
|
Due in 2014
|
4,917 | |||
|
Due in 2015
|
6,732 | |||
|
Thereafter
|
13,110 | |||
|
|
||||
|
Total
|
$ | 150,715 | ||
|
|
||||
At December 31, 2010 and 2009 long-term borrowings consisted of the following:
| Balance | Interest Rate | |||||||||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | Maturity | |||||||||||||||
|
|
||||||||||||||||||||
|
Federal Home Loan Bank Advances*
|
$ | 5,000 | $ | 5,000 | 3.75 | % | 3.75 | % | January 2013 | |||||||||||
|
Subordinated Term Loan Note
|
1,125 | 1,625 | 1.67 | % | 1.64 | % | April 2013 | |||||||||||||
|
Subordinated Term Loan Note
|
2,250 | 3,250 | 1.67 | % | 1.64 | % | May 2013 | |||||||||||||
|
Trust Preferred Securities
|
20,619 | 20,619 | 3.34 | % | 3.33 | % | October 2033 | |||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 28,994 | $ | 30,494 | ||||||||||||||||
|
|
||||||||||||||||||||
| * |
Federal Home Loan Bank (FHLB) Advances are calculated at a weighted average rate and do
not include the fair value adjustment of $190 thousand at December 31, 2009, recorded on
debt assumed through the 2003 acquisitions.
|
83
Table of Contents
The contractual maturities of long-term borrowings as of December 31, 2010 are as
follows:
| (Dollars in thousands) | ||||
|
|
||||
|
Due in 2011
|
$ | 1,125 | ||
|
Due in 2012
|
1,500 | |||
|
Due in 2013
|
5,750 | |||
|
Due in 2014
|
— | |||
|
Due in 2015
|
— | |||
|
Thereafter
|
20,619 | |||
|
|
||||
|
|
$ | 28,994 | ||
|
|
||||
Advances from the FHLB are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans of the Bank. The fair value adjustment recorded on FHLB
advances assumed through acquisitions totaled $0 and $190 thousand at December 31, 2010 and
2009, respectively. The Corporation, through the Bank, has short-term and long-term credit
facilities with the FHLB with a maximum borrowing capacity of approximately $387.9 million. At
December 31, 2010 and 2009, the Bank’s outstanding short-term and long-term borrowings under the
FHLB credit facilities totaled $5.0 million and $92.0 million, respectively. Short-term
borrowings with the FHLB decreased by $87.0 million during 2010 due to maturities. At December
31, 2010, the Bank also had outstanding short-term letters of credit with the FHLB totaling
$15.0 million which were utilized to collateralize seasonal 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.
The Corporation secured two subordinated term loan notes during the second quarter of 2003.
The first note was issued for $5.0 million at the fixed rate of 5.5% per annum. This note
converted to a floating rate in second quarter 2008 based upon the one-month U.S. London
Interbank Borrowing Rate (LIBOR) plus 1.40% per annum. Quarterly principal and interest payments
are made on this note. The second note was issued for $10.0 million at a floating rate based
upon the one-month LIBOR plus 1.40% per annum. Quarterly principal and interest payments are
made on this note. Both of these notes mature in the second quarter of 2013. At December 31,
2010 and 2009, the outstanding balance of these notes was $3.4 million and $4.9 million,
respectively.
On August 27, 2003, the Corporation issued $20.0 million of Capital Securities of Univest
Capital Trust I, a Delaware statutory trust formed by the Corporation. This issuance constitutes
Trust Preferred Securities, which were completed through a placement in Junior Subordinated
Debentures of the Corporation. The deconsolidation of Univest Capital Trust I increased the
carrying amount of the Trust Preferred Securities by $619 thousand. The 30-year term securities
were issued on a variable rate based upon the published LIBOR rate plus 3.05% per annum. The
securities are callable by Univest at par in whole or in part after five years. Quarterly
interest payments are made on this note. At December 31, 2010, the $20.6 million in Trust
Preferred Securities qualified as Tier 1 capital under capital guidelines of the Federal
Reserve. The proceeds from the Trust Preferred Securities were used to support the future growth
of the Corporation and its banking subsidiary, the Bank.
The Bank maintains federal fund credit lines with several correspondent banks totaling
$82.0 million at December 31, 2010 and 2009. Outstanding borrowings under these lines totaled
$24.6 million at December 31, 2010; there was no outstanding balance at December 31, 2009.
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, 2010 and 2009, the Corporation had no outstanding
borrowings from this line.
84
Table of Contents
The following table details key information pertaining to securities sold under agreement
to repurchase on an overnight basis for the periods indicated:
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Balance at December 31
|
$ | 90,271 | $ | 95,624 | $ | 81,230 | ||||||
|
Weighted average interest rate at year end
|
0.30 | % | 0.50 | % | 0.49 | % | ||||||
|
Maximum amount outstanding at any month’s end
|
$ | 109,712 | $ | 133,140 | $ | 92,962 | ||||||
|
Average amount outstanding during the year
|
$ | 97,667 | $ | 91,390 | $ | 84,254 | ||||||
|
Weighted average interest rate during the year
|
0.40 | % | 0.60 | % | 1.12 | % | ||||||
The following table sets forth the computation of basic and diluted earnings per
share:
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Numerator for basic and diluted earnings per share—income available to common shareholders
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | ||||||
|
|
||||||||||||
|
Denominator:
|
||||||||||||
|
Denominator for basic earnings per share—weighted-average shares outstanding
|
16,598 | 14,347 | 12,873 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Employee stock options
|
— | — | 22 | |||||||||
|
|
||||||||||||
|
Denominator for diluted earnings per share—adjusted weighted-average shares outstanding
|
16,598 | 14,347 | 12,895 | |||||||||
|
|
||||||||||||
|
Basic earnings per share
|
$ | 0.95 | $ | 0.75 | $ | 1.60 | ||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 0.95 | $ | 0.75 | $ | 1.60 | ||||||
|
|
||||||||||||
Anti-dilutive options have been excluded in the computation of diluted earnings per
share because the options’ exercise prices were greater than the average market price of the
common stock. For 2010, 2009 and 2008, there were 403,032, 406,615 and 88,267 anti-dilutive
options at an average price of $23.41, $23.45, and $28.26, per share, respectively.
85
Table of Contents
The following shows the components of comprehensive income, net of income taxes, for
the periods presented:
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Net Income
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | ||||||
|
|
||||||||||||
|
Net unrealized (losses) gains on available-for-sale investment securities:
|
||||||||||||
|
Net unrealized (losses) gains arising during the period
|
(4,248 | ) | 2,730 | (249 | ) | |||||||
|
Less: reclassification adjustment for net gains on sales realized in net income
|
281 | 748 | 182 | |||||||||
|
Less: reclassification adjustment for other-than-temporary impairment on equity securities realized in net income
|
(40 | ) | (1,110 | ) | (813 | ) | ||||||
|
|
||||||||||||
|
Total net unrealized (losses) gains on available-for-sale investment securities
|
(4,489 | ) | 3,092 | 382 | ||||||||
|
Net change in fair value of derivative used for cash flow hedges
|
(830 | ) | 1,299 | (149 | ) | |||||||
|
Defined benefit pension plans:
|
||||||||||||
|
Net unrealized (losses) gains arising during the period
|
(1,208 | ) | 1,314 | (7,336 | ) | |||||||
|
Less: amortization of net loss included in net periodic pension costs
|
(450 | ) | (601 | ) | (235 | ) | ||||||
|
Prior service costs rising during the period
|
— | — | 34 | |||||||||
|
Less: accretion (amortization) of prior service cost included in net periodic pension costs
|
349 | (18 | ) | 17 | ||||||||
|
Unrecognized transition asset arising during the period
|
— | 1,771 | — | |||||||||
|
Less: amortization of transition asset included in net periodic pension costs
|
(184 | ) | — | — | ||||||||
|
|
||||||||||||
|
Total defined benefit pension plans
|
(923 | ) | 3,704 | (7,084 | ) | |||||||
|
|
||||||||||||
|
Total comprehensive income, net of tax
|
$ | 9,514 | $ | 18,875 | $ | 13,739 | ||||||
|
|
||||||||||||
The following shows the components of accumulated other comprehensive loss, net of
income taxes, for the periods presented:
| Net | ||||||||||||||||
| Unrealized | ||||||||||||||||
| (Losses) | Net Change | Net Change | ||||||||||||||
| Gains | in Fair Value | Related to | ||||||||||||||
| Available for | of Derivative | Defined | Accumulated | |||||||||||||
| Sale | Used for | Benefit | Other | |||||||||||||
| Investment | Cash Flow | Pension | Comprehensive | |||||||||||||
| (Dollars in thousands) | Securities | Hedges | Plan | Loss | ||||||||||||
|
|
||||||||||||||||
|
Balance, December 31, 2007
|
$ | 1,899 | $ | — | $ | (3,667 | ) | $ | (1,768 | ) | ||||||
|
Net Change
|
382 | (149 | ) | (7,084 | ) | (6,851 | ) | |||||||||
|
|
||||||||||||||||
|
Balance, December 31, 2008
|
2,281 | (149 | ) | (10,751 | ) | (8,619 | ) | |||||||||
|
Net Change
|
3,092 | 1,299 | 3,704 | 8,095 | ||||||||||||
|
|
||||||||||||||||
|
Balance, December 31, 2009
|
5,373 | 1,150 | (7,047 | ) | (524 | ) | ||||||||||
|
Net Change
|
(4,489 | ) | (830 | ) | (923 | ) | (6,242 | ) | ||||||||
|
|
||||||||||||||||
|
Balance, December 31, 2010
|
$ | 884 | $ | 320 | $ | (7,970 | ) | $ | (6,766 | ) | ||||||
|
|
||||||||||||||||
Loan commitments are made to accommodate the financial needs of the Bank’s customers.
The Bank offers commercial, mortgage, and consumer credit products to their customers in the
normal course of business, which are detailed in Note 4. These products represent a diversified
credit portfolio and are generally issued to borrowers within the Bank’s branch office systems
in eastern 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.
86
Table of Contents
Standby letters of credit commit the Bank to make payments on behalf of customers when
certain specified future events occur. They primarily are 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 unassignable 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 any
credit risk. As of December 31, 2010, the maximum potential amount of future payments under the
standby letters of credit is $63.8 million. The current carrying amount of the contingent
obligation is $304 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 also controls their credit risk by limiting the amount of credit to any business,
institution, or individual. Management evaluates the creditworthiness of the institution on at
least a quarterly basis in an effort to monitor its credit risk associated with this
concentration.
The Bank significantly grew its mortgage-banking business during 2010 and due to this
growth increased its potential to have to repurchase the mortgages due to errors in
documentation and underwriting. The exposure to repurchase these mortgages is $282.1 million as
of December 31, 2010. The Bank maintains a reserve in other liabilities for sold mortgages that
may be repurchased. At December 31, 2010, the reserve for sold mortgages was $49 thousand.
Based on consultation with the Corporation’s legal counsel, Management is not aware of any
litigation that would have a material adverse effect on the consolidated financial position of
the Corporation. There are no proceedings pending other than the ordinary routine litigation
incident to the business of the Corporation. In addition, there are no material proceedings
pending or known to be threatened or contemplated against the Corporation or the Bank by
government authorities.
The following schedule summarizes the Corporation’s off-balance sheet financial
instruments:
| Contract/Notional | ||||
| (Dollars in thousands) | Amount | |||
|
Financial instruments representing credit risk:
|
||||
|
Commitments to extend credit
|
$ | 430,817 | ||
|
Performance letters of credit
|
34,651 | |||
|
Financial standby letters of credit
|
28,920 | |||
|
Other letters of credit
|
238 | |||
As of December 31, 2010, the Corporation and its subsidiaries were obligated under
non-cancelable leases for various premises and equipment. A summary of the future minimum rental
commitments under non-cancelable operating leases net of related sublease revenue is as follows:
|
(Dollars in thousands)
Year |
Amount | |||
|
2011
|
$ | 2,092 | ||
|
2012
|
1,906 | |||
|
2013
|
1,738 | |||
|
2014
|
1,759 | |||
|
2015
|
1,676 | |||
|
Thereafter
|
19,610 | |||
|
|
||||
|
Total
|
$ | 28,781 | ||
|
|
||||
Rental expense charged to operations was $2.0 million, $1.9 million and $2.0 million
for the years ended December 31, 2010, 2009 and 2008, respectively.
87
Table of Contents
The Corporation may use interest-rate swap agreements to modify the interest rate
characteristics from variable to fixed or fixed to floating in order to reduce the impact of
interest rate changes on future net interest income. The Corporation accounts for its
interest-rate swap contracts in cash flow and fair value hedging relationships by establishing
and documenting the effectiveness of the instrument in offsetting the change in cash flows or
fair value 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 the statement of operations, potentially causing material fluctuations in
reported earnings in the period of the change relative to comparable periods.
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 equity until the underlying
forecasted transactions occur, at which time the deferred gains and losses are recognized in
income. For a qualifying fair value hedge, the gain or loss on the hedging instrument is
recognized in earnings, and the change in fair value on the hedge item to the extent
attributable
to the hedged risk adjusts the carrying amount of the hedge item and is recognized in
earnings.
Derivative loan commitments represent agreements for delayed delivery of financial
instruments in which the buyer agrees to purchase and the seller agrees to deliver, at a
specified future date, a specified instrument at a specified price or yield. The Corporation’s
derivative loan commitments are commitments to sell loans secured by 1-to-4 family residential
properties whose predominant risk characteristic is interest rate risk. The fair values of these
derivative loan commitments are based upon the estimated amount the Corporation would receive or
pay to terminate the contracts or agreements, taking into account current interest rates and,
when appropriate, the current creditworthiness of the counterparties. Loans held for sale are
included as forward loan commitments. At December 31, 2010, the notional amounts of interest
rate locks with customers and forward loan commitments were $37.7 million and $41.8 million,
respectively with positive fair values of $530 thousand and $269 thousand, respectively. At
December 31, 2009, the notional amounts of interest rate locks with customers and forward loan
commitments were $11.6 million and $13.3 million, respectively with positive fair values of $24
thousand and $132 thousand, respectively. For the interest rate locks with customers, the
Corporation recognized fair value adjustments which resulted in gains of $509 thousand and $24
thousand for the years ended December 31, 2010 and 2009, respectively. For the forward loan
commitments, the Corporation recognized fair value adjustments which resulted in gains of $135
thousand and $132 thousand for the years ended December 31, 2010 and 2009, respectively. The
fair value gains and losses related to interest rate locks and forward loan commitments are
classified as a component of net gain on mortgage banking activities in the Corporation’s
consolidated statements of income.
On March 24, 2009, the Corporation entered into a $22.0 million notional interest rate
swap, which had been classified as a fair value hedge on a real estate-commercial loan. Under
the terms of the swap agreement, the Corporation paid a fixed rate of 6.49% and received a
floating rate which is based on the one month LIBOR with a 357 basis point spread and a maturity
date of April 1, 2019. The Corporation performed an assessment of the hedge at inception, and at
re-designation. During the fourth quarter of 2009, the Corporation participated $5.0 million of
the hedged real estate-commercial loan and de-designated the hedge relationship. During the
first quarter of 2010, the Corporation re-designated $17.0 million of the interest rate swap.
Upon re-designation, $17.0 million of the swap had some ineffectiveness and the $5.0 million
remained undesignated. During the third quarter of 2010, the Corporation terminated the swap. At
December 31, 2009, the interest rate swap had a positive fair value of $1.2 million which was
classified on the balance sheet in other assets. The underlying commercial loan had a positive
fair value adjustment on the termination date of $859 thousand which is being amortized through
a reduction of interest income over the remaining life. At December 31, 2009, the underlying
commercial loan had a negative fair value adjustment of $431 thousand, which was classified on
the balance sheet as a component of loans and leases. For this interest rate swap, the
Corporation recognized fair value adjustments which resulted in a loss of $1.1 million and a
gain of $641 thousand for the years ended December 31, 2010 and 2009, respectively. The fair
value gains and losses related to this interest rate swap are classified as a component of net
(loss) gain on interest rate swap in the Corporation’s consolidated statements of income.
On December 23, 2008, the Corporation entered into a cash flow hedge with a notional amount
of $20.0 million that had the effect of converting the variable rates on trust preferred
securities to a fixed rate. Under the terms of the swap agreement, the Corporation pays a fixed
rate of 2.65% and receives a floating rate based on the three month LIBOR with a maturity date
of January 7, 2019. The Corporation had performed an assessment of the hedge at inception and
determined that this derivative was highly effective in offsetting the changes in the cash flows
of the hedged item. At December 31, 2010, the interest rate swap had a positive fair value of
$492 thousand, which was classified on the balance sheet as a component of other assets, and was
determined to be highly effective in offsetting the changes in the cash flows of the hedged
item. The fair value of the interest rate swap, net of taxes, of $320 thousand was recorded as a
component of accumulated other comprehensive loss on the balance sheet. At December 31, 2009,
the interest rate swap had a positive fair value of $1.8 million, which was classified on the
balance sheet as a component of other assets, and was determined to be highly effective in
offsetting the value of the hedged item. The fair value of the interest rate swap, net of taxes,
of $1.1 million was recorded as a component of accumulated other comprehensive loss on the
balance sheet. The cash payments on the interest rate swap of $468 thousand and $377 thousand
for the years ended December 31, 2010 and 2009, respectively, were recorded as a component of
interest expense on the income statement. The Corporation expects that approximately $469
thousand of the net gain in accumulated other comprehensive loss will be reclassified as a
reduction of interest expense within the next twelve months.
88
Table of Contents
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 on 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. 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.
| • |
Level 1—Valuations are based on quoted prices in active markets for identical
assets or liabilities that the Corporation has the ability to access. 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.
Assets and liabilities utilizing Level 1 inputs include: Exchange-traded equity and
most U.S. treasury securities
|
||
| • |
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. Assets and
liabilities generally utilizing Level 2 inputs include: most U.S. Government agency
mortgage-backed debt securities (MBS), corporate debt securities, corporate and
municipal bonds, asset-backed securities (ABS), residential mortgage loans held for
sale, certain commercial loans, mortgage servicing rights and derivative financial
instruments.
|
||
| • |
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. These assets and liabilities include: certain commercial mortgage
obligations (CMOs) and certain ABS securities.
|
Following is a description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant to the valuation
hierarchy.
Investment Securities
Where quoted prices are available in an active market for identical instruments, investment
securities are classified within Level 1 of the valuation hierarchy. Level 1 investment
securities include highly liquid U.S. Treasury securities and most equity securities. If quoted
market prices are not available, then fair values are estimated by using pricing models, quoted
prices of securities with similar characteristics or discounted cash flows. Examples of
instruments, which would generally be classified within Level 2 of the valuation hierarchy,
include U.S. Government sponsored enterprises, certain MBS, CMOs, and 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. Investment securities classified within Level 3 include certain CMO and certain ABS
securities.
89
Table of Contents
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.
The following table presents the assets and liabilities measured at fair value on a
recurring basis as of December 31, 2010 and 2009, classified using the fair value hierarchy:
| At December 31, 2010 | ||||||||||||||||
| Assets/ | ||||||||||||||||
| Liabilities at | ||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
|
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S government corporations and agencies
|
$ | — | $ | 188,100 | $ | — | $ | 188,100 | ||||||||
|
State and political subdivisions
|
— | 108,048 | — | 108,048 | ||||||||||||
|
Mortgage-backed securities
|
— | 85,101 | — | 85,101 | ||||||||||||
|
Commercial mortgage obligations
|
— | 68,760 | 4,331 | 73,091 | ||||||||||||
|
Other securities
|
— | 9,667 | — | 9,667 | ||||||||||||
|
Equity securities
|
2,985 | — | — | 2,985 | ||||||||||||
|
|
||||||||||||||||
|
Total available-for-sale securities
|
2,985 | 459,676 | 4,331 | 466,992 | ||||||||||||
|
|
||||||||||||||||
|
Interest rate swaps
|
— | 492 | — | 492 | ||||||||||||
|
Interest rate locks with customers
|
— | 530 | — | 530 | ||||||||||||
|
Forward loan commitments
|
— | 269 | — | 269 | ||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 2,985 | $ | 460,967 | $ | 4,331 | $ | 468,283 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Liabilities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
|
Total liabilities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
| At December 31, 2009 | ||||||||||||||||
| Assets/ | ||||||||||||||||
| Liabilities at | ||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
|
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
U.S government corporations and agencies
|
$ | — | $ | 119,992 | $ | — | $ | 119,992 | ||||||||
|
State and political subdivisions
|
— | 107,566 | — | 107,566 | ||||||||||||
|
Mortgage-backed securities
|
— | 101,289 | — | 101,289 | ||||||||||||
|
Commercial mortgage obligations
|
— | 74,282 | 5,172 | 79,454 | ||||||||||||
|
Asset-backed securities
|
— | — | 573 | 573 | ||||||||||||
|
Other securities
|
— | 9,144 | — | 9,144 | ||||||||||||
|
Equity securities
|
1,924 | — | — | 1,924 | ||||||||||||
|
|
||||||||||||||||
|
Total available-for-sale securities
|
1,924 | 412,273 | 5,745 | 419,942 | ||||||||||||
|
|
||||||||||||||||
|
Interest rate swaps
|
— | 2,968 | — | 2,968 | ||||||||||||
|
Interest rate locks with customers
|
— | 24 | — | 24 | ||||||||||||
|
Forward loan commitments
|
— | 132 | — | 132 | ||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 1,924 | $ | 415,397 | $ | 5,745 | $ | 423,066 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Liabilities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
|
Total liabilities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
|
||||||||||||||||
90
Table of Contents
The following table presents a reconciliation for all assets measured at fair value on
a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value
for the years ended December 31, 2010 and 2009:
| Total | Total | |||||||||||||||||||
| Balance at | Unrealized | Realized | Balance at | |||||||||||||||||
| December 31, | Gains or | Gains or | December 31, | |||||||||||||||||
| (Dollars in thousands) | 2009 | (Losses) | (Losses) | Paydowns | 2010 | |||||||||||||||
|
|
||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Commercial mortgage obligations
|
$ | 5,172 | $ | 375 | $ | — | $ | (1,216 | ) | $ | 4,331 | |||||||||
|
Asset-backed securities
|
573 | (9 | ) | — | (564 | ) | — | |||||||||||||
|
|
||||||||||||||||||||
|
Total Level 3 assets
|
$ | 5,745 | $ | 366 | $ | — | $ | (1,780 | ) | $ | 4,331 | |||||||||
|
|
||||||||||||||||||||
| Total | ||||||||||||||||||||
| Balance at | Total | Realized | Balance at | |||||||||||||||||
| December 31, | Unrealized | Gains or | December 31, | |||||||||||||||||
| (Dollars in thousands) | 2008 | Gains | (Losses) | Paydowns | 2009 | |||||||||||||||
|
|
||||||||||||||||||||
|
Available-for-sale securities:
|
||||||||||||||||||||
|
Commercial mortgage obligations
|
$ | 5,340 | $ | 1,057 | $ | — | $ | (1,225 | ) | $ | 5,172 | |||||||||
|
Asset-backed securities
|
1,211 | 29 | — | (667 | ) | 573 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total Level 3 assets
|
$ | 6,551 | $ | 1,086 | $ | — | $ | (1,892 | ) | $ | 5,745 | |||||||||
|
|
||||||||||||||||||||
Realized gains or losses are recognized in the Consolidated Statements of Income.
There were no realized gains or losses recognized on Level 3 assets during the years ended
December 31, 2010 or 2009.
The following table represents assets measured at fair value on a non-recurring basis as of
December 31, 2010 and 2009.
| At December 31, 2010 | ||||||||||||||||
| Assets/Liabilities | ||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | at Fair Value | ||||||||||||
|
|
||||||||||||||||
|
Loans held for sale
|
$ | — | $ | 4,178 | $ | — | $ | 4,178 | ||||||||
|
Real estate-commercial loan
|
— | 17,650 | — | 17,650 | ||||||||||||
|
Impaired loans and leases
|
— | — | 44,159 | 44,159 | ||||||||||||
|
Mortgage servicing rights
|
— | 2,441 | — | 2,441 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | — | $ | 24,269 | $ | 44,159 | $ | 68,428 | ||||||||
|
|
||||||||||||||||
| At December 31, 2009 | ||||||||||||||||
| Assets/Liabilities | ||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | at Fair Value | ||||||||||||
|
|
||||||||||||||||
|
Acquired leases
|
$ | — | $ | — | $ | 3,796 | $ | 3,796 | ||||||||
|
Real estate-commercial loan
|
— | 16,569 | — | 16,569 | ||||||||||||
|
Impaired loans and leases
|
— | — | 35,685 | 35,685 | ||||||||||||
|
Mortgage servicing rights
|
— | 1,437 | — | 1,437 | ||||||||||||
|
Other long-lived assets
|
— | 1,080 | — | 1,080 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | — | $ | 19,086 | $ | 39,481 | $ | 58,567 | ||||||||
|
|
||||||||||||||||
The fair value of the Corporation’s loans held for sale are generally determined using
a pricing model based on current market information obtained from external sources, including,
interest rates, and bids or indications provided by market participants on specific loans that
are actively marketed for sale. The Corporation’s loans held for sale are primarily residential
mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans
held for sale at December 31, 2010 were carried at the lower of cost or estimated fair value.
91
Table of Contents
The fair value of the hedged real estate-commercial loan (as discussed in Note 17) was
based on a discounted cash flow model which takes into consideration the changes in market value
due to changes in LIBOR. Commercial loans are classified within Level 2 of the valuation
hierarchy. During the fourth quarter of 2009, the Corporation participated $5.0 million of the
hedged real estate-commercial loan and at that time the remaining $17.0 million loan was marked
to fair value due to the de-designation of the fair value hedge. During the first quarter of
2010, the swap was re-designated and the hedged loan was being marked to fair value on a
recurring basis. During the third quarter of 2010 the swap was terminated and the loan was
marked to fair value. The fair value is being amortized to par value over the remaining life of
the loan using the level-yield method.
Acquired leases are measured at the time of acquisition and are based on the fair value of
the collateral securing these leases. Acquired leases are classified within Level 3 of the
valuation hierarchy.
Impaired loans and leases include those collateral-dependent loans and leases for which the
practical expedient was applied, resulting in a fair-value adjustment to the loan or lease.
Impaired loans and leases are evaluated and valued at the time the loan is identified as
impaired, at the lower of cost or fair value. Fair value is measured based on the value of the
collateral securing these loans less cost to sell and is classified at a Level 3 in the fair
value hierarchy. The fair value of collateral is based on appraisals performed by qualified
licensed appraisers hired by the Corporation. At December 31, 2010, impaired loans and leases
had a carrying amount of $45.8 million with a valuation allowance of $1.6 million. At December
31, 2009, impaired loans and leases had a carrying amount of $37.1 million with a valuation
allowance of $1.4 million.
The Corporation estimates the fair value of MSR’s 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. MSR’s are classified within Level 2 of the valuation hierarchy. MSR’s are carried at
the lower of amortized cost or estimated fair value.
