United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Period Ended September 30, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ______________ to ______________.
UNIVEST CORPORATION OF PENNSYLVANIA
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1886144
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
10 West Broad 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. Yes __X__ No _____.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $5 par value 7,442,885
(Title of Class) (Number of shares outstanding
at 9/30/98)
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income
Three and Six Months Ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows
Six Months Ended September 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information: 17
Other Information
Part III. Financial Data Schedule 19
2
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (SEE NOTE)
September 30, 1998 December 31, 1997
------------------ -----------------
(In thousands)
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 34,175 $ 33,352
INTEREST BