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Table of Contents

 
 
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 2009.
or
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from                      to                     .
Commission File Number: 0-7617
UNIVEST CORPORATION OF PENNSYLVANIA
 
(Exact name of registrant as specified in its charter)
     
Pennsylvania   23-1886144
     
(State or other jurisdiction of incorporation of organization)   (IRS Employer Identification No.)
14 North Main Street, Souderton, Pennsylvania 18964
 
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (215) 721-2400
Not applicable
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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). o Yes þ No
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
     
Common Stock, $5 par value   16,442,021
     
(Title of Class)   (Number of shares outstanding at 9/30/09)
 
 

 

 


 

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
         
    Page Number
 
       
       
 
       
       
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    20  
 
       
    41  
 
       
    41  
 
       
       
 
       
    41  
 
       
    41  
 
       
    42  
 
       
    42  
 
       
    42  
 
       
    42  
 
       
    42  
 
       
    43  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 

 


Table of Contents

PART I.FINANCIAL INFORMATION
Item 1. Financial Statements
UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    (UNAUDITED)     (SEE NOTE)  
    September 30, 2009     December 31, 2008  
    ($ in thousands, except per share data)  
Cash and due from banks
  $ 32,512     $ 34,800  
Interest-earning deposits with other banks
    1,914       5,266  
Investment securities held-to-maturity (fair value $1,215 and $1,432 at September 30, 2009 and December 31, 2008, respectively)
    1,114       1,368  
Investment securities available-for-sale
    471,377       430,898  
Loans held for sale
    1,439       544  
Loans and leases
    1,451,128       1,449,892  
Less: Reserve for loan and lease losses
    (21,945 )     (13,118 )
 
           
Net loans and leases
    1,429,183       1,436,774  
 
           
Premises and equipment, net
    33,226       32,602  
Goodwill
    50,392       50,236  
Other intangibles, net of accumulated amortization of $7,628 and $6,497 at September 30, 2009 and December 31, 2008, respectively
    5,637       5,815  
Bank owned life insurance
    46,389       45,419  
Accrued interest and other assets
    44,666       41,075  
 
           
Total assets
  $ 2,117,849     $ 2,084,797  
 
           
 
               
LIABILITIES
               
Demand deposits, noninterest-bearing
  $ 226,395     $ 221,863  
Demand deposits, interest-bearing
    444,380       487,983  
Savings deposits
    367,742       307,512  
Time deposits
    498,386       509,970  
 
           
Total deposits
    1,536,903       1,527,328  
 
           
Securities sold under agreements to repurchase
    98,106       81,230  
Other short-term debt
    128,400       111,500  
Accrued expenses and other liabilities
    45,073       41,526  
Long-term debt
    15,071       92,637  
Subordinated notes
    5,625       6,750  
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding junior subordinated debentures of Univest (“Trust Preferred Securities”)
    20,619       20,619  
 
           
Total liabilities
    1,849,797       1,881,590  
 
           
 
               
SHAREHOLDERS’ EQUITY
               
Common stock, $5 par value: 48,000,000 shares authorized at September 30, 2009 and December 31, 2008; 18,266,404 and 14,873,904 shares issued at September 30, 2009 and December 31, 2008, respectively; 16,442,021 and 12,938,514 shares outstanding at September 30, 2009 and December 31, 2008, respectively
    91,332       74,370  
Additional paid-in capital
    60,037       22,459  
Retained earnings
    152,305       151,816  
Accumulated other comprehensive loss, net of tax benefit
    (1,444 )     (8,619 )
Treasury stock, at cost; 1,824,383 shares and 1,935,390 shares at September 30, 2009 and December 31, 2008, respectively
    (34,178 )     (36,819 )
 
           
Total shareholders’ equity
    268,052       203,207  
 
           
Total liabilities and shareholders’ equity
  $ 2,117,849     $ 2,084,797  
 
           
     
Note:    
The condensed consolidated balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    ($ in thousands except per share data)  
Interest and fees on loans and leases:
                               
Taxable
  $ 18,641     $ 20,621     $ 56,190     $ 62,405  
Exempt from federal income taxes
    963       934       2,845       2,787  
 
                       
Total interest and fees on loans and leases
    19,604       21,555       59,035       65,192  
 
                       
Interest and dividends on investment securities:
                               
Taxable
    3,510       4,119       10,748       12,771  
Exempt from federal income taxes
    1,127       970       3,384       3,236  
Interest on federal funds sold and term federal funds
    3       17       8       403  
 
                       
Total interest income
    24,244       26,661       73,175       81,602  
 
                       
Interest expense
                               
Interest on deposits
    5,284       8,080       17,402       26,900  
Interest on short-term borrowings
    980       636       2,283       1,447  
Interest on long-term borrowings
    637       1,432       2,629       4,333  
 
                       
Total interest expense
    6,901       10,148       22,314       32,680  
 
                       
Net interest income
    17,343       16,513       50,861       48,922  
Provision for loan and lease losses
    5,928       3,046       13,437       6,342  
 
                       
Net interest income after provision for loan and lease losses
    11,415       13,467       37,424       42,580  
 
                       
Noninterest income
                               
Trust fee income
    1,325       1,578       4,075       4,833  
Service charges on deposit accounts
    1,745       1,719       5,050       5,085  
Investment advisory commission and fee income
    876       581       2,402       1,838  
Insurance commission and fee income
    1,470       1,266       5,567       4,595  
Bank owned life insurance income
    405       241       970       2,766  
Other service fee income
    851       732       2,575       2,581  
Other-than-temporary impairment on securities
    (47 )     (693 )     (1,447 )     (928 )
Net gain on sales of securities
    112       1       127       79  
Gain on sale of loans held for sale
    401       26       1,331       61  
Net loss on dispositions of fixed assets
          (28 )     (147 )     (33 )
Other
    (40 )     141       595       410  
 
                       
Total noninterest income
    7,098       5,564       21,098       21,287  
 
                       
Noninterest expense
                               
Salaries and benefits
    8,818       7,935       27,667       24,122  
Net occupancy
    1,338       1,318       4,005       3,895  
Equipment
    878       792       2,569       2,357  
Marketing and advertising
    397       268       877       989  
Deposit insurance premiums
    526       183       2,586       291  
Other
    3,606       3,169       10,152       10,704  
 
                       
Total noninterest expense
    15,563       13,665       47,856       42,358  
 
                       
Income before income taxes
    2,950       5,366       10,666       21,509  
Applicable income taxes
    197       1,176       1,408       4,724  
 
                       
Net income
  $ 2,753     $ 4,190     $ 9,258     $ 16,785  
 
                       
Net income per share:
                               
Basic
  $ .19     $ .33     $ .68     $ 1.31  
Diluted
    .19       .33       .68       1.30  
Dividends declared
    .20       .20       .60       .60  
     
Note:  
Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    For the Nine Months Ended  
    September 30,  
    2009     2008  
    ($ in thousands)  
Cash flows from operating activities:
               
Net income
  $ 9,258     $ 16,785  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan and lease losses
    13,437       6,342  
Depreciation of premises and equipment
    1,787       1,644  
Other-than-temporary impairment on investment securities
    1,447       928  
Net gains on sale of investment securities
    (127 )     (79 )
Net losses on dispositions of fixed assets
    147       33  
Net gains on sale of loans held for sale
    (1,331 )     (61 )
Originations of loans held for sale
    (105,415 )     (3,695 )
Proceeds from the sale of loans held for sale
    104,898       3,716  
Bank owned life insurance income
    (970 )     (2,766 )
Other adjustments to reconcile net income to cash provided by operating activities
    (2,580 )     (700 )
(Increase) decrease in interest receivable and other assets
    (1,253 )     2,921  
Increase (decrease) in accrued expenses and other liabilities
    4,914       (3,756 )
 
           
Net cash provided by operating activities
    24,212       21,312  
 
           
Cash flows from investing activities:
               
Net cash paid due to acquisitions, net of cash acquired
    (156 )     (151 )
Net capital expenditures
    (1,789 )     (6,491 )
Proceeds from maturities of securities held-to-maturity
    254       5,322  
Proceeds from maturities of securities available-for-sale
    46,376       161,582  
Proceeds from sales and calls of securities held-to-maturity
          28,800  
Proceeds from sales and calls of securities available-for-sale
    125,771       93,225  
Purchases of investment securities held-to-maturity
          (34,900 )
Purchases of investment securities available-for-sale
    (205,003 )     (252,342 )
Purchases of lease financings
    (4,178 )     (41,070 )
Net increase in loans and leases
    (4,444 )     (50,252 )
Net (increase) decrease in interest-bearing deposits
    3,352       (223 )
Net increase in federal funds sold
          (3,328 )
 
           
Net cash used in investing activities
    (39,817 )     (99,828 )
 
           
Cash flows from financing activities:
               
Net increase (decrease) in deposits
    9,575       (25,070 )
Net (decrease) increase in short-term borrowings
    (44,224 )     67,099  
Issuance of long-term debt
          30,000  
Repayment of subordinated debt
    (1,125 )     (1,125 )
Issuance of common stock
    55,617        
Purchases of treasury stock
    (370 )     (1,227 )
Proceeds from sales of treasury stock
          122  
Stock issued under dividend reinvestment and employee stock purchase plans
    1,569       1,441  
Proceeds from exercise of stock options, including tax benefits
    64       1,438  
Cash dividends paid
    (7,789 )     (7,699 )
 
           
Net cash provided by financing activities
    13,317       64,979  
 
           
Net decrease in cash and due from banks
    (2,288 )     (13,537 )
Cash and due from banks at beginning of year
    34,800       47,135  
 
           
Cash and due from banks at end of period
  $ 32,512     $ 33,598  
 
           
 
               
Supplemental disclosures of cash flow information
               
Cash paid during the year for:
               
Interest
  $ 22,816     $ 34,457  
Income taxes, net of refunds received
    1,522       5,893  
     
Note:  
Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1. Financial Information
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. Certain amounts have been reclassified to conform to the current-year presentation. Operating results for the nine-month period ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 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, 2008, which has been filed with the SEC on March 6, 2009.
The Corporation has evaluated events that occurred subsequent to September 30, 2009 for recognition or disclosure in our financial statements and notes to our financial statements. We performed our subsequent event review through November 9, 2009, the date the third quarter financial statements were issued.
Use of Estimates
The preparation of the unaudited condensed 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 the assessment for impairment of certain investment securities, the allowance for loan losses, deferred tax assets and liabilities, impairment of goodwill and other intangible assets, stock compensation expense and other real estate owned.
Note 2. Investment Securities
The following table shows the amortized cost and the approximate market value of the held-to-maturity securities and available-for-sale securities at September 30, 2009 and December 31, 2008 by maturity within each type.
                                 
    September 30, 2009  
            Gross     Gross        
            Unrealized     Unrealized        
    Book Value     Gains     Losses     Fair Value  
Securities Held-to-Maturity
                               
Mortgage-backed securities:
                               
1 to 5 years
  $ 158     $ 9     $     $ 167  
5 to 10 years
    469       38             507  
Over 10 years
    471       54             525  
 
                       
 
    1,098       101             1,199  
 
                       
Other:
                               
1 to 5 years
    16                   16  
 
                       
 
    16                   16  
 
                       
Total
  $ 1,114     $ 101     $     $ 1,215  
 
                       

 

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Table of Contents

                                 
    September 30, 2009  
            Gross     Gross        
            Unrealized     Unrealized        
    Book Value     Gains     Losses     Fair Value  
 
                               
Securities Available-for-Sale
                               
U.S. Treasury, government corporations and agencies
                               
1 to 5 years
  $ 133,540     $ 618     $ (32 )   $ 134,126  
 
                       
 
    133,540       618       (32 )     134,126  
 
                       
 
                               
State and political subdivisions
                               
Within 1 year
                       
1 to 5 years
    7,246       252       (3 )     7,495  
5 to 10 years
    31,411       896       (40 )     32,267  
Over 10 years
    66,634       3,272             69,906  
 
                       
 
    105,291       4,420       (43 )     109,668  
 
                       
 
                               
Mortgage-backed securities
                               
Within 1 year
    1,781       28             1,809  
1 to 5 years
    99       7             106  
5 to 10 years
    16,813       679             17,492  
Over 10 years
    97,759       4,915       (2 )     102,672  
 
                       
 
    116,452       5,629       (2 )     122,079  
 
                       
 
                               
Collateral mortgage obligations
                               
5 to 10 years
    3,665       86             3,751  
Over 10 years
    88,106       2,246       (656 )     89,696  
 
                       
 
    91,771       2,332       (656 )     93,447  
 
                       
 
                               
Asset backed securities
                               
1 to 5 years
    708       14             722  
 
                       
 
    708       14             722  
 
                       
 
                               
Other securities
                               
Within 1 year
    2,267                   2,267  
1 to 5 years
    6,995       132       (25 )     7,102  
 
                       
 
    9,262       132       (25 )     9,369  
 
                       
 
                               
Equity securities
                               
No stated maturity
    1,850       349       (233 )     1,966  
 
                       
 
    1,850       349       (233 )     1,966  
 
                       
Total
  $ 458,874     $ 13,494     $ (991 )   $ 471,377  
 
                       
                                 
    December 31, 2008  
            Gross     Gross        
            Unrealized     Unrealized        
    Book Value     Gains     Losses     Fair Value  
Securities Held-to-Maturity
                               
Mortgage-backed securities:
                               
Within 1 year
  $ 5     $     $     $ 5  
1 to 5 years
    222       8             230  
5 to 10 years
    199       10             209  
Over 10 years
    927       46             973  
 
                       
 
    1,353       64             1,417  
 
                       
Other:
                               
1 to 5 years
    15                   15  
 
                       
 
    15                   15  
 
                       
Total
  $ 1,368     $ 64     $     $ 1,432  
 
                       

 

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Table of Contents

                                 
    December 31, 2008  
            Gross     Gross        
            Unrealized     Unrealized        
    Book Value     Gains     Losses     Fair Value  
 
                               
Securities Available-for-Sale
                               
U.S. Treasury, government corporations and agencies
                               
Within 1 year
  $ 5,871     $     $ (9 )   $ 5,862  
1 to 5 years
    97,994       884       (34 )     98,844  
 
                       
 
    103,865       884       (43 )     104,706  
 
                       
 
                               
State and political subdivisions
                               
1 to 5 years
    3,048       109       (5 )     3,152  
5 to 10 years
    28,176       939       (37 )     29,078  
Over 10 years
    68,572       478       (930 )     68,120  
 
                       
 
    99,796       1,526       (972 )     100,350  
 
                       
 
                               
Mortgage-backed securities
                               
Within 1 year
    175       1             176  
1 to 5 years
    2,910       3       (4 )     2,909  
5 to 10 years
    3,760       130             3,890  
Over 10 years
    119,907       3,091       (65 )     122,933  
 
                       
 
    126,752       3,225       (69 )     129,908  
 
                       
 
                               
Collateral mortgage obligations
                               
5 to 10 years
    4,763       13       (55 )     4,721  
Over 10 years
    75,957       1,421       (1,894 )     75,484  
 
                       
 
    80,720       1,434       (1,949 )     80,205  
 
                       
Asset backed securities
                               
1 to 5 years
    1,231             (20 )     1,211  
 
                       
 
    1,231             (20 )     1,211  
 
                       
 
                               
Other securities
                               
Within 1 year
    4,583                   4,583  
1 to 5 years
    6,992       165       (130 )     7,027  
 
                       
 
    11,575       165       (130 )     11,610  
 
                       
 
                               
Equity securities
                               
No stated maturity
    3,447       53       (592 )     2,908  
 
                       
 
    3,447       53       (592 )     2,908  
 
                       
Total
  $ 427,386     $ 7,287     $ (3,775 )   $ 430,898  
 
                       
Securities with a market value of $357.5 million and $311.7 million at September 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits and for other purposes as required by law.
During the nine months ended September 30, 2009 and 2008, available-for-sale securities with a fair value at the date of sale of $41.9 million and $16.4 million, respectively, were sold. Gross realized gains on such sales totaled $155 thousand during 2009 and $82 thousand in 2008. Gross realized losses on sales totaled $28 thousand in 2009 and $3 thousand in 2008. Tax expense related to net realized gains from the sales of investment securities for the nine months ended September 30, 2009 and 2008 were $44 thousand and $28 thousand, respectively. Accumulated other comprehensive income related to securities of $8.1 million and $2.3 million, net of taxes, has been included in shareholders’ equity at September 30, 2009 and December 31, 2008, respectively.

 

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The Corporation realized an impairment charge of $1.4 million to noninterest income on its equity portfolio during the nine months ended September 30, 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 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 until recovery to the Corporation’s cost basis occurs. The Corporation does not consider those investments to be other-than-temporarily impaired at September 30, 2009.
Management evaluates debt securities, which comprises 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 has the intent to hold the securities and will not be required to sell the securities before recovery occurs.
At September 30, 2009 and December 2008, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.
The following table shows the amount of securities that were in an unrealized loss position at September 30, 2009 and December 31, 2008:
                                                 
    At September 30, 2009  
    Less than Twelve Months     Twelve Months or Longer     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
U.S. Treasury, government corporations and agencies
  $ 15,066     $ (32 )   $     $     $ 15,066     $ (32 )
State and political subdivisions
                3,202       (43 )     3,202       (43 )
Mortgage-backed securities
    94       (1 )     59       (1 )     153       (2 )
Collateral mortgage obligations
    21,839       (153 )     5,690       (503 )     27,529       (656 )
Other securities
    3,975       (25 )                 3,975       (25 )
Equity securities
    223       (33 )     412       (200 )     635       (233 )
 
                                   
Total
  $ 41,197     $ (244 )   $ 9,363     $ (747 )   $ 50,560     $ (991 )
 
                                   
                                                 
    At December 31, 2008  
    Less than Twelve Months     Twelve Months or Longer     Total  
            Unrealized             Unrealized             Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
U.S. Treasury, government corporations and agencies
  $ 10,869     $ (43 )   $     $     $ 10,869     $ (43 )
State and political subdivisions
    32,985       (704 )     6,897       (268 )     39,882       (972 )
Mortgage-backed securities
    12,718       (69 )                 12,718       (69 )
Collateral mortgage obligations
    4,449       (9 )     8,909       (1,940 )     13,358       (1,949 )
Asset-backed securities
    1,211       (20 )                 1,211       (20 )
Other securities
    2,863       (130 )                 2,863       (130 )
Equity securities
    1,062       (270 )     1,137       (322 )     2,199       (592 )
 
                                   
Total
  $ 66,157     $ (1,245 )   $ 16,943     $ (2,530 )   $ 83,100     $ (3,775 )
 
                                   

 

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Note 3. Loans and Leases
The following is a summary of the major loan and lease categories:
                 
    At September 30,     At December 31,  
($ in thousands)   2009     2008  
Commercial, financial and agricultural
  $ 449,052     $ 424,649  
Real estate-commercial
    464,172       399,003  
Real estate-construction
    119,796       153,506  
Real estate-residential
    279,968       316,039  
Loans to individuals
    47,587       54,212  
Lease financings
    100,544       110,095  
 
           
Total gross loans and leases
    1,461,119       1,457,504  
Less: Unearned income
    (9,991 )     (7,612 )
 
           
Total loans and leases
  $ 1,451,128     $ 1,449,892  
 
           
Note 4. Reserve for Loan and Lease Losses
A summary of the activity in the reserve for loan and lease losses is as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September30,     September 30,  
($ in thousands)   2009     2008     2009     2008  
Reserve for loan and lease losses at beginning of period
  $ 18,824     $ 13,713     $ 13,118     $ 13,086  
Provision for loan and lease losses
    5,928       3,046       13,437       6,342  
Recoveries
    268       134       641       351  
Loans charged off
    (3,075 )     (1,939 )     (5,251 )     (4,825 )
 
                       
Reserve for loan and lease losses at period end
  $ 21,945     $ 14,954     $ 21,945     $ 14,954  
 
                       
Information with respect to loans and leases that are considered to be impaired under Accounting Standards Codification (“ASC”) 310 (formerly Statement of Financial Accounting Standards “SFAS” No. 114, “Accounting by Creditors for Impairment of a Loan”) at September 30, 2009 and December 31, 2008 is as follows:
                                 
    At September 30, 2009     At December 31, 2008  
            Specific             Specific  
($ in thousands)   Balance     Reserve     Balance     Reserve  
Recorded investment in impaired loans and leases at period-end subject to a specific reserve for loan and lease losses and corresponding specific reserve
  $ 6,582     $ 2,130     $ 166     $ 36  
Recorded investment in impaired loans and leases at period-end requiring no specific reserve for loan and lease losses
    29,750               5,243          
 
                           
Recorded investment in impaired loans and leases at period-end
  $ 36,332             $ 5,409          
 
                           
Recorded investment in nonaccrual and restructured loans and leases
  $ 36,332             $ 5,409          
 
                           
The following is an analysis of interest on nonaccrual and restructured loans and leases:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
($ in thousands)   2009     2008     2009     2008  
Nonaccrual and restructured loans and leases at period end
  $ 36,332     $ 8,434     $ 36,332     $ 8,434  
Average recorded investment in impaired loans and leases
    18,851       7,730       10,730       7,011  
Interest income that would have been recognized under original terms
    309       266       499       564  

 

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Interest income of $74 thousand and $126 thousand was recognized on these loans for the three- and nine- month periods ended September 30, 2009. Interest income of $5 thousand was recognized on these loans for both three- and nine-month periods ended September 30, 2008.
Note 5. Mortgage Servicing Rights
The Corporation has originated mortgage servicing rights which are included in other intangible assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method using an accelerated amortization method and are subject to periodic impairment testing. Changes in the capitalized mortgage servicing rights balance are summarized as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Beginning of period
  $ 1,019     $ 485     $ 418     $ 512  
Servicing rights capitalized
    261       12       953       40  
Amortization of servicing rights
    (63 )           (100 )     (26 )
Changes in valuation
    (30 )     (21 )     (84 )     (50 )
 
                       
End of period
  $ 1,187     $ 476     $ 1,187     $ 476  
 
                       
Activity in the valuation allowance for mortgage servicing rights was as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Valuation allowance, beginning of period
  $ (220 )   $ (77 )   $ (166 )   $ (48 )
Additions
    (30 )     (21 )     (84 )     (50 )
Reductions
                       
Direct write-downs
                       
 
                       
Valuation allowance, end of period,
  $ (250 )   $ (98 )   $ (250 )   $ (98 )
 
                       
The Corporation services loans for others with unpaid principal balances at September 30, 2009 and December 31, 2008 of approximately $141.9 million and $53.8 million, respectively.
Estimated Amortization Expense:
         
For the three months ended December 31, 2009
  $ 52  
For the year ended December 31, 2010
    202  
For the year ended December 31, 2011
    169  
For the year ended December 31, 2012
    139  
For the year ended December 31, 2013
    115  
For the year ended December 31, 2014
    96  
Thereafter
    414  
 
     
 
  $ 1,187  
 
     

 

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Note 6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
($ in thousands)   2009     2008     2009     2008  
Numerator:
                               
Numerator for basic and diluted earnings per share — Income available to common shareholders
  $ 2,753     $ 4,190     $ 9,258     $ 16,785  
 
                       
Denominator:
                               
Denominator for basic earnings per share — weighted-average shares outstanding
    14,873       12,875       13,636       12,856  
Effect of dilutive securities:
                               
Employee stock options
          35             13  
 
                       
Denominator for diluted earnings per share — adjusted weighted-average shares outstanding
    14,873       12,910       13,636       12,869  
 
                       
Basic earnings per share
  $ 0.19     $ 0.33     $ .68     $ 1.31  
 
                       
Diluted earnings per share
    0.19       0.33       .68       1.30  
 
                       
Note 7. Comprehensive Income
The following shows the comprehensive income, net of income taxes, for the periods presented:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
($ in thousands)   2009     2008     2009     2008  
Net Income
  $ 2,753     $ 4,190     $ 9,258     $ 16,785  
Unrealized (loss) gain on cash flow hedges:
                               
Unrealized holding (losses) gains arising during the period
    (369 )           875        
Unrealized gain on available-for-sale investment securities:
                               
Unrealized gains (losses) arising during the period
    4,371       (2,250 )     4,988       (4,617 )
Less: reclassification adjustment for gains (losses) realized in net income
    42       (450 )     (858 )     (552 )
Defined benefit pension plans:
                               
Unrealized (losses) gains arising during the period
    (1 )     4       (4 )     13  
Less: amortization of net loss included in net periodic pension costs
    (148 )     (59 )     (444 )     (177 )
Prior service costs arising during the period
          29             87  
Less: (amortization) accretion of prior service cost included in net periodic pension costs
    (5 )     10       (14 )     31  
 
                       
Total comprehensive income, net of tax
  $ 6,865     $ 2,472     $ 16,433     $ 12,966  
 
                       
Note 8 Pensions and Other Postretirement Benefits
Components of net periodic benefit cost:
                                 
    Three Months Ended September 30,  
    2009     2008     2009     2008  
($ in thousands)   Retirement Plans     Other Post Retirement  
Service cost
  $ 322     $ 308     $ 18     $ 17  
Interest cost
    489       511       23       21  
Expected return on plan assets
    (386 )     (471 )            
Amortization of net gain
    224       90       4       1  
Amortization (accretion) of prior service cost
    12       (11 )     (5 )     (5 )
 
                       
Net periodic cost
  $ 661     $ 427     $ 40     $ 34  
 
                       

 

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    Nine Months Ended September 30,  
    2009     2008     2009     2008  
($ in thousands)   Retirement Plans     Other Post Retirement  
Service cost
  $ 1,031     $ 933     $ 54     $ 51  
Interest cost
    1,467       1,468       70       63  
Expected return on plan assets
    (1,158 )     (1,400 )            
Amortization of net loss
    672       269       11       3  
Amortization (accretion) of prior service cost
    36       (32 )     (15 )     (15 )
 
                       
Net periodic cost
  $ 2,048     $ 1,238     $ 120     $ 102  
 
                       
The Corporation previously disclosed in its financial statements for the year ended December 31, 2008, that it expected to make payments of $2.2 million for its qualified and non-qualified retirement plans and $126 thousand for its other postretirement benefit plans in 2009. As of September 30, 2009, $1.4 million and $61 thousand have been paid to participants from its qualified and non-qualified retirement plans and other postretirement plans, respectively. During the nine months ended September 30, 2009, the Corporation contributed $463 thousand and $61 thousand to its qualified and non-qualified retirement plans and other postretirement plans, respectively.
Note 9. Income Taxes
As of January 1, 2009 and September 30, 2009, 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. Our 2006 and 2007 federal tax returns were examined with some adjustments, and tax years 2006 through 2008 remain subject to federal examination as well as examination by state taxing jurisdictions.
Note 10. Derivative Instruments and Hedging Activities
The Corporation may use interest-rate swap agreements to modify the interest rate characteristics from variable to fixed or fixed to floating in order to reduce the impact of interest rate changes on future net interest income. The Corporation accounts for its interest-rate swap contracts in cash flow and fair value hedging relationships in compliance with ASC 815 (formerly SFAS 133) 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. Under ASC 815 (formerly SFAS 133), 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 or commodities in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument or commodity 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. At September 30, 2009, derivative loan commitments had a positive fair value of $200 thousand and is classified on the balance sheet as a component of other assets.

 

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At September 30, 2008, there were no interest rate swaps outstanding.
On March 24, 2009, the Corporation entered into a $22.0 million notional interest rate swap, which has been classified as a fair value hedge on a commercial loan. Under the terms of the swap agreement, the Corporation will pay a fixed rate of 6.49% and receive a floating rate which is based on the one month U.S. London Interbank Borrowing Rate (“LIBOR”) with a 357 basis point spread and a termination date of April 1, 2019. The Corporation performed an assessment of the hedge at inception. At September 30, 2009, the interest rate swap had a positive fair value of $538 thousand, which is classified on the balance sheet as other assets, and the hedged loan had a negative fair value of $344 thousand, which is classified on the balance sheet as a component of loans and leases. The Corporation has elected to record the change in fair value of the interest rate swap and hedged loan as a component of noninterest income on the income statement. The amount of ineffectiveness for the nine months ended September 30, 2009 was a positive $194 thousand, which is recorded as a component of other income on the income statement.
At September 30, 2009, the Corporation had 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. The cash payment on the interest rate swap of $257 thousand for the nine months ended September 30, 2009 was recorded as a component of interest expense on the income statement. At September 30, 2009, the cash flow hedge had a positive fair value of $1.1 million, which is 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 items. The fair value of the interest rate swap net of taxes of $727 thousand is recorded as a component of accumulated other comprehensive income on the balance sheet.
Note 11. Fair Value Disclosures
As of January 1, 2008, the Corporation adopted ASC 820 (formerly SFAS No. 157, “Fair Value Measurements”). ASC 820 establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability. The Corporation does not currently hold any trading assets, or other financial instruments that are measured at fair value on a recurring basis that were impacted by the adoption of ASC 820.
ASC 820 establishes a hierarchy for inputs used in measuring fair value that 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. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
   
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. Government 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 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 MBS and ABS securities.

 

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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, U.S. Government sponsored enterprises, 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 such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain MBS, CMOs, ABS and municipal bonds. 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 municipal bonds, certain ABS and other less liquid investment securities.
Hedged Loans
The fair value of hedged loans is based on a discounted cash flow model which takes into consideration the changes in market value due to changes in LIBOR. Hedged loans are classified within Level 2 hierarchy.
Loans Held for Sale
The fair value of the Corporation’s loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including, interest rates, 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 September 30, 2009 were carried at the lower of cost or estimated fair value.
Mortgage Servicing Rights
The Corporation estimates the fair value of Mortgage Servicing Rights (“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 classified within level 2 of the valuation hierarchy. MSRs are carried at the lower of amortized cost or estimated fair value.
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.

 

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The following table presents the assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008, classified using the ASC 820 valuation hierarchy:
                                 
    At September 30, 2009  
                            Assets/  
                            Liabilities at  
($ in thousands)   Level 1     Level 2     Level 3     Fair Value  
Assets:
                               
Available-for-sale securities
                               
U.S. Treasury, government corporations and agencies
  $     $ 134,126     $     $ 134,126  
State and political subdivisions
          109,668             109,668  
Mortgage-backed securities
          122,079             122,079  
Collateral mortgage obligations
          87,757       5,690       93,447  
Asset-backed securities
                722       722  
Other securities
          9,369             9,369  
Equity securities
    1,966                   1,966  
 
                       
Total available-for-sale securities
    1,966       462,999       6,412       471,377  
 
                       
 
                               
Hedged loans
          21,656             21,656  
Mortgage servicing rights
          1,187             1,187  
Interest rate swaps
          1,656             1,656  
Derivative loan commitments
          200             200  
 
                       
Total assets
  $ 1,966     $ 487,698     $ 6,412     $ 496,076  
 
                       
 
                               
Liabilities:
                               
Interest rate swaps
  $     $     $     $  
 
                       
Total liabilities
  $     $     $     $  
 
                       
                                 
    At December 31, 2008  
                            Assets/  
                            Liabilities at  
($ in thousands)   Level 1     Level 2     Level 3     Fair Value  
Assets:
                               
Available-for-sale securities
                               
U.S. Treasury, government corporations and agencies
  $     $ 104,706     $     $ 104,706  
State and political subdivisions
          100,350             100,350  
Mortgage-backed securities
          129,908             129,908  
Collateral mortgage obligations
          74,865       5,340       80,205  
Asset-backed securities
                1,211       1,211  
Other securities
          11,610             11,610  
Equity securities
    2,908                   2,908  
 
                       
Total available-for-sale securities
    2,908       421,439       6,551       430,898  
 
                       
 
                               
Mortgage servicing rights
          418             418  
 
                       
Total assets
  $ 2,908     $ 421,857     $ 6,551     $ 431,316  
 
                       
 
                               
Liabilities:
                               
Interest rate swaps
  $     $ 229     $     $ 229  
 
                       
Total liabilities
  $     $ 229     $     $ 229  
 
                       

 

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The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value:
                                         
    For the Three Months Ended September 30, 2009  
            Total     Total              
    Balance at     Unrealized     Realized     Purchases     Balance at  
    June 30,     Gains or     Gains or     (Sales or     September 30,  
($ in thousands)   2009     (Losses)     (Losses)     Paydowns)     2009  
Available-for-sale securities:
                                       
Asset-backed securities
  $ 886     $     $     $ (164 )   $ 722  
Commercial mortgage obligations
    5,415       625             (350 )     5,690  
 
                             
Total Level 3 assets
  $ 6,301     $ 625     $     $ (514 )   $ 6,412  
 
                             
                                         
    For the Nine Months Ended September 30, 2009  
            Total     Total              
    Balance at     Unrealized     Realized     Purchases     Balance at  
    December     Gains or     Gains or     (Sales or     September 30,  
($ in thousands)   31, 2008     (Losses)     (Losses)     Paydowns)     2009  
Available-for-sale securities:
                                       
Asset-backed securities
  $ 1,211     $ 34     $     $ (523 )   $ 722  
Commercial mortgage obligations
    5,340       1,382             (1,032 )     5,690  
 
                             
Total Level 3 assets
  $ 6,551     $ 1,416     $     $ (1,555 )   $ 6,412  
 
                             
Realized gains or losses are recognized in the Consolidated Statements of Income. There were no realized gains or losses recognized on Level 3 assets during the three or nine month periods ended September 30, 2009.
The following table represents assets measured at fair value on a non-recurring basis as of September 30, 2009.
                                 
    At September 30, 2009  
                            Assets at  
($ in thousands)   Level 1     Level 2     Level 3     Fair Value  
Assets:
                               
Acquired leases
  $     $     $ 4,789     $ 4,789  
Impaired loans and leases
                4,489       4,489  
 
                       
 
  $     $     $ 9,278     $ 9,278  
 
                       
Acquired leases are measured at the time of acquisition and are based on the fair value of the collateral securing these loans. 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 under ASC 310 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. During the nine months ended September 30, 2009, the carrying value of impaired loans and leases was reduced by $2.2 million based on the fair value of the underlying collateral as allowed by ASC 310 (formerly SFAS No. 114), with an offset to the allowance for loan and lease losses.
Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other intangible assets. During the nine months ended September 30, 2009, there were no triggering events to fair value goodwill and other intangible assets.

 

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The following table represents the estimates of fair value of financial instruments:
                                 
    At September 30, 2009     At December 31, 2008  
                  Carrying,        
    Carrying, Notional             Notional or        
    or Contract     Fair Value     Contract     Fair Value  
Assets:
                               
Cash and Short-term assets
  $ 34,426     $ 34,426     $ 40,066     $ 40,066  
Investment securities
    472,491       472,592       432,266       432,330  
Loans held for sale
    1,439       1,456       544       550  
Net loans and leases
    1,429,183       1,484,190       1,436,774       1,502,733  
Interest rate swaps
    42,000       1,656              
Liabilities:
                               
Deposits
    1,536,903       1,517,237       1,527,328       1,539,879  
Short-term borrowings
    226,506       228,867       192,730       192,730  
Long-term borrowings
    41,315       42,506       120,006       124,084  
Interest rate swap
                20,000       229  
Off-Balance-Sheet:
                               
Commitments to extend credit
    430,914       (294 )     425,271       (389 )
Letters of credit
    72,799       (740 )     81,462       (829 )
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 and leases: The fair values for loans are estimated using ASC 825 (formerly FAS 107) approach which utilizes a 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.
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 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.

 

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Note 12. Common Stock Issuance
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 $38.6 million at September 30, 2009.
Note 13. Capital Adequacy
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Capital adequacy guidelines, and additionally for the Bank prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
                                                 
                                    To Be Well-Capitalized  
                    For Capital Adequacy     Under Prompt Corrective  
    Actual     Purposes     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of September 30, 2009:
                                               
Total Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 256,945       15.47 %   $ 132,906       8.00 %   $ 166,133       10.00 %
Bank
    242,944       14.86       130,804       8.00       163,505       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Corporation
    234,535       14.12       66,453       4.00       99,680       6.00  
Bank
    222,485       13.61       65,402       4.00       98,103       6.00  
Tier 1 Capital (to Average Assets):
                                               
Corporation
    234,535       11.51       61,154       3.00       81,538       4.00  
Bank
    222,485       11.02       60,578       3.00       80,771       4.00  
 
                                               
As of December 31, 2008:
                                               
Total Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 191,469       11.60 %   $ 132,060       8.00 %   $ 165,075       10.00 %
Bank
    178,535       10.97       130,196       8.00       162,745       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Corporation
    175,801       10.65       66,030       4.00       99,045       6.00  
Bank
    165,267       10.16       65,098       4.00       97,647       6.00  
Tier 1 Capital (to Average Assets):
                                               
Corporation
    175,801       8.94       59,023       3.00       78,697       4.00  
Bank
    165,267       8.46       58,640       3.00       78,186       4.00  
As of September 30, 2009 and December 31, 2008, 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, it’s Tier 1 and Total Capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. As of September 30, 2009, 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.

 

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Note 14. Recent Accounting Pronouncements
In April 2009, FASB issued ASC 825 (formerly FSP FAS No. 107-1, “Disclosure of Fair Value of Financial Instruments in Interim Statements,” and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim Financial Reporting.” ASC 825 requires that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. ASC 825 is effective for interim reporting periods ending after June 15, 2009. The application of the provisions of ASC 825 resulted in additional disclosure about the fair value of financial instruments in connection with the Corporation’s September 30, 2009 quarterly report on Form 10-Q, but did not have a material impact on its consolidated financial statements.
In April 2009, FASB issued ASC 320 (formerly FSP FAS No. 115-2 and FAS No. 124-2), “Recognition and Presentation of Other-Than-Temporary Impairments.” ASC 320 (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. ASC 320 is effective for interim and annual periods ending after June 15, 2009. The application of the provisions of ASC 320 did not have a material impact on the Corporation’s consolidated financial statements as of September 30, 2009.
In April 2009, FASB issued ASC 805 (formerly FSP No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” ASC 805 provides guidance in respect of initial recognition and measurement, subsequent measurement, and disclosures concerning assets and liabilities arising from pre-acquisition contingencies in a business combination. ASC 805 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The application of the provisions of ASC 805 did not have a material impact on the Corporation’s consolidated financial statements as of September 30, 2009.
In April 2009, FASB issued ASC 820 (formerly FSP FAS No. 157-4), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. ASC 820 provides additional guidance for determining fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly. ASC 820 also provides guidance for determining whether a transaction is an orderly one. ASC 820 is effective prospectively for interim periods and annual years ending after June 15, 2009. The application of the provisions of ASC 820 did not have a material impact on the Corporation’s consolidated financial statements as of September 30, 2009.
In May 2009, FASB issued ASC 855 (formerly Statement No. 165, “Subsequent Events”). ASC 855 establishes guidance for the accounting for and the disclosure of events that happen after the date of the balance sheet but before the release of the financial statements. ASC 855 is effective for reporting periods that end after June 15, 2009. The application of the provisions of ASC 855 did not have a material impact on the Corporation’s consolidated financial statements as of September 30, 2009.
In June 2009, FASB issued FASB Statement No. 166 (“FAS 166”), “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” FAS 166 was issued to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically to address: (1) practices that have developed since the issuance of FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. FAS 166 must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes and must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The Corporation does not anticipate the adoption of FAS 166 will have a material impact on the Corporation’s consolidated financial statements.

 

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In June 2009, FASB issued Statement No. 167 (“FAS 167”), “Amendments to FASB Interpretation No. 46(R).” FAS 167 was issued to improve financial reporting by enterprises involved with variable interest entities. Specifically to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, “Accounting for Transfers of Financial Assets,” and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FAS 167 must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes and must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter with early application prohibited. The Corporation does not anticipate the adoption of FAS 167 will have a material impact on the Corporation’s consolidated financial statements.
In June 2009, the FASB issued ASU No. 2009-01 (formerly Statement No. 168), “Topic 105 - Generally Accepted Accounting Principles — FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.” The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification is effective for interim or annual reporting periods ending after September 15, 2009. The appropriate changes to GAAP references have been made to the Corporation’s interim financial statements as of September 30, 2009.
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820) — Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent)”. This ASU permits, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this ASU on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date. The ASU also requires disclosures by major category of investment about the attributes of investments within the scope of the Update. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Corporation does not anticipate the adoption of ASU 2009-12 will have a material impact on the Corporation’s consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(All dollar amounts presented within tables are in thousands, except per share data. “N/M” equates to “not meaningful”; “-” equates to “zero” or “doesn’t round to a reportable number”; and “N/A” equates to “not applicable”. Certain amounts have been reclassified to conform to the current-year presentation.)
Forward-Looking Statements
The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words “believe,” “anticipate,” “estimate,” “expect,” “project,” “target,” “goal” and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below:

 

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Operating, legal and regulatory risks
 
   
Economic, political and competitive forces impacting various lines of business
 
   
The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful
 
   
Volatility in interest rates
 
   
Other risks and uncertainties
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.
General
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. Univest Capital, 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. TCG Investment Advisory, a wholly owned subsidiary of the Bank, is a registered investment advisor and provides discretionary investment consulting and management services.
Executive Overview
The Corporation recorded net income for the nine months ended September 30, 2009 of $9.3 million, a 44.8% decrease compared to the September 30, 2008 period. Diluted net income per share decreased by 47.7% for the nine months ended September 30, 2009 as compared to September 30, 2008.
Average interest-earning assets increased $44.3 million and average interest-bearing liabilities increased $34.2 million when comparing the nine-month periods ended September 30, 2009 and 2008. Decreased rates on commercial business, real estate-commercial and construction and real estate-residential loans were more than offset by decreased rates on money market savings and time deposits; this contributed to a $2.4 million increase in tax-equivalent net interest income. The tax-equivalent net interest margin increased to 3.82% for the nine month period ended September 30, 2009 from 3.73% when compared to the same period in 2008.
Non-interest income decreased by 0.9%, when comparing the nine-month periods ended September 30, 2009 to 2008, due to a decrease in bank owned life insurance income of $1.8 million, primarily due to a death benefit recorded in 2008, and other-than-temporary impairments on equity securities being $519 thousand greater in 2009 over 2008. These decreases were partially offset by increases in investment advisory fees, insurance commissions and fee income, the gain on sale of loans held for sale and other income.
Non-interest expense grew 13.0% 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. Additionally, FDIC insurance premiums increased in 2009 over 2008 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, and credits that were utilized by the Corporation in 2008 causing an aggregated variance of $2.3 million.
The Corporation earns its revenues primarily from the margins and fees it generates from loans and leases and depository services it provides as well as from trust, 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; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation maintains a relatively neutral interest rate risk profile and anticipates that an increase of 200 basis points in interest rates would not significantly impact its net interest margin.

 

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The Corporation seeks to establish itself as the financial provider of choice in the markets it serves. It plans to achieve this goal by offering a broad range of high quality financial products and services and by increasing market awareness of its brand and the benefits that can be derived from its products. The Corporation operates in an attractive market for financial services but also is in intense competition with domestic and international banking organizations and other insurance and investment providers for the financial services business. The Corporation has taken initiatives to achieve its business objectives by acquiring banks and other financial service providers in strategic markets, through marketing, public relations and advertising, by establishing standards of service excellence for its customers, and by using technology to ensure that the needs of its customers are understood and satisfied.
Results of Operations — Three Months Ended September 30, 2009 Versus 2008
The Corporation’s consolidated net income and earnings per share for the three months ended September 30, 2009 and 2008 were as follows:
                                 
    For the Three Months Ended        
    September 30,     Change  
    2009     2008     Amount     Percent  
Net income
  $ 2,753     $ 4,190     $ (1,437 )     (34.3 )%
Net income per share:
                               
Basic
  $ .19     $ .33     $ (.14 )     (42.4 )%
Diluted
    .19       .33       (.14 )     (42.4 )
Return on average shareholders’ equity was 4.55% and return on average assets was 0.52% for the three months ended September 30, 2009, compared to 8.13% and 0.82%, respectively, for the same period in 2008.
Net Interest Income
Net interest income is the difference between interest earned on loans and leases, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation’s revenue. Table 1 presents a summary of the Corporation’s average balances; the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the three months ended September 30, 2009 and 2008. 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 Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.
Tax-equivalent net interest income increased $967 thousand for the three months ended September 30, 2009 compared to 2008 primarily due to increased volume in real estate-commercial and construction loans and investments in obligations of state and political subdivisions. Decreased rates on commercial, financial and agriculture loans and real estate-commercial and construction loans were offset by decreased rates on money market savings and time deposits. The tax-equivalent net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was 3.82% and 3.77% for the three-month periods ended September 30, 2009 and 2008, 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 3.53% for the three months ended September 30, 2009 compared to 3.37% for the same period in 2008. The effect of net interest free funding sources decreased to 0.29% for the three months ended September 30, 2009 compared to 0.40% for the same period in 2008; this represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity. Proceeds from the capital issuance were invested in U.S. Government Obligations and obligations of state and political subdivisions and utilized to pay down borrowings.

 

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Table 1 — Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
                                                 
    For the Three Months Ended September 30,  
    2009     2008  
    Average     Income/     Average     Average     Income/     Average  
    Balance     Expense     Rate     Balance     Expense     Rate  
Assets:
                                               
Interest-earning deposits with other banks
  $ 4,067     $ 3       0.29 %   $ 584     $ 4       2.72 %
U.S. Government obligations
    123,008       979       3.16       98,876       1,135       4.57  
Obligations of states and political subdivisions
    105,060       1,734       6.55       86,900       1,501       6.87  
Other debt and equity securities
    219,857       2,531       4.57       226,495       2,984       5.24  
Federal funds sold
                      3,232       13       1.60  
 
                                       
Total interest-earning deposits, investments and federal funds sold
    451,992       5,247       4.61       416,087       5,637       5.39  
 
                                       
Commercial, financial and agricultural loans
    417,694       4,802       4.56       399,334       5,961       5.94  
Real estate-commercial and construction loans
    528,104       7,972       5.99       482,213       7,817       6.45  
Real estate-residential loans
    282,758       3,242       4.55       310,982       3,986       5.10  
Loans to individuals
    48,110       829       6.84       60,871       1,069       6.99  
Municipal loans and leases
    91,674       1,388       6.01       82,753       1,298       6.24  
Lease financings
    88,122       1,796       8.09       86,621       1,788       8.21  
 
                                       
Gross loans and leases
    1,456,462       20,029       5.46       1,422,774       21,919       6.13  
 
                                       
Total interest-earning assets
    1,908,454       25,276       5.25       1,838,861       27,556       5.96  
 
                                   
Cash and due from banks
    32,637                       36,841                  
Reserve for loan and lease losses
    (19,445 )                     (14,070 )                
Premises and equipment, net
    33,274                       32,533                  
Other assets
    144,044                       126,372                  
 
                                           
Total assets
  $ 2,098,964                     $ 2,020,537                  
 
                                           
Liabilities:
                                               
Interest-bearing checking deposits
  $ 162,764       57       0.14     $ 143,774       114       0.32  
Money market savings
    296,676       342       0.46       362,864       1,725       1.89  
Regular savings
    367,825       714       0.77       286,554       1,142       1.59  
Time deposits
    491,356       4,171       3.37       483,262       5,099       4.20  
 
                                       
Total time and interest-bearing deposits
    1,318,621       5,284       1.59       1,276,454       8,080       2.52  
 
                                       
Securities sold under agreements to repurchase
    102,582       155       0.60       84,931       228       1.07  
Other short-term borrowings
    95,008       825       3.45       72,302       408       2.24  
Long-term debt
    44,810       315       2.79       98,678       1,055       4.25  
Subordinated notes and capital securities
    26,244       322       4.87       27,744       377       5.41  
 
                                       
Total borrowings
    268,644       1,617       2.39       283,655       2,068       2.90  
 
                                       
Total interest-bearing liabilities
    1,587,265       6,901       1.72       1,560,109       10,148       2.59  
 
                                   
Demand deposits, non-interest bearing
    228,815                       226,948                  
Accrued expenses and other liabilities
    42,617                       28,418                  
 
                                           
Total liabilities
    1,858,697                       1,815,475                  
 
                                           
Shareholders’ Equity:
                                               
Common stock
    83,588                       74,370                  
Additional paid-in capital
    43,882                       22,647                  
Retained earnings and other equity
    112,797                       108,045                  
 
                                           
Total shareholders’ equity
    240,267                       205,062                  
 
                                           
Total liabilities and shareholders’ equity
  $ 2,098,964                     $ 2,020,537                  
 
                                           
Net interest income
          $ 18,375                     $ 17,408          
 
                                           
Net interest spread
                    3.53                       3.37  
Effect of net interest-free funding sources
                    0.29                       0.40  
 
                                           
Net interest margin
                    3.82 %                     3.77  
 
                                           
Ratio of average interest-earning assets to average interest-bearing liabilities
    120.24 %                     117.87 %                
 
                                           
     
Notes:  
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35 percent.

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.

 

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Table 2 — Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest income for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated to change in volume.
                         
    The Three Months Ended September 30,  
    2009 Versus 2008  
    Volume     Rate        
    Change     Change     Total  
Interest income:
                       
Interest-earning deposits with other banks
  $ 3     $ (4 )   $ (1 )
U.S. Government obligations
    194       (350 )     (156 )
Obligations of states and political subdivisions
    303       (70 )     233  
Other debt and equity securities
    (72 )     (381 )     (453 )
Federal funds sold
    (13 )           (13 )
 
                 
Interest on deposits, investments and federal funds sold
    415       (805 )     (390 )
 
                 
Commercial, financial and agricultural loans and leases
    226       (1,385 )     (1,159 )
Real estate-commercial and construction loans
    713       (558 )     155  
Real estate-residential loans
    (314 )     (430 )     (744 )
Loans to individuals
    (217 )     (23 )     (240 )
Municipal loans and leases
    138       (48 )     90  
Lease financings
    34       (26 )     8  
 
                 
Interest and fees on loans and leases
    580       (2,470 )     (1,890 )
 
                 
Total interest income
    995       (3,275 )     (2,280 )
 
                 
Interest expense:
                       
Interest-bearing checking deposits
    8       (65 )     (57 )
Money market savings
    (79 )     (1,304 )     (1,383 )
Regular savings
    163       (591 )     (428 )
Time deposits
    80       (1,008 )     (928 )
 
                 
Interest on time and interest-bearing deposits
    172       (2,968 )     (2,796 )
 
                 
Securities sold under agreement to repurchase
    27       (100 )     (73 )
Other short-term borrowings
    197       220       417  
Long-term debt
    (378 )     (362 )     (740 )
Subordinated notes and capital securities
    (17 )     (38 )     (55 )
 
                 
Interest on borrowings
    (171 )     (280 )     (451 )
 
                 
Total interest expense
    1       (3,248 )     (3,247 )
 
                 
Net interest income
  $ 994     $ (27 )   $ 967  
 
                 
Notes:  
Tax-equivalent amounts for both periods have been calculated using the Corporation’s federal applicable rate of 35%.

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.
Interest Income
Interest income on U. S. Government obligations decreased during the three months ended September 30, 2009 compared to 2008 due to a decline in average rates. Interest income on obligations of state and political subdivisions increased due to an increase in average volume which is partially offset by a decrease in average rates. Interest income on other debt and equity securities decreased primarily due to average rate decreases on mortgage-backed securities.
The decline in interest and fees on loans and leases is due primarily to average rate decreases on commercial business loans and real estate-commercial and construction loans. The rate decreases are attributable to the 175 basis point decline in average prime rate comparing the three months ended September 30, 2009 to the same period in 2008. The average interest yield on the commercial loan portfolio decreased 138 basis points; which contributed to a $1.2 million decrease in interest income. Volume decreases of $28.2 million and rate decreases of 55 basis points contributed to a $744 thousand decline in interest on real estate-residential loans as the Corporation has primarily been selling all mortgages originated in 2009 in the secondary market as opposed to holding the loans in the portfolio in order to manage the Corporation’s interest rate risk. The average volume decline on loans to individuals of $12.8 million, contributed to a $240 thousand decrease in interest income. These decreases were partially offset by an increase in average volume on municipal loan and leases of $8.9 million, contributing to a $90 thousand increase in interest income; and an increase in average volume on real estate- commercial and construction loans of $45.9 million, contributing to a $155 thousand increase in interest income.

 

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Interest Expense
The Corporation’s average cost of deposits decreased 93 basis points for the three months ended September 30, 2009 compared to the same period in 2008. This decrease in average rate contributed to a $2.8 million decrease in interest expense on deposits. The average rate paid on money market savings decreased 143 basis points and the average volume decreased $66.2 million; contributing to a $1.4 million decrease in interest expense. Interest on regular savings decreased $428 thousand due to a 82 basis-point decrease in average rate that was partially offset by an average volume increase of $81.3 million. Interest on certificates of deposit decreased $928 thousand due to a 83 basis-point decrease in average rate.
The Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account (“sweep accounts”). Interest expense on these securities sold under agreements to repurchase decreased $73 thousand during the three months ended September 30, 2009 compared to 2008 primarily due to rate decreases of 47 basis points. Interest expense on other short-term borrowings includes interest paid on federal funds purchased and short-term FHLB debt. Interest expense on other short-term borrowings increased $417 thousand due to average rate increases of 121 basis points and average volume increases of $22.7 million. Average volume increased in short-term FHLB debt was due to reclasses from long-term FHLB debt of $53.9 million partially offset by repayments
Interest on long-term debt, which consists of long-term FHLB borrowings, decreased due to a decline in average volume of $53.9 million and a 146 basis point decrease in the average rate paid. Subordinated notes and capital securities include the issuance of $15.0 million in Subordinated Capital Notes in 2003, and the issuance of $20.0 million in Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Junior Subordinated Debentures of the Corporation (“Trust Preferred Securities”) in 2003. Interest expense on Subordinated Capital Notes and Trust Preferred Securities decreased $55 thousand primarily due to rate decreases.
Provision for Loan and Lease Losses
The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charged-off activity. Loans and leases are also reviewed for impairment based on discounted cash flows using the loans’ and leases’ initial effective interest rates or the fair value of the collateral for certain collateral dependent loans as provided for under ASC 310 (formerly SFAS No. 114). Any of the above criteria may cause the reserve to fluctuate. The provision for the three months ended September 30, 2009 and 2008 was $5.9 million and $3.0 million, respectively. The increase in the provision for loan losses is due to the deterioration of underlying collateral and economic factors. This resulted in the migration of loans to a higher risk category. Additionally, nonaccrual loans and restructured loans increased to $36.3 million at September 30, 2009 from $8.4 million at September 30, 2008. This increase is primarily due to two credits which went on non-accrual during the third quarter of 2009. One credit is a Shared National Credit to a continuing care retirement community in which Univest participates. The parent company of the community has come under financial difficulty and as a result, the parent company and all communities recently declared bankruptcy. The credit has $7.4 million outstanding at September 30, 2009. The second credit is for four separate facilities to a local commercial real estate developer/home builder which aggregate $16.6 million at September 30, 2009. Univest will continue to closely monitor these credits and may have to provide additional reserve in future quarters related to these credits.
Noninterest Income
Non-interest income consists of trust department fee income, service charges on deposits, commission income, 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 represents changes in the cash surrender value of bank-owned life insurance policies and any excess proceeds from death benefit claims. Total non-interest income increased during the three months ended September 30, 2009 compared to 2008 primarily due to fewer other-than-temporary impairments on securities taken in the 2009 period versus 2008, additional fee income resulting from the Trollinger and Liberty acquisitions and increases in the gain on sale of loans held for sale due to growth in our mortgage banking activities.

 

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    Three Months Ended        
    September 30,     Change  
    2009     2008     Amount     Percent  
Trust fee income
  $ 1,325     $ 1,578     $ (253 )     (16.0 )%
Service charges on deposit accounts
    1,745       1,719       26       1.5  
Investment advisory commission and fee income
    876       581       295       50.8  
Insurance commission and fee income
    1,470       1,266       204       16.1  
Bank owned life insurance income
    405       241       164       68.0  
Other service fee income
    851       732       119       16.3  
Other-than-temporary impairments on securities
    (47 )     (693 )     646       93.2  
Net gain on the sales of securities
    112       1       111       N/M  
Gain on sale of loans held for sale
    401       26       375       N/M  
Net loss on dispositions of fixed assets
          (28 )     28       N/M  
Other
    (40 )     141       (181 )     N/M  
 
                         
Total noninterest income
  $ 7,098     $ 5,564     $ 1,534       27.6  
 
                         
Trust fee income decreased in 2009 over 2008 primarily due to a decrease in the market value of managed accounts.
Investment advisory commissions and fee income, the primary source of income for Univest Investments, Inc. increased in 2009 over 2008 due to the acquisition of the Trollinger Consulting Group in December 2008 that resulted in increased fees and commissions received. Insurance commissions and fee income, the primary source of income for Univest Insurance, Inc. increased in the third quarter of 2009 over 2008 primarily due to the acquisition of Liberty Benefits.
Life insurance income is primarily the change in the cash surrender values of bank owned life insurance policies, which is affected by the market value of the underlying assets. Life insurance income may also be recognized as the result of a death benefit claim. Bank owned life insurance income increased in the third quarter of 2009 over 2008 due to an increase in the market value of the underlying assets.
Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (“Mastermoney fees”), non-customer debit card fees, other merchant fees, mortgage servicing income, mortgage placement income and registered investment advisory fees. Other service fee income increased for the third quarter of 2009 over 2008 primarily due to registered investment advisory fees resulting from the Trollinger Consulting Group acquisition.
Other non-interest income includes fair value adjustments on derivatives, gains on sales of other real estate owned, reinsurance income and other miscellaneous income. Other non-interest income decreased for the three months ended 2009 compared to the same period in 2008 primarily due to a negative fair value adjustment on interest rate swaps.
Gains on Sale of Assets
Sales of $33.6 million in loans held for sale, primarily due to increased mortgage activity, during the three months ended September 30, 2009 resulted in gains of $401 thousand compared to sales of $1.1 million for gains of $26 thousand for the three months ended September 30, 2008.
During the three months ended September 30, 2009, approximately $8.9 million of available for sale securities were sold recognizing gains of $112 thousand. Additionally, the Corporation realized an other-than-temporary impairment charge of $47 thousand on its equity portfolio during the third quarter of 2009. The Corporation determined that there was an increased severity and duration of the decline in fair values during the quarter due to 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 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. During the three months ended September 30, 2008, the Corporation sold $1.7 million in securities that resulted in a $1 thousand gain. Additionally, the Corporation realized an impairment charge of $693 thousand on its equity portfolio during the third quarter of 2008.

 

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Noninterest Expense
The operating costs of the Corporation are known as non-interest expense, and include, but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses.
The following table presents noninterest expense for the periods indicated:
                                 
    For the Three Months Ended        
    September 30,     Change  
    2009     2008     Amount     Percent  
Salaries and benefits
  $ 8,818     $ 7,935     $ 883       11.1 %
Net occupancy
    1,338       1,318       20       1.5  
Equipment
    878       792       86       10.9  
Marketing and advertising
    397       268       129       48.1  
Deposit insurance premiums
    526       183       343       N/M  
Other
    3,606       3,169       437       13.8  
 
                         
Total noninterest expense
  $ 15,563     $ 13,665     $ 1,898       13.9  
 
                         
Salaries and benefits increased 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.
Deposit insurance premiums increased as the utilization of credits ran out during the third quarter of 2008 and rate increases of 7 basis points.
Other expenses increased primarily due to legal fees resulting from non-performing loan activity, the timing of state tax credits received, and intangible asset amortization resulting from the Liberty and Trollinger acquisitions.
Tax Provision
The provision for income taxes was $197 thousand for the three months ended September 30, 2009 compared to $1.2 million in 2008, at effective rates of 6.68% and 21.92%, 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 and loans, and bank-owned life insurance. The decrease in the effective tax rate between the three-month periods is primarily due to a larger percentage of tax-exempt income to pre-tax income.
Results of Operations — Nine Months Ended September 30, 2009 Versus 2008
The Corporation’s consolidated net income and earnings per share for the nine months ended September 30, 2009 and 2008 were as follows:
                                 
    For the Nine Months Ended        
    September 30,     Change  
    2009     2008     Amount     Percent  
Net income
  $ 9,258     $ 16,785     $ (7,527 )     (44.8 )%
Net income per share:
                               
Basic
  $ 0.68     $ 1.31     $ (0.63 )     (48.1 )%
Diluted
    0.68       1.30       (0.62 )     (47.7 )

 

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Return on average shareholders’ equity was 5.68% and return on average assets was 0.60% for the nine months ended September 30, 2009, compared to 11.01% and 1.11%, respectively, for the same period in 2008.
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 nine months ended September 30, 2009 and 2008. 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 Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.
Tax-equivalent net interest income increased $2.4 million for the nine months ended September 30, 2009 compared to 2008 primarily due to rate decreases in money market savings and time deposits. Decreased rates on commercial business loans and real estate-commercial and commercial construction loans were partially offset by increased volumes on commercial business and real estate-commercial and construction loans and lease financings. The tax-equivalent net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was 3.82% and 3.73% for the nine-month periods ended September 30, 2009 and 2008, 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 3.54% for the nine months ended September 30, 2009 compared to 3.30% for the same period in 2008. The effect of net interest free funding sources decreased to 0.28% for the nine months ended September 30, 2009 compared to 0.43% for the same period in 2008; this represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.

 

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Table 1 — Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential
                                                 
    For the Nine Months Ended September 30,  
    2009     2008  
    Average     Income/     Average     Average     Income/     Average  
    Balance     Expense     Rate     Balance     Expense     Rate  
Assets:
                                               
Interest-earning deposits with other banks
  $ 3,602     $ 8       0.30 %   $ 680     $ 11       2.16 %
U.S. Government obligations
    105,565       2,743       3.47       100,721       3,525       4.67  
Obligations of states and political subdivisions
    103,389       5,206       6.73       96,315       4,731       6.56  
Other debt and equity securities
    218,169       8,005       4.91       237,508       9,246       5.20  
Federal funds sold
    77                   19,275       392       2.72  
 
                                       
Total interest-earning deposits, investments and federal funds sold
    430,802       15,962       4.95       454,499       17,905       5.26  
 
                                       
Commercial, financial and agricultural loans
    409,513       14,021       4.58       382,337       18,149       6.34  
Real estate-commercial and construction loans
    518,828       23,289       6.00       478,277       23,936       6.69  
Real estate-residential loans
    297,248       10,432       4.69       307,692       12,087       5.25  
Loans to individuals
    50,759       2,621       6.90       64,934       3,413       7.02  
Municipal loans and leases
    88,851       4,082       6.14       82,043       3,846       6.26  
Lease financings
    92,792       5,827       8.40       74,682       4,820       8.62  
 
                                       
Gross loans and leases
    1,457,991       60,272       5.53       1,389,965       66,251       6.37  
 
                                       
Total interest-earning assets
    1,888,793       76,234       5.40       1,844,464       84,156       6.09  
 
                                   
Cash and due from banks
    31,490                       35,912                  
Reserve for loan and lease losses
    (16,358 )                     (13,402 )                
Premises and equipment, net
    33,011                       31,076                  
Other assets
    141,963                       125,675                  
 
                                           
Total assets
  $ 2,078,899                     $ 2,023,725                  
 
                                           
Liabilities:
                                               
Interest-bearing checking deposits
  $ 161,213       199       0.17     $ 143,517       350       0.33  
Money market savings
    312,888       1,389       0.59       430,758       7,595       2.36  
Regular savings
    343,897       2,211       0.86       267,563       3,211       1.60  
Time deposits
    515,755       13,603       3.53       476,443       15,744       4.41  
 
                                       
Total time and interest-bearing deposits
    1,333,753       17,402       1.74       1,318,281       26,900       2.73  
 
                                       
Securities sold under agreements to repurchase
    88,104       416       0.63       84,766       759       1.20  
Other short-term borrowings
    89,987       1,867       2.77       39,422       688       2.33  
Long-term debt
    61,899       1,654       3.57       95,602       3,084       4.31  
Subordinated notes and capital securities
    26,617       975       4.90       28,131       1,249       5.93  
 
                                       
Total borrowings
    266,607       4,912       2.46       247,921       5,780       3.11  
 
                                       
Total interest-bearing liabilities
    1,600,360       22,314       1.86       1,566,202       32,680       2.79  
 
                                   
Demand deposits, non-interest bearing
    220,789                       224,611                  
Accrued expenses and other liabilities
    39,909                       29,250                  
 
                                           
Total liabilities
    1,861,058                       1,820,063                  
 
                                           
Shareholders’ Equity:
                                               
Common stock
    77,476                       74,370                  
Additional paid-in capital
    29,897                       22,636                  
Retained earnings and other equity
    110,468                       106,656                  
 
                                           
Total shareholders’ equity
    217,841                       203,662                  
 
                                           
Total liabilities and shareholders’ equity
  $ 2,078,899                     $ 2,023,725                  
 
                                           
Net interest income
          $ 53,920                     $ 51,476          
 
                                           
Net interest spread
                    3.54                       3.30  
Effect of net interest-free funding sources
                    0.28                       0.43  
 
                                           
Net interest margin
                    3.82 %                     3.73 %
 
                                           
Ratio of average interest-earning assets to average interest-bearing liabilities
    118.02 %                     117.77 %                
 
                                           
Notes:  
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35 percent.

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.

 

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Table 2 — Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest income for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated to change in volume.
                         
    The Nine Months Ended September 30,  
    2009 Versus 2008  
    Volume     Rate        
    Change     Change     Total  
Interest income:
                       
Interest-earning deposits with other banks
  $ 6     $ (9 )   $ (3 )
U.S. Government obligations
    123       (905 )     (782 )
Obligations of states and political subdivisions
    352       123       475  
Other debt and equity securities
    (725 )     (516 )     (1,241 )
Federal funds sold
    (392 )           (392 )
 
                 
Interest on deposits, investments and federal funds sold
    (636 )     (1,307 )     (1,943 )
 
                 
Commercial, financial and agricultural loans and leases
    910       (5,038 )     (4,128 )
Real estate-commercial and construction loans
    1,824       (2,471 )     (647 )
Real estate-residential loans
    (365 )     (1,290 )     (1,655 )
Loans to individuals
    (734 )     (58 )     (792 )
Municipal loans and leases
    310       (74 )     236  
Lease financings
    1,130       (123 )     1,007  
 
                 
Interest and fees on loans and leases
    3,075       (9,054 )     (5,979 )
 
                 
Total interest income
    2,439       (10,361 )     (7,922 )
 
                 
Interest expense:
                       
Interest-bearing checking deposits
    21       (172 )     (151 )
Money market savings
    (498 )     (5,708 )     (6,206 )
Regular savings
    482       (1,482 )     (1,000 )
Time deposits
    998       (3,139 )     (2,141 )
 
                 
Interest on time and interest-bearing deposits
    1,003       (10,501 )     (9,498 )
 
                 
Securities sold under agreement to repurchase
    19       (362 )     (343 )
Other short-term borrowings
    1,049       130       1,179  
Long-term debt
    (900 )     (530 )     (1,430 )
Subordinated notes and capital securities
    (57 )     (217 )     (274 )
 
                 
Interest on borrowings
    111       (979 )     (868 )
 
                 
Total interest expense
    1,114       (11,480 )     (10,366 )
 
                 
Net interest income
  $ 1,325     $ 1,119     $ 2,444  
 
                 
Notes:  
Tax-equivalent amounts for both periods have been calculated using the Corporation’s federal applicable rate of 35%.

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.
Interest Income
Interest income on U. S. Government obligations decreased during the nine months ended September 30, 2009 compared to 2008 due to a decline in average rates. Interest income on obligations of state and political subdivisions increased due to increases in average volume and average rates. Interest income on other debt and equity securities decreased due to decline in average volume and average rates 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 is due primarily to average rate decreases on commercial business loans and real estate-commercial and construction loans. The rate decreases are attributable to the 196 basis point decline in average prime rate comparing the nine months ended September 30, 2009 to the same period in 2008. The average interest yield on the commercial loan portfolio decreased 176 basis points; which contributed to a $4.1 million decrease in interest income. The average yield on real estate-commercial and construction loans decreased 69 basis points which contributed to a $647 thousand decline in interest income. Average volume decreases of $10.4 million and average rate decreases of 56 basis points on real estate — residential loans contributed to a $1.7 million decrease in interest income. The average volume decline on loans to individuals of $14.2 million, contributed to a $792 thousand decrease in interest income. These decreases were offset by an increase in average volume on lease financings of $18.1 million; this contributed to a $1.0 million increase in interest income.

 

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Interest Expense
The Corporation’s average cost of deposits decreased 99 basis points for the nine months ended September 30, 2009 compared to the same period in 2008. This decrease in average rate contributed to a $9.5 million decrease in interest expense on deposits. The average rate paid on money market savings decreased 177 basis points and the average volume decreased $117.9 million, contributing to a $6.2 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. Interest on regular savings decreased $1.0 million due to a 74 basis-point decrease in average rate that was partially offset by an average volume increase of $76.3 million. Interest on certificates of deposit decreased $2.1 million, due to a 88 basis-point decrease in average rate while the average volume increased by $39.3 million.
The Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account (“sweep accounts”). Interest expense on these securities sold under agreements to repurchase decreased $343 thousand during the nine months ended September 30, 2009 compared to 2008 primarily due to average rate decreases of 57 basis points. Interest expense on other short-term borrowings includes interest paid on federal funds purchased and short-term FHLB debt. Interest expense on other short-term borrowings increased primarily due to volume increases of $50.6 million due to reclasses from long-term FHLB borrowings of $33.7 million and increased federal funds purchased.
Interest on long-term debt, which consists of long-term FHLB borrowings, decreased due to a decline in average volume of $33.7 million and a 74 basis point decrease in the average rate paid. Subordinated notes and capital securities include the issuance of $15.0 million in Subordinated Capital Notes in 2003, and the issuance of $20.0 million in Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Junior Subordinated Debentures of the Corporation (“Trust Preferred Securities”) in 2003. Interest expense on Subordinated Capital Notes and Trust Preferred Securities decreased $274 thousand primarily due to rate decreases.
Provision for Loan and Lease Losses
The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charged-off activity. Loans and leases are also reviewed for impairment based on discounted cash flows using the loans’ and leases’ initial effective interest rates or the fair value of the collateral for certain collateral dependent loans as provided for under ASC 310. Any of the above criteria may cause the reserve to fluctuate. The provision for the nine months ended September 30, 2009 and 2008 was $13.4 million and $6.3 million, respectively. 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 $2.1 million at September 30, 2009 from $36 thousand at December 31 2008. Additionally, nonaccrual loans and restructured loans increased to $36.3 million at September 30, 2009 from $5.4 million at September 30, 2008. This increase is primarily due to two credits which went on non-accrual during the third quarter of 2009. One credit is a Shared National Credit to a continuing care retirement community in which Univest participates. The parent company of the community has come under financial difficulty and as a result, the parent company and all communities recently declared bankruptcy. The credit has $7.4 million outstanding at September 30, 2009. The second credit is for four separate facilities to a local commercial real estate developer/home builder which aggregate $16.6 million at September 30, 2009. Univest will continue to closely monitor these credits and may have to provide additional reserve in future quarters related to these credits.
Noninterest Income
Non-interest income consists of trust department fee income, service charges on deposits, commission income, 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 represents changes in the cash surrender value of bank-owned life insurance policies and any excess proceeds from death benefit claims. Total non-interest income decreased during the nine months ended September 30, 2009 compared to 2008 primarily due to a decrease of $1.8 million in bank owned life insurance income, a decline of $758 thousand in trust fee income and an additional $519 thousand in other-than-temporary impairment losses on available-for-sale securities.

 

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    Nine Months Ended        
    September 30,     Change  
    2009     2008     Amount     Percent  
Trust fee income
  $ 4,075     $ 4,833     $ (758 )     (15.7 )%
Service charges on deposit accounts
    5,050       5,085       (35 )     (0.7 )
Investment advisory commission and fee income
    2,402       1,838       564       30.7  
Insurance commission and fee income
    5,567       4,595       972       21.2  
Bank owned life insurance income
    970       2,766       (1,796 )     (64.9 )
Other service fee income
    2,575       2,581       (6 )     (0.2 )
Other-than-temporary impairments on securities
    (1,447 )     (928 )     (519 )     (55.9 )
Net gain on sale of securities
    127       79       48       60.8  
Gain on sale of loans held for sale
    1,331       61       1,270       N/M  
Net loss on dispositions of fixed assets
    (147 )     (33 )     (114 )     N/M  
Other
    595       410       185       45.1  
 
                         
Total noninterest income
  $ 21,098     $ 21,287     $ (189 )     (0.9 )
 
                         
Trust fee income decreased in 2009 over 2008 primarily due to a decrease in the market value of managed accounts. Service charges on deposit accounts decreased slightly when comparing the nine months ended September 30, 2009 to the same period in 2008.
Investment advisory commissions and fee income, the primary source of income for Univest Investments, Inc. increased in 2009 over 2008 due to the acquisition of the Trollinger Consulting Group in December 2008 that resulted in increased fees and commissions received. Insurance commissions and fee income, the primary source of income for Univest Insurance, Inc. increased during the nine- month period ended September 30, 2009 over the same period in 2008 primarily due to the acquisitions of Liberty Benefits, Inc. and Trollinger Consulting Group in December 2008.
Life insurance income is primarily the change in the cash surrender values of bank owned life insurance policies, which is affected by the market value of the underlying assets. Life insurance income may also be recognized as the result of a death benefit claim. As a result of payments for death benefit claims during the nine months ended September 30, 2008 of $1.9 million, life insurance income decreased when comparing the nine months ended September 30, 2009 to the same period in 2008.
Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (“Mastermoney fees”), non-customer debit card fees, other merchant fees, mortgage servicing income, mortgage placement income and registered investment advisory fees. Other service fee income decreased for the nine months ended September 30, 2009 over the same period in 2008 primarily due to income recognized in 2008 which resulted from a renegotiated contract with a service provider.
Other non-interest income includes fair value adjustments on derivatives, gains on sales of other real estate owned, reinsurance income and other miscellaneous income. Other non-interest income increased for the nine months ended 2009 compared to the same period in 2008 primarily due to net positive fair value adjustments on derivative loan commitments and interest rate swaps.
Gains on Sale of Assets
Sales of $104.5 million in loans held for sale, primarily due to increased mortgage activity, during the nine months ended September 30, 2009 resulted in gains of $1.3 million compared to sales of $3.7 million for gains of $61 thousand for the nine months ended September 30, 2008.

 

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During the nine months ended September 30, 2009, approximately $41.9 million of available for sale securities were sold recognizing gains of $127 thousand. Additionally, the Corporation realized an other-than-temporary impairment charge of $1.4 million on its equity portfolio during the nine month period ended September 30, 2009. The Corporation determined that there was an increased severity and duration of the decline in fair values during the quarter due to 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 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. During the nine months ended September 30, 2008, the Corporation sold $16.4 million in securities that resulted in a gain of $79 thousand. Additionally, the Corporation realized an other-than-temporary impairment charge of $928 thousand on its equity portfolio during the nine month period ended September 30, 2008.
Net losses on the disposition of fixed assets were $147 thousand and $33 thousand for the nine months ended September 30, 2009 and 2008, respectively. Net losses in 2009 were primarily the result of relocating a banking office within one of its supermarket locations to a traditional office and the demolition of the Corporation’s former operations center.
Noninterest Expense
The operating costs of the Corporation are known as non-interest expense, and include, but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses.
The following table presents noninterest expense for the periods indicated:
                                 
    For the Nine Months Ended        
    September 30,     Change  
    2009     2008     Amount     Percent  
Salaries and benefits
  $ 27,667     $ 24,122     $ 3,545       14.7 %
Net occupancy
    4,005       3,895       110       2.8  
Equipment
    2,569       2,357       212       9.0  
Marketing and advertising
    877       989       (112 )     (11.3 )
Deposit insurance premiums
    2,586       291       2,295       N/M  
Other
    10,152       10,704       (552 )     (5.2 )
 
                         
Total noninterest expense
  $ 47,856     $ 42,358     $ 5,498       13.0  
 
                         
Salaries and benefits increased 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. 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.
Deposit insurance premiums increased 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, causing an aggregate variance of $2.3 million.
Other expenses decreased primarily due to 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 are not recurring in nature, and lower contributions made in 2009 primarily due to timing. These decreases are partially offset by increases in the amortization of customer intangible lists which increased by $568 thousand due to the acquisitions stated above and miscellaneous tax expense.
Tax Provision
The provision for income taxes was $1.4 million for the nine months ended September 30, 2009 compared to $4.7 million in 2008, at effective rates of 13.20% and 21.96%, 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 nine-month periods is primarily due to a larger percentage of tax-exempt income to pre-tax income.

 

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Financial Condition
Assets
Total assets increased $33.1 million since December 31, 2008. This increase was primarily due to an increase in investment securities, partially offset by decreases in cash and an increase in the reserve for loan and lease losses. The following table presents the assets for the periods indicated:
                                 
    At September30,     At December 31,     Change  
    2009     2008     Amount     Percent  
Cash, deposits and federal funds sold
  $ 34,426     $ 40,066     $ (5,640 )     (14.1 )%
Investment securities
    472,491       432,266       40,225       9.3  
Loans held for sale
    1,439       544       895       164.5  
Total loans and leases
    1,451,128       1,449,892       1,236       0.1  
Reserve for loan and lease losses
    (21,945 )     (13,118 )     (8,827 )     (67.3 )
Premises and equipment, net
    33,226       32,602       624       1.9  
Goodwill and other intangibles, net
    56,029       56,051       (22 )      
Cash surrender value of insurance policies
    46,389       45,419       970       2.1  
Accrued interest and other assets
    44,666       41,075       3,591       8.7  
 
                         
Total assets
  $ 2,117,849     $ 2,084,797     $ 33,052       1.6  
 
                         
Investment Securities
The investment portfolio is managed as part of the overall asset and liability management process to optimize income and market performance over an entire interest rate cycle while mitigating risk. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk 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, mortgage-backed and municipal securities.
Total investments increased primarily due to security purchases of $205.0 million that were partially offset by maturities of $46.6 million and sales and calls of $125.8 million.
Loans and Leases
Total loans and leases increased in the nine months ended September 30, 2009 due to increases in commercial real estate of $65.2 million and commercial, financial and agriculture loans of $24.4 million. These increases were partially offset by decreases in construction loans of $33.7 million, residential loans of $36.1 million, and loans to individuals of $6.6 million and lease financings, net of unearned income of $11.9 million.
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 under ASC 310, 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.

 

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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, restructured and nonaccrual loans and leases totaled $36.3 million at September 30, 2009, $5.4 million at December 31, 2008 and $8.4 million at September 30, 2008 and consist mainly of commercial loans and real estate related commercial loans. For the nine months ended September 30, 2009 and 2008, nonaccrual loans and leases resulted in lost interest income of $499 thousand and $564 thousand, respectively. Loans and leases 90 days or more past due totaled $644 thousand at September 30, 2009, $1.1 million at December 31, 2008 and $1.6 million at September 30, 2008. Other real estate owned totaled $3.3 million at September 30, 2009, $346 thousand at December 31, 2008 and $346 thousand at September 30, 2008. The Corporation’s ratio of nonperforming assets to total loans and leases and other real estate owned was 2.77% at September 30, 2009, 0.48% at December 31, 2008 and 0.72% at September 30, 2008. The ratio of nonperforming assets to total assets was 1.90% at September 30, 2009, 0.33% at December 31, 2008 and 0.51% at September 30, 2008. The increase from year-end is primarily due to an increase in non-accrual loans of $28.1 million and an increase in restructured loans of $2.8 million. This increase is primarily due to two credits which went on non-accrual during the third quarter of 2009. One credit is a Shared National Credit to a continuing care retirement community in which Univest participates. The parent company of the community has come under financial difficulty and recently declared bankruptcy. The credit has $7.4 million outstanding at September 30, 2009. The second credit is for four separate facilities to a local commercial real estate developer/home builder which aggregate $16.6 million at September 30, 2009. Univest will continue to closely monitor these credits and may have to provide additional reserve in future quarters related to these credits.
Nonperforming assets include cash basis, restructured and nonaccrual loans (impaired loans), accruing loans 90 days or more past due and other real estate owned. The following table presents nonperforming assets for the periods indicated:
                 
    09/30/09     12/31/08  
Commercial, financial and agricultural
  $ 5,299     $ 835  
Real estate — commercial — owner occupied
    1,939       1,338  
Real estate — commercial — non-owner occupied
    13,261       3,173  
Real estate — construction
    12,912        
Real estate — residential
    1,303       409  
Loans to individuals
    568       369  
Lease financings
    1,694       430  
Other real estate owned
    3,330       346  
 
           
Total
  $ 40,306     $ 6,900  
 
           
At September 30, 2009, the recorded investment in loans and leases that are considered to be impaired under ASC 310 was $36.3 million, all of which were on a nonaccrual basis or trouble debt restructured. The related reserve for loan and lease losses for those loans was $2.1 million. At December 31, 2008, the recorded investment in loans and leases that are considered to be impaired under ASC 310 was $5.4 million, all of which were on a nonaccrual basis or trouble debt restructured. The related reserve for loan and lease losses for those loans was $36 thousand. At September 30, 2008, the recorded investment in loans and leases that are considered to be impaired under ASC 310 was $8.4 million and the related reserve for loan and lease losses for those credits was $2.5 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.
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 probable losses in the loan and lease portfolio. Management’s methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan and lease loss experience, current economic conditions and trends, and the volume, growth, and composition of the portfolio.

 

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The reserve for loan and lease losses is determined through a monthly evaluation of reserve adequacy. This analysis takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Non-accrual loans and leases, and those which have been 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 as provided under ASC 310. 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, Inc. 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.
The reserve for loan and lease losses is based on management’s evaluation of the loan and lease portfolio under current economic conditions and such other factors, which deserve recognition in estimating loan and lease losses. This evaluation is inherently subjective, as it requires estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Additions to the reserve arise from the provision for loan and lease losses charged to operations or from the recovery of amounts previously charged off. Loan and lease charge-offs reduce the reserve. Loans and leases are charged off when there has been permanent impairment or when in the opinion of management the full amount of the loan or lease, in the case of non-collateral dependent borrowings, will not be realized. Certain impaired loans and leases 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 if the loan is collateral dependent.
The reserve for loan and lease losses consists of an allocated reserve and unallocated reserve categories. The allocated reserve is comprised of reserves established on specific loans and leases, and class reserves based on historical loan and lease loss experience, current trends, and management assessments. The unallocated reserve is based on both general economic conditions and other risk factors in the Corporation’s individual markets and portfolios.
The specific reserve element is based on a regular analysis of impaired commercial and real estate loans. For these loans, the specific reserve established is based on an analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.
The class reserve element is determined by an internal loan and lease grading process in conjunction with associated allowance factors. The Corporation revises the class allowance factors whenever necessary, but no less than quarterly, in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan or lease pool classification.
The Corporation maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded in categories with historical loss experience.
The reserve for loan and lease losses increased $8.8 million from December 31, 2008 to September 30, 2009, primarily due to deterioration of underlying collateral and economic factors. Management believes that the reserve is maintained at a level that is adequate to absorb losses in the loan and lease portfolio. The ratio of the reserve for loan and lease losses to total loans and leases was 1.51% at September 30, 2009 and 0.90% at December 31, 2008.
Goodwill and Other Intangible Assets
The Corporation has goodwill of $50.4 million, which is deemed to be an indefinite intangible asset and in accordance with ASC 350 (formerly SFAS No. 142, “Goodwill and Other Intangible Assets”), is not amortized. The Corporation also has intangible assets due to bank and branch acquisitions, core deposit intangibles, covenants not to compete (in favor of the Corporation), 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.

 

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In accordance with ASC 805 (formerly SFAS No. 141R, “Accounting for Business Combinations”) and ASC 350, 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 in accordance with ASC 360 (formerly SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”). 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. At September 30, 2009, there was no impairment indicated.
Liabilities
Total liabilities decreased since December 31, 2008 primarily due to a decrease in borrowings, partially offset by an increase in deposits and accrued expenses and other liabilities. The following table presents the liabilities for the periods indicated:
                                 
    At     At        
    September 30,     December 31,     Change  
    2009     2008     Amount     Percent  
Deposits
  $ 1,536,903     $ 1,527,328     $ 9,575       0.6 %
Borrowings
    267,821       312,736       (44,915 )     (14.4 )
Accrued expenses and other liabilities
    45,073       41,526       3,547       8.5  
 
                         
Total liabilities
  $ 1,849,797     $ 1,881,590     $ (31,793 )     (1.7 )
 
                         
Deposits
Total deposits increased at the Bank primarily due to increases of $60.2 million in regular savings which is partially offset by a decrease of $48.2 million in money market savings accounts.
Borrowings
Long-term borrowings at September 30, 2009, included $5.6 million in Subordinated Capital Notes, $20.6 million of Trust Preferred Securities, $14.0 million in long-term borrowings from the FHLB and $769 thousand in a capital lease obligation. Long-term borrowings decreased due to a reclassification of long-term debt to short-term debt in the amount of $78.0 million due to the remaining term to maturity being one year or less. Short-term borrowings typically include federal funds purchased, Federal Reserve Bank discount window borrowings and short-term FHLB borrowings. Short-term borrowings increased primarily due to the $78.0 million reclass from long-term borrowing partially offset by repayments.
Shareholders’ Equity
Total shareholders’ equity increased since December 31, 2008 primarily due to an additional $55.6 million in capital as a result of the issuance of common stock during the third quarter 2009. Additionally, current earnings and a reduction in accumulated other comprehensive loss which was partially offset by cash dividends paid.
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 estimated offering expenses are expected to be approximately $55.6 million.

 

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The following table presents the shareholders’ equity for the periods indicated:
                                 
    At     At        
    September 30,     December 31,     Change  
    2009     2008     Amount     Percent  
Common stock
  $ 91,332     $ 74,370     $ 16,962       22.8 %
Additional paid-in capital
    60,037       22,459       37,578       167.3  
Retained earnings
    152,305       151,816       489       0.3  
Accumulated other comprehensive loss
    (1,444 )     (8,619 )     7,175       83.2  
Treasury stock
    (34,178 )     (36,819 )     2,641       7.2  
 
                         
Total shareholders’ equity
  $ 268,052     $ 203,207     $ 64,845       31.9  
 
                         
Retained earnings were favorably impacted by nine months of net income of $9.3 million partially offset by cash dividends of $8.5 million declared during the first nine months of 2009. Treasury stock decreased primarily due to issuances for the employee stock purchase plan, employee stock options 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 loss decreased by $7.2 million primarily due to unrealized gains related to securities of $8.1 million, net of taxes. The period-to-period recovery in accumulated other comprehensive income (loss) was a result of increases in the fair values of mortgage-backed government agency debt securities and obligations of state and political subdivisions.
Capital Adequacy
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Capital adequacy guidelines, and additionally for the Bank prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
                                                 
                                    To Be Well-Capitalized  
                                    Under Prompt  
                    For Capital Adequacy     Corrective Action  
    Actual     Purposes     Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of September 30, 2009:
                                               
Total Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 256,945       15.47 %   $ 132,906       8.00 %   $ 166,133       10.00 %
Bank
    242,944       14.86       130,804       8.00       163,505       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Corporation
    234,535       14.12       66,453       4.00       99,680       6.00  
Bank
    222,485       13.61       65,402       4.00       98,103       6.00  
Tier 1 Capital (to Average Assets):
                                               
Corporation
    234,535       11.51       61,154       3.00       81,538       4.00  
Bank
    222,485       11.02       60,578       3.00       80,771       4.00  

 

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                                    To Be Well-Capitalized  
                                    Under Prompt  
                    For Capital Adequacy     Corrective Action  
    Actual     Purposes     Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
As of December 31, 2008:
                                               
Total Capital (to Risk-Weighted Assets):
                                               
Corporation
  $ 191,469       11.60 %   $ 132,060       8.00 %   $ 165,075       10.00 %
Bank
    178,535       10.97       130,196       8.00       162,745       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Corporation
    175,801       10.65       66,030       4.00       99,045       6.00  
Bank
    165,267       10.16       65,098       4.00       97,647       6.00  
Tier 1 Capital (to Average Assets):
                                               
Corporation
    175,801       8.94       59,023       3.00       78,697       4.00  
Bank
    165,267       8.46       58,640       3.00       78,186       4.00  
As of September 30, 2009 and December 31, 2008, 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, it’s Tier 1 and Total Capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. As of September 30, 2009, 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.
Critical Accounting Policies
Management, in order to prepare the Corporation’s financial statements in conformity with generally accepted accounting principles, is required to make estimates and assumptions that effect 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 reserve for loan and lease losses, intangible assets, investment securities, mortgage servicing rights, income taxes and benefit plans as its critical accounting policies. For more information on these critical accounting policies, please refer to our 2008 Annual Report on Form 10-K.
Asset/Liability Management
The primary functions of Asset/Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers and corporate needs. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates.
The Corporation uses both interest-sensitivity gap analysis and simulation techniques to quantify its exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year horizon. The simulation uses existing portfolio rate and 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.

 

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Liquidity
The Corporation, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans and deposit withdrawals. The Corporation manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. The Corporation has a contingency funding plan in place to address liquidity needs in the event of an institution-specific or a systemic financial crisis.
Sources of Funds
Core deposits and cash management repurchase agreements (“Repos”) have historically been the most significant funding sources for the Corporation. These deposits and Repos are generated from a base of consumer, business and public customers primarily located in Bucks and Montgomery counties, Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, thrifts, mutual funds, security dealers and others.
The Corporation supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the Bank’s investment portfolio and are at current money market mutual fund rates. This funding source is subject to changes in the asset allocations of the trust accounts.
The Bank purchases 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 September 30, 2009, the Bank had no PLGIT deposits.
The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $245.3 million. At September 30, 2009, total outstanding short-term and long-term borrowings with the FHLB totaled $107.0 million. The maximum borrowing capacity changes as a function of qualifying collateral assets and the amount of funds received may be reduced by additional required purchases of FHLB stock.
The Corporation maintains federal fund lines with several correspondent banks totaling $82.0 million. At September 30, 2009, there were $5.4 million outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.
The Corporation, through the Bank, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At September 30, 2009, the Corporation had outstanding borrowings of $30.0 million under this line.
Cash Requirements
The Corporation has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The most significant contractual obligation, in both the under and over one year time period, is for the Bank to repay its certificates of deposit. Securities sold under agreement to repurchase constitute the next largest payment obligation which is short term in nature. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its branch network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market.
Commitments to extend credit are the Bank’s most significant commitment in both the under and over one year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.
Recent Accounting Pronouncements
See footnote 14 for the listing of recent accounting pronouncements.

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk
No material changes in the Corporation’s market risk or market strategy occurred during the current period. A detailed discussion of market risk is provided in the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2008.
Item 4. Controls and Procedures
Management is responsible for the disclosure controls and procedures of Univest Corporation of Pennsylvania (“Univest”). 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. Based on their evaluation Management believes that the financial information required to be disclosed in accordance with the Securities Exchange Act of 1934 is presented fairly, recorded, summarized and reported within the required time periods.
As of September 30, 2009 an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s management, including the CEO and CFO, concluded that the Corporation’s disclosure controls and procedures were effective and there have been no changes in the Corporation’s internal controls or in other factors that have materially affected or are reasonably likely to materially affect internal controls subsequent to December 31, 2008.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a material adverse effect on the consolidated 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 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K, Part 1, Item 1A, for the Year Ended December 31, 2008 as filed with the Securities and Exchange Commission on March 6, 2009.
The Company Borrows from the Federal Home Loan Bank and the Federal Reserve, and There Can be No Assurance These Programs Will Continue in Their Current Manner.
We at times utilize the Federal Home Loan Bank (“FHLB”) of Pittsburgh 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. 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. In this regard, the FHLB of Pittsburgh has taken impairment charges and has suspended dividends and repurchases of capital stock. Any change or termination would have an adverse affect on our liquidity and profitability.
A Substantial Decline in the Value of Our Federal Home Loan Bank of Pittsburgh Common Stock May Adversely Affect Our Financial Condition.
We own common stock of the FHLB of Pittsburgh in order to qualify for membership in the FHLB system, which enables us to borrow funds under the FHLB advance program. The carrying value of our FHLB common stock was $7.4 million as of September 30, 2009.
The FHLB of Pittsburgh has taken impairment charges and has suspended dividends and repurchases of capital stock. Consequently, given that there is no market for our FHLB common stock, we believe that there is a risk that our investment could be deemed other than temporarily impaired at some time in the future. If this occurs, it may adversely affect our results of operations and financial condition.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information on repurchases by the Corporation of its common stock during the three months ended September 30, 2009.
                                 
ISSUER PURCHASES OF EQUITY SECURITIES  
    Total
Number
of Shares
    Average
Price
Paid per
    Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
    Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
 
Period   Purchased     share     or Programs     Programs (3)  
July 1 — 31, 2009
                      643,782  
August 1 — 31, 2009
                      643,782  
September 1 — 30, 2009
                      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 August 22, 2007. The repurchased shares limit is net of normal Treasury activity such as purchases to fund the Dividend Reinvestment Program, Employee Stock Purchase Program and the equity compensation plan.
 
3.  
The number of shares approved for repurchase under the Corporation’s stock repurchase program is 643,782.
 
4.  
The Corporation’s current stock repurchase program does not have an expiration date.
 
5.  
No stock repurchase plan or program of the Corporation expired during the period covered by the table.
 
6.  
The Corporation has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases. The plans are restricted during certain blackout periods in conformance with the Corporation’s Insider Trading Policy.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits
  a.  
Exhibits
     
Exhibit 31.1
  Certification of William S. Aichele, Chairman, President and Chief Executive Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 31.2
  Certification of Jeffrey M. Schweitzer Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 32.1
  Certification of William S. Aichele, Chief Executive Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 32.2
  Certification of 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.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Univest Corporation of Pennsylvania
                    (Registrant)
 
 
Date: November 9, 2009  /s/ William S. Aichele    
  William S. Aichele, Chairman, President   
  and Chief Executive Officer   
 
         
     
Date: November 9, 2009  /s/ Jeffrey M. Schweitzer    
  Jeffrey M. Schweitzer, Executive Vice President,   
  and Chief Financial Officer   

 

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EXHIBIT INDEX
     
Exhibit Number   Description
Exhibit 31.1
  Certification of William S. Aichele, Chairman, President and Chief Executive Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 31.2
  Certification of Jeffrey M. Schweitzer Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 32.1
  Certification of William S. Aichele, Chief Executive Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
Exhibit 32.2
  Certification of 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.

 

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