The fair value of long-lived assets is based upon readily available market prices adjusted
for underlying restrictions on selling; therefore, long-lived assets are classified within
Level 2 of the valuation hierarchy. At December 31, 2009, long-lived assets in the previous
non-recurring basis table consisted of the Corporation’s ownership of shares of stock in a
company which it was restricted from trading. During the first quarter of 2010, due to increased
market activity and removal of underlying restrictions from selling, these thinly traded
equities were marked to fair value and continue to be marked to fair value on a recurring basis
and are included in equity securities in the previous recurring basis table.
Certain non-financial assets subject to measurement at fair value on a non-recurring basis
include goodwill and other intangible assets. During the 2010 and 2009, there were no triggering
events to fair value goodwill and other intangible assets.
The following table represents the estimates of fair value of financial instruments:
| At December 31, 2010 | At December 31, 2009 | |||||||||||||||
| Carrying, | Carrying, | |||||||||||||||
| Notional or | Notional or | |||||||||||||||
| Contract | Contract | Fair | ||||||||||||||
| (Dollars in thousands) | Amount | Fair Value | Amount | Value | ||||||||||||
|
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash and short-term assets
|
$ | 29,187 | $ | 29,187 | $ | 68,597 | $ | 68,597 | ||||||||
|
Investment securities
|
467,024 | 467,024 | 420,045 | 420,050 | ||||||||||||
|
Loans held for sale
|
4,178 | 4,178 | 1,693 | 1,708 | ||||||||||||
|
Net loans and leases
|
1,440,288 | 1,499,065 | 1,401,182 | 1,459,568 | ||||||||||||
|
Interest rate swaps
|
20,000 | 492 | 42,000 | 2,968 | ||||||||||||
|
Interest rate locks with
customers
|
37,691 | 530 | 11,637 | 24 | ||||||||||||
|
Forward loan commitments
|
41,842 | 269 | 13,330 | 132 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Deposits
|
1,686,270 | 1,666,566 | 1,564,257 | 1,542,882 | ||||||||||||
|
Short-term borrowings
|
114,871 | 114,908 | 183,379 | 185,139 | ||||||||||||
|
Long-term borrowings
|
28,994 | 29,363 | 30,684 | 31,248 | ||||||||||||
|
Off-Balance-Sheet:
|
||||||||||||||||
|
Commitments to extend credit
|
— | (1,069 | ) | — | (935 | ) | ||||||||||
92
Table of Contents
The following methods and assumptions were used by the Corporation in estimating its
fair value disclosures for financial instruments:
Cash and short-term assets:
The carrying amounts reported in the balance sheets for cash
and due from banks, interest-earning deposits with other banks, and federal funds sold and other
short-term investments approximates those assets’ fair values.
Investment securities:
Fair values for the held-to-maturity and available-for-sale
investments securities are based on quoted market prices that are available in an active market
for identical instruments. 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.
Loans held for sale:
The fair value of the Corporation’s loans held for sale are
generally determined using a pricing model based on current market information obtained from
external sources, including, interest rates, and bids or indications provided by market
participants on specific loans that are actively marketed for sale. The Corporation’s loans held
for sale are primarily residential mortgage loans. Loans held for sale are carried at the lower
of cost or estimated fair value.
Loans and leases:
The fair values for loans are estimated using discounted cash flow
analyses, using a discount rate consisting of an appropriate risk free rate, as well as
components for credit risk, operating expense, and embedded prepayment options. 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.
Deposit liabilities:
The fair values for deposits with fixed maturities are estimated
by discounting the final maturity, and the fair values for non-maturity deposits are established
using a decay factor estimate of cash flows based upon industry-accepted assumptions. The
discount rate applied to deposits consists of an appropriate risk free rate and includes
components for operating expense.
Short-term borrowings:
The carrying amounts of securities sold under repurchase
agreements, and fed funds purchased approximate their fair values. Short-term FHLB advances with
embedded options are estimated using a discounted cash flow analysis using a discount rate
consisting of an appropriate risk free rate, as well as operating expense, and embedded
prepayment options.
Long-term borrowings:
The fair values of the Corporation’s long-term borrowings
(other than deposits) are estimated using a discounted cash flow analysis using a discount rate
consisting of an appropriate risk free rate, as well as components for credit risk, operating
expense, and embedded prepayment options.
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.
On August 12, 2009, the Corporation completed its public offering of 3,392,500 shares
of common stock at a price of $17.50 per share, including 442,500 shares of common stock
purchased by the underwriters pursuant to their over-allotment option, which was exercised in
full. The net proceeds of the offering after deducting underwriting discounts and commissions
and offering expenses were approximately $55.6 million. As a result of the stock issuance,
common stock increased by $17.0 million and additional paid-in capital increased by $38.7
million.
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 Bank’s financial
statements. Capital adequacy guidelines, and additionally for the Bank 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.
93
Table of Contents
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).
| To Be Well- | ||||||||||||||||||||||||
| Capitalized | ||||||||||||||||||||||||
| Under Prompt | ||||||||||||||||||||||||
| For Capital | Corrective | |||||||||||||||||||||||
| Adequacy | Action | |||||||||||||||||||||||
| Actual | Purposes | Provisions | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
|
As of December 31, 2010:
|
||||||||||||||||||||||||
|
Total Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 260,244 | 15.47 | % | $ | 134,623 | 8.00 | % | $ | 168,279 | 10.00 | % | ||||||||||||
|
Univest National Bank
|
243,908 | 14.71 | 132,674 | 8.00 | 165,842 | 10.00 | ||||||||||||||||||
|
Tier 1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated
|
238,393 | 14.17 | 67,312 | 4.00 | 100,968 | 6.00 | ||||||||||||||||||
|
Univest National Bank
|
223,050 | 13.45 | 66,337 | 4.00 | 99,505 | 6.00 | ||||||||||||||||||
|
Tier 1 Capital (to Average Assets):
|
||||||||||||||||||||||||
|
Consolidated
|
238,393 | 11.54 | 82,649 | 4.00 | 103,311 | 5.00 | ||||||||||||||||||
|
Univest National Bank
|
223,050 | 10.89 | 81,911 | 4.00 | 102,389 | 5.00 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||||||||||
|
Total Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated
|
$ | 255,482 | 15.76 | % | $ | 129,711 | 8.00 | % | $ | 162,139 | 10.00 | % | ||||||||||||
|
Univest National Bank
|
241,177 | 15.13 | 127,502 | 8.00 | 159,377 | 10.00 | ||||||||||||||||||
|
Tier 1 Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated
|
233,654 | 14.41 | 64,856 | 4.00 | 97,283 | 6.00 | ||||||||||||||||||
|
Univest National Bank
|
221,193 | 13.88 | 63,751 | 4.00 | 95,626 | 6.00 | ||||||||||||||||||
|
Tier 1 Capital (to Average Assets):
|
||||||||||||||||||||||||
|
Consolidated
|
233,654 | 11.46 | 81,539 | 4.00 | 81,539 | 5.00 | ||||||||||||||||||
|
Univest National Bank
|
221,193 | 10.97 | 80,666 | 4.00 | 80,666 | 5.00 | ||||||||||||||||||
As of December 31, 2010 and December 31, 2009, management believes that the
Corporation and the Bank met all capital adequacy requirements to which they are subject. The
Corporation, like other bank holding companies, currently is required to maintain Tier 1 Capital
and Total Capital (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 4.0% and
8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet
items, such as standby letters of credit). The Bank, like other depository institutions, is
required to maintain similar capital levels under capital adequacy guidelines. For a depository
institution to be considered “well capitalized” under the regulatory framework for prompt
corrective action, its Tier 1 and Total Capital ratios must be at least 6.0% and 10.0% on a
risk-adjusted basis, respectively. As of December 31, 2010, the most recent notification from
the Office of Comptroller of the Currency and Federal Deposit Insurance Corporation (FDIC)
categorized the Bank 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.
