Univest Financial Corporation - 10-Q quarterly report FY

The accompanying unaudited condensed consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (the “Corporation”) and its wholly owned subsidiaries; the Corporation’s primary subsidiary is Univest National Bank and Trust Co. (the “Bank”). The unaudited condensed consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary to present a fair statement of the results and condition for the interim periods presented. Operating results for the six-month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, which has been filed with the SEC on March 8, 2007.

The following is a summary of the major loan and lease categories:

 

 

Components of net periodic benefit cost:

 

 

Effective January 1, 2007 the Corporation adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. According to FIN 48, a tax position is recognized if it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize and should be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

 

 

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

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.

Univest Corporation of Pennsylvania, (the “Corporation”), is a Financial Holding Company. It owns all of the capital stock of Univest National Bank and Trust Co. (the “Bank”), Univest Realty Corporation, Univest Delaware, Inc., and Univest Reinsurance Corporation.

The Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers. Vanguard Leasing, Inc., a wholly owned subsidiary of the Bank, provides lease financing. Delview, Inc., a wholly owned subsidiary of the Bank, provides various financial services including financial planning, investment management, insurance products and brokerage services to individuals and businesses through its subsidiaries Univest Investments, Inc. and Univest Insurance, Inc.

 

Non-interest income grew 11.22%, when comparing the six-month periods ended June 30, 2007 to 2006, primarily due to increases in insurance commissions and fee income, investment advisory commissions and fee income, and other service fee income. Non-interest expense grew 5.99% primarily due to an increase in salary and employee benefit expense slightly offset by a decrease in marketing and adverting expenses.

 

 

The Corporation earns its revenues primarily from the margins and fees it generates from the loan and lease and depository services it provides as well as from trust, insurance and investment commissions and fees. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value while the margin impact will vary from bank to bank based upon the structure of its balance sheet. The Corporation maintains a relatively low interest rate risk profile and does not anticipate that an increase in interest rates would be adverse to its net interest margin.

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

The Corporation’s consolidated net income and earnings per share for the three months ended June 30, 2007 and 2006 were as follows:

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. The following table presents a summary of the Corporation's average balances; the tax-equivalent yields earned on average assets, and the cost of average liabilities for the three months ended June 30, 2007 and 2006. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Asset/Liability Management and Investment committees work to maintain an adequate and reliable net interest margin for the Corporation.

Net interest income increased $83 thousand for the three months ended June 30, 2007 compared to 2006 primarily due to increased volume on lease financings and increased volume and rates on commercial loans and commercial real estate and construction loans, partially offset by increased volume and rates on money market savings deposits and increased rates on certificates of deposit. The tax-equivalent net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was 3.71% and 3.95% for the three month period ended June 30, 2007 and 2006, respectively. The tax-equivalent net interest spread, which represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, was 3.13% for the three months ended June 30, 2007 compared to 3.47% for the same period in 2006. The effect of net interest free funding sources increased to 0.58% for the three month period ended June 30, 2007 compared to 0.48% for the same period in 2006; this represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.

Nonaccrual loans and leases have been included in the average loan and lease balances.

Certain amounts have been reclassified to conform to the current-year presentation.

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

Nonaccrual loan and lease unearned discounts have been included in the average loan and lease balances.

The growth in interest and fees on loans is due primarily to increased volume and rates on commercial business loans and commercial and construction real estate loans and increased volume of lease financings. The average interest yield on the commercial loan portfolio increased 51 basis points, primarily due to 36 basis point increase in the average prime rate, for the three months ended June 30, 2007 compared to the same period in 2006; which, along with average volume increases of $35.0 million, contributed to a $1.2 million increase in interest income. The average yield on commercial and construction real estate loans increased by 36 basis points; this along with average volume increases of $13.9 million contributed to a $643 thousand increase in interest income. Lease financing’s growth in volume of $43.0 million contributed to the $956 thousand increase in interest income.

 

Interest on investments, interest-bearing deposits and federal funds sold increased primarily due to rate increases on U.S. Government agency obligations and average volume and rate increases in other securities.

 

Interest expense on short-term borrowings 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 (“sweep accounts”). Interest expense on federal funds purchased increased $112 thousand due to average volume increase of $8.2 million and a 18 basis point increase in the average rate paid.

Interest expense on long-term debt increased $374 thousand due to an average volume increase of $27.2 million and a 39 basis-point increase in the rate.

The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans, current economic conditions, various types of lending activities, policies, real estate and other loan commitments, and significant changes in charge-off activity. Loans are also reviewed for impairment based on discounted cash flows using the loans' initial effective interest rate or the fair value of the collateral for certain collateral dependent loans as provided for under SFAS No. 114. Any of the above criteria may cause the provision to fluctuate. The bank’s primary regulators, as an integral part of their examination process, may require adjustments to the allowance. Continued growth in loan and lease volumes and current economic conditions indicated the need for an increase to the reserve in 2007. The provision for loan and lease losses for the three months ended June 30, 2007 and 2006 was $653 thousand and $515 thousand, respectively.

Noninterest income consists of trust department fees, service charges on deposits, commissions, net gains on sales of securities, and other miscellaneous types of income. It also includes various types of service fees, such as ATM fees, and life insurance income which primarily represents changes in the cash surrender value of bank-owned insurance. Total noninterest income increased during the three months ended June 30, 2007 compared to 2006 primarily due to higher insurance commission and fee income.

The following table presents noninterest income for the periods indicated:

 

Trust fee income for the three months ended June 30, 2007 increased slightly over 2006 primarily due to an increase in the number and market value of managed accounts. Service charges on deposit accounts grew slightly in 2007 compared to 2006. This was a result of an increase in nonsufficient-funds fees and money manager fees. These increases were offset by reductions in regular checking service fee charges resulting from free-checking products introduced during 2006.

Investment advisory commissions and fee income, the primary source of income for Univest Investments, Inc., increased in 2007 over 2006 due to market activity and volume. Insurance commissions and fee income, the primary source of income for Univest Insurance, Inc., grew approximately $392 thousand primarily due to the acquisition of B.G. Balmer and Co. in the third quarter of 2006.

 

 

Life insurance income is primarily the change in the cash surrender values of bank owned life insurance policies, which is primarily affected by the market value of the underlying assets. There was a $177 thousand increase in the value of these policies when compared to the same period in 2006.

Net gains on the sales of securities increased slightly and the net loss recognized on dispositions of fixed asset remained stable when compared to the same period in 2006. The details of these items are discussed below.

Other service fee income consists primarily of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (“Mastermoney fees”), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Other service fee income increased for the second quarter of 2007 over 2006 primarily due to increases in Mastermoney fees, merchant fees and mortgage servicing fees.

Other non-interest income includes loss on investments in partnerships, gains on sales of mortgages, gains on sales of other real estate owned, reinsurance income and other miscellaneous income. Other non-interest income increased over prior year primarily due to the $76 thousand decline of losses recognized on investments in partnerships.

Sales of $1.3 million in loans and leases during three months ended June 30, 2007 resulted in gains of $37 thousand compared to sales of $738 thousand for gains of $7 thousand for the three months ended June 30, 2006.

During the three months ended June 30, 2007, approximately $3.6 million in available-for-sale securities were sold, resulting in a gain of $51 thousand. During the three months ended June 30, 2006, approximately $31 thousand of securities were sold recognizing gains of $1 thousand; the Corporation also received $46 thousand resulting from the mandatory sale of shares created through conversion of one of its vendor relationships from a membership association to a private share corporation.

The operating costs of the Corporation are known as noninterest expense, and include, but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses.

The following table presents noninterest expense for the periods indicated:

 

 

Salary and benefits increased due to normal annual increases, the acquisition of B.G. Balmer and Co. in the third quarter of 2006, and increased benefit costs for the six months ended June 30, 2007 when compared to June 30, 2006. Net occupancy expense increased primarily due to increased rental obligations for the B.G. Balmer and Co. and the Vernfield office rents. Marketing and advertising expenses decreased primarily due to a reduction in radio and newspaper advertising costs. Other expenses increased primarily due an increase in the bank shares tax, audit and examination fees and amortization costs associated with customer lists. These increases were partially offset by decreases in consultant fees and sales training expenses.

The provision for income taxes was $2.1 million for the three months ended June 30, 2007 compared to $2.2 million in 2006, at effective rates of 26.06% and 26.73%, respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects and tax-exempt income from investments in municipal securities, loans and bank-owned life insurance. The decrease in the effective tax rate between the three-month periods is primarily due to growth in amount the cash surrender value of bank-owned life insurance policies increased partially offset by a decrease in tax credits generated from investments in low-income housing projects.

The Corporation’s consolidated net income and earnings per share for the six months ended June 30, 2007 and 2006 were as follows:

Net interest income is the difference between interest earned on loans, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation's revenue. The following table presents a summary of the Corporation's average balances; the tax-equivalent yields earned on average assets, and the cost of average liabilities for the six months ended June 30, 2007 and 2006. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Asset/Liability Management and Investment committees work to maintain an adequate and reliable net interest margin for the Corporation.

Net interest income increased $536 thousand for the six months ended June 30, 2007 compared to 2006 primarily due to increased volume and rates on commercial loans and commercial real estate and construction loans and the volume of lease financings, partially offset by increased volume and rates on money market savings deposits and increased rates on certificates of deposit. The tax-equivalent net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was 3.74% for the six-month period ended June 30, 2007 and 3.98% for the same period in 2006. The tax-equivalent net interest spread, which represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, was 3.17% for the six months ended June 30, 2007 compared to 3.52% for the same period in 2006. The effect of net interest free funding sources increased to 0.57% for the six months ended June 30, 2007 compared to 0.46% for the same period in 2006; this represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.