Dividend 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 Office of Comptroller of the Currency is required for a national bank
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 2011 without approval
of the Office of Comptroller of the Currency of approximately $1.7 million plus an additional
amount equal to the Bank’s net profits for 2011 up to the date of any such dividend declaration.
94
Table of Contents
The Federal Reserve Act requires that extension of credit by the Bank to certain
affiliates, including Univest 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.
At December 31, 2010, loans to directors and executive officers of the Corporation and
companies in which directors have an interest (Related Parties) aggregated $45.3 million. These
loans have been made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time for comparable
transactions with customers and did not involve more than the normal risk of collectability or
present other unfavorable terms.
The summary of activity for the past year is as follows:
(Dollars in thousands)
| Amounts | ||||||||||||||
| Collected | ||||||||||||||
| Balance at | and Other | Balance at | ||||||||||||
| January 1, 2010 | Additions | Reductions | December 31, 2010 | |||||||||||
| $ | 37,002 | $ | 23,159 | $ | 14,859 | $ | 45,302 | |||||||
The Corporation paid $1.4 million and $1.7 million during 2010 and 2009, respectively,
to H. Mininger & Son, Inc. for building expansion projects which were in the normal course of
business on substantially the same terms as available for others. H. Ray Mininger, a director of
the Corporation, is secretary of H. Mininger & Son, Inc.
Deposits received from Related Parties as of December 31, 2010 were $6.6 million.
At December 31, 2010, the Bank had commitments to extend credit to Related Parties of $13.0
million and standby and commercial letters of credit for Related Parties of $192 thousand. These
commitments have been made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time for comparable
loans with persons not related to the lender and did not involve more than the normal risk of
collectability or present other unfavorable features.
95
Table of Contents
Condensed financial statements of Univest, parent company only, follow:
| At December 31, | ||||||||
| (Dollars in thousands) | 2010 | 2009 | ||||||
|
|
||||||||
|
Balance Sheets
|
||||||||
|
Assets:
|
||||||||
|
Cash and balances due from financial institutions
|
$ | 648 | $ | 86 | ||||
|
Investments in securities
|
9,985 | 8,924 | ||||||
|
Investments in subsidiaries, at equity in net assets:
|
||||||||
|
Bank
|
263,183 | 266,026 | ||||||
|
Non-banks
|
16,120 | 21,458 | ||||||
|
Other assets
|
24,376 | 20,265 | ||||||
|
|
||||||||
|
Total assets
|
$ | 314,312 | $ | 316,759 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities:
|
||||||||
|
Dividends payable
|
$ | 3,329 | $ | 3,294 | ||||
|
Other borrowings
|
372 | 755 | ||||||
|
Subordinated capital notes
|
3,375 | 4,875 | ||||||
|
Trust preferred securities
|
20,619 | 20,619 | ||||||
|
Other liabilities
|
20,393 | 19,409 | ||||||
|
|
||||||||
|
Total liabilities
|
48,088 | 48,952 | ||||||
|
|
||||||||
|
Shareholders’ equity
|
266,224 | 267,807 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 314,312 | $ | 316,759 | ||||
|
|
||||||||
| For the Years ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Statements of Income
|
||||||||||||
|
Dividends from bank
|
$ | 12,482 | $ | 12,482 | $ | 13,542 | ||||||
|
Dividends from non-banks
|
1,190 | 1,190 | 1,200 | |||||||||
|
Other-than-temporary impairment on equity securities
|
(62 | ) | (1,708 | ) | (1,251 | ) | ||||||
|
Other-than-temporary impairment on other long-lived assets
|
— | (500 | ) | — | ||||||||
|
Net gain (loss) on sales of securities
|
105 | (28 | ) | 79 | ||||||||
|
Other income
|
15,976 | 14,014 | 13,325 | |||||||||
|
|
||||||||||||
|
Total operating income
|
29,691 | 25,450 | 26,895 | |||||||||
|
Operating expenses
|
15,715 | 16,376 | 15,444 | |||||||||
|
|
||||||||||||
|
Income before income tax (benefit) and equity in undistributed income (loss) of subsidiaries
|
13,976 | 9,074 | 11,451 | |||||||||
|
Applicable income tax (benefit)
|
73 | (1,745 | ) | (852 | ) | |||||||
|
|
||||||||||||
|
Income before equity in undistributed income (loss) of subsidiaries
|
13,903 | 10,819 | 12,303 | |||||||||
|
Equity in undistributed income (loss) of subsidiaries:
|
||||||||||||
|
Bank
|
1,777 | (71 | ) | 8,264 | ||||||||
|
Non-banks
|
76 | 32 | 23 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | ||||||
|
|
||||||||||||
96
Table of Contents
| For the Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Statements of Cash Flows
|
||||||||||||
|
|
||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 15,756 | $ | 10,780 | $ | 20,590 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Equity in undistributed net (income) loss of subsidiaries
|
(1,853 | ) | 39 | (8,287 | ) | |||||||
|
Other-than-temporary impairment on equity securities
|
62 | 1,708 | 1,251 | |||||||||
|
Other-than-temporary impairment on other long-lived assets
|
— | 500 | — | |||||||||
|
Net (gain) loss on sales of securities
|
(105 | ) | 28 | (79 | ) | |||||||
|
Depreciation of premises and equipment
|
185 | 143 | 99 | |||||||||
|
Increase in other assets
|
(2,736 | ) | (1,298 | ) | (1,013 | ) | ||||||
|
(Decrease) increase in other liabilities
|
(76 | ) | (820 | ) | (856 | ) | ||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
11,233 | 11,080 | 11,705 | |||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Investments in subsidiaries
|
— | (55,000 | ) | (310 | ) | |||||||
|
Proceeds from sales of securities
|
7,265 | 5,989 | 5,702 | |||||||||
|
Purchases of investment securities
|
(7,000 | ) | (7,000 | ) | (6,680 | ) | ||||||
|
Liquidation of subsidiary, net of cash acquired
|
2,384 | — | — | |||||||||
|
Other, net
|
147 | (393 | ) | (126 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by (used) in investing activities
|
2,796 | (56,404 | ) | (1,414 | ) | |||||||
|
|
||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net change in purchased funds and other short-term borrowings
|
(754 | ) | (57 | ) | — | |||||||
|
Repayment of long-term debt
|
(1,500 | ) | (1,875 | ) | (1,500 | ) | ||||||
|
Purchases of treasury stock
|
(153 | ) | (370 | ) | (1,614 | ) | ||||||
|
Proceeds from the issuance of common stock
|
— | 55,597 | — | |||||||||
|
Stock issued under dividend reinvestment and employee stock purchase plans
|
2,189 | 2,058 | 2,014 | |||||||||
|
Proceeds from exercise of stock options, including tax benefits
|
— | 93 | 2,032 | |||||||||
|
Cash dividends paid
|
(13,249 | ) | (11,078 | ) | (10,275 | ) | ||||||
|
|
||||||||||||
|
Net cash (used in) provided by financing activities
|
(13,467 | ) | 44,368 | (9,343 | ) | |||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and due from financial institutions
|
562 | (956 | ) | 948 | ||||||||
|
Cash and due from financial institutions at beginning of year
|
86 | 1,042 | 94 | |||||||||
|
|
||||||||||||
|
Cash and due from financial institutions at end of year
|
$ | 648 | $ | 86 | $ | 1,042 | ||||||
|
|
||||||||||||
|
Supplemental disclosures of cash flow information:
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | 1,250 | $ | 1,480 | $ | 1,810 | ||||||
|
|
||||||||||||
|
Income tax, net of refunds received
|
$ | 2,501 | $ | 4,977 | $ | 7,791 | ||||||
|
|
||||||||||||
97
Table of Contents
The unaudited results of operations for the quarters for the years ended December 31,
2010 and 2009 were as follows:
|
(Dollars in thousands, except per share data)
2010 Quarterly Financial Data: |
Fourth | Third | Second | First | ||||||||||||
|
|
||||||||||||||||
|
Interest income
|
$ | 22,580 | $ | 23,060 | $ | 22,878 | $ | 22,485 | ||||||||
|
Interest expense
|
3,380 | 4,107 | 4,602 | 5,380 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
19,200 | 18,953 | 18,276 | 17,105 | ||||||||||||
|
Provision for loan and lease losses
|
6,276 | 5,529 | 4,865 | 4,895 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income after provision for loan and lease
losses
|
12,924 | 13,424 | 13,411 | 12,210 | ||||||||||||
|
Noninterest income
|
9,268 | 8,884 | 8,059 | 8,207 | ||||||||||||
|
Noninterest expense
|
16,190 | 17,171 | 16,909 | 17,079 | ||||||||||||
|
|
||||||||||||||||
|
Income before income taxes
|
6,002 | 5,137 | 4,561 | 3,338 | ||||||||||||
|
Applicable income taxes
|
1,093 | 990 | 831 | 368 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 4,909 | $ | 4,147 | $ | 3,730 | $ | 2,970 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Per share data:
|
||||||||||||||||
|
Net income:
|
||||||||||||||||
|
Basic
|
$ | 0.30 | $ | 0.25 | $ | 0.23 | $ | 0.18 | ||||||||
|
|
||||||||||||||||
|
Diluted
|
$ | 0.30 | $ | 0.25 | $ | 0.23 | $ | 0.18 | ||||||||
|
|
||||||||||||||||
|
Dividends per share
|
$ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||
|
|
||||||||||||||||
| 2009 Quarterly Financial Data: | Fourth | Third | Second | First | ||||||||||||
|
|
||||||||||||||||
|
Interest income
|
$ | 23,184 | $ | 24,244 | $ | 24,529 | $ | 24,402 | ||||||||
|
Interest expense
|
6,409 | 6,901 | 7,356 | 8,057 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
16,775 | 17,343 | 17,173 | 16,345 | ||||||||||||
|
Provision for loan and lease losses
|
7,449 | 5,928 | 5,353 | 2,156 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income after provision for loan and lease
losses
|
9,326 | 11,415 | 11,820 | 14,189 | ||||||||||||
|
Noninterest income
|
8,819 | 7,098 | 7,826 | 6,174 | ||||||||||||
|
Noninterest expense
|
17,468 | 15,563 | 16,790 | 15,503 | ||||||||||||
|
|
||||||||||||||||
|
Income before income taxes
|
677 | 2,950 | 2,856 | 4,860 | ||||||||||||
|
Applicable income taxes
|
(845 | ) | 197 | 187 | 1,024 | |||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 1,522 | $ | 2,753 | $ | 2,669 | $ | 3,836 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Per share data:
|
||||||||||||||||
|
Net income:
|
||||||||||||||||
|
Basic
|
$ | 0.09 | $ | 0.19 | $ | 0.21 | $ | 0.30 | ||||||||
|
|
||||||||||||||||
|
Diluted
|
$ | 0.09 | $ | 0.19 | $ | 0.21 | $ | 0.30 | ||||||||
|
|
||||||||||||||||
|
Dividends per share
|
$ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||
|
|
||||||||||||||||
98
Table of Contents
| Item 9. |
Change in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
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 in place to assure that all material
information is collected and disclosed in accordance with Rule 13a — 15(e) and 15d-15(e) under
the Securities Exchange Act of 1934. Management carried out an evaluation, under the supervision
and with the participation of the Corporation’s Chief Executive Officer (Principal Executive
Officer) and the Corporation’s Chief Financial Officer (Principal Financial and Accounting
Officer), of the effectiveness of the design and operation of the Corporation’s disclosures and
procedures. Based on their evaluation, management concluded that the Corporation’s disclosure
controls and procedures were effective as of December 31, 2010. Disclosures controls and
procedures are designed to ensure that information required to be disclosed by the Corporation
in accordance with the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the required time periods specified in the SEC’s rules and forms.
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 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.
Management assessed the effectiveness of the Corporation’s internal control over financial
reporting as of December 31, 2010, using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.
Based on this assessment, Management concluded that, as of December 31, 2010, the Corporation’s
internal control over financial reporting is effective based on those criteria.
The Corporation’s financial information as shown in the Annual Report Form 10-K for the
Years 2010, 2009 and 2008 has been audited by KPMG LLP, independent registered public accounting
firm. KPMG LLP presented the Corporation with unqualified opinions for these years.
There were no changes to the Corporation’s internal controls over financial reporting (as
defined in Rule 13a-15(f)) of the Securities Exchange Act during the quarter ended December 31,
2010 that materially affected, or are reasonably likely to affect, the Corporation’s control
over financial reporting.
99
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Univest Corporation Pennsylvania:
Univest Corporation Pennsylvania:
We have audited Univest Corporation of Pennsylvania and subsidiaries’ (the “Company”) internal
control over financial reporting as of December 31, 2010, based on criteria established in
Internal
Control — Integrated Framework
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, 2010, based on criteria established in
Internal Control —
Integrated Framework
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, 2010, and
the related consolidated statements of income, changes in shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2010, and our report dated March 4,
2011 expressed an unqualified opinion on those consolidated financial statements.
March 4, 2011
Philadelphia, PA
Philadelphia, PA
100
Table of Contents
| Item 9B. |
Other Information
|
None.
| 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 Registrant’s definitive proxy
statement on Schedule 14A for the annual meeting of shareholders on April 19, 2011 (2011 Proxy),
under the headings: “Election of Directors and Alternate Directors,” “Compliance with Section
16(a) of the Securities Exchange Act of 1934,” “The Board, the Board’s Committees and Their
Functions,” “Audit Committee,” “Board Compensation Committee,” “Corporate Governance Disclosure”
and “Nominating and Governance Committee.”
The Corporation has adopted 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 waiver
reporting requirement process was established in 2004 and there have been no waivers. 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 in the “Investors Section” under 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 Registrant’s 2011 Proxy under the
headings: “The Board, the Board’s Committees and Their Functions,” “Executive and Director
Compensation,” and “Compensation Committee Report.”
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matter
|
Information required by Items 201(d) and 403 of Regulation S-K is incorporated herein
by reference from the Registrant’s 2011 Proxy under the heading, “Beneficial Ownership of
Directors and Officers.”
| 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 Registrant’s 2011 Proxy under the headings, “The Board, the Board’s
Committees and Their Functions” and “Related Party Transactions.”
| Item 14. |
Principal Accountant Fees and Services
|
Information required by Item 9(e) of Schedule 14A is incorporated herein by reference
from the Registrant’s 2011 Proxy under the headings: “Audit Committee” and “Independent
Registered Public Accounting Firm Fees.”
101
Table of Contents
| 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 a separate
section.
|
||
| (c) |
Financial Statement Schedules — none.
|
102
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
[Item 15(a) 1. & 2.]
Annual Report to Shareholders
| Page | ||||
| 48 | ||||
| 49 | ||||
| 50 | ||||
| 51 | ||||
| 52 | ||||
| 54 | ||||
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.
103
Table of Contents
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX TO EXHIBITS
[Item 15(a) 3. and 15(b)]
| Description | ||||
| (3.1 | ) |
Amended and Restated Articles of Incorporation are incorporated by reference to
Appendix A of Form DEF14A, filed with the Securities and Exchange Commission
(the SEC) on March 9, 2006.
|
||
| (3.2 | ) |
Amended By-Laws dated September 26, 2007 are incorporated by reference to
Exhibit 3.2 of Form 8-K, filed with the SEC on September 27, 2007.
|
||
| (10.1 | ) |
Univest 2003 Amended and Restated Long-term Incentive Plan is incorporated by
reference to Appendix A of the Corporation’s Definitive Proxy Statement on Form
DEF14A, File No. 000-07617, filed with the SEC on March 7, 2008.
|
||
| (10.2 | ) |
Non-Qualified Pension Plan, including Split-dollar Agreement, for certain
executive officers, incorporated by reference to Exhibit 10.2 of Form 10-K,
filed with the SEC March 7, 2005.
|
||
| (10.3 | ) |
Supplemental Retirement Plan incorporated by reference to Exhibit 10.3 of Form
10-K, filed with the SEC March 7, 2005.
|
||
| (11 | ) |
Statement Re Computation of Per Share Earnings — is incorporated by reference
from Footnote 14 in Item (8) of this Form 10-K.
|
||
| (14 | ) |
Code of Ethics — is incorporated by reference from Item (10) of this Form 10-K.
|
||
| (21 | ) |
Subsidiaries of the Registrant
|
||
| (23.1 | ) |
Consent of independent registered public accounting firm, KPMG LLP
|
||
| (31.1 | ) |
Certification of William S. Aichele, Chairman, President and Chief Executive
Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as
enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
| (31.2 | ) |
Certification of Jeffrey M. Schweitzer, 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 William S. Aichele, Chief Executive Officer of the
Corporation, pursuant to 18 United States Code Section 1350, as enacted by
Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
| (32.2 | )* |
Certification of Jeffrey M. Schweitzer, Chief Financial Officer of the
Corporation, pursuant to 18 United States Code Section 1350, as enacted by
Section 906 of the Sarbanes-Oxley Act of 2002.
|
| * |
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, except to the extent that the registrant
specifically incorporates it by reference.
|
104
Table of Contents
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/ Jeffrey M. Schweitzer | ||||
| Jeffrey M. Schweitzer | |||||
|
Senior Executive Vice President and
Chief Financial Officer, (Principal Financial and Accounting Officer) March 4, 2011 |
|||||
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
|
Chairman, President, Chief Executive Officer and Director (Principal Executive Officer) | March 4, 2011 | ||
|
|
||||
|
/s/ MARVIN A. ANDERS
|
Retired Chairman, Director | March 4, 2011 | ||
|
|
||||
|
/s/ CHARLES H. HOEFLICH
|
Chairman Emeritus | March 4, 2011 | ||
|
|
||||
|
/s/ R. LEE DELP
|
Director | March 4, 2011 | ||
|
|
||||
|
/s/ WILLIAM G. MORRAL
|
Director | March 4, 2011 | ||
|
|
||||
|
/s/ H. PAUL LEWIS
|
Director | March 4, 2011 | ||
|
|
||||
|
/s/ H. RAY MININGER
|
Director | March 4, 2011 | ||
|
|
||||
|
/s/ MARK A. SCHLOSSER
|
Director | March 4, 2011 | ||
|
|
||||
|
/s/ P. GREG SHELLY
|
Director | March 4, 2011 | ||
|
|
||||
|
/s/ K. LEON MOYER
|
Vice Chairman | March 4, 2011 |
105
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Removed and ReservedPart IIItem 5. Market For The Registrant S Common Stock, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesPart OfItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1. Summary Of Significant Accounting PoliciesNote 2. Restrictions on Cash and Due From Bank AccountsNote 3. Investment SecuritiesNote 4. Loans and LeasesNote 5. Credit Quality Of Loans and Leases and The Reserve For Loan and Lease LossesNote 6. Premises and EquipmentNote 7. Intangible AssetsNote 8. Accrued Interest and Other AssetsNote 9. Income TaxesNote 10. Retirement Plan and Supplemental Retirement PlansNote 11. Long-term Incentive PlanNote 12. Time DepositsNote 13. BorrowingsNote 14. Earnings Per ShareNote 15. Comprehensive Income and Accumulated Other Comprehensive LossNote 16. Commitments and ContingenciesNote 17. Derivative Instruments and Hedging ActivitiesNote 18. Fair Value DisclosuresNote 19. Common Stock IssuanceNote 20. Regulatory MattersNote 21. Related Party TransactionsNote 22. Parent Company Financial InformationNote 23. Quarterly Data (unaudited)Item 9. Change in and Disagreements with Accountants on Accounting and Financial DisclosuresItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MatterItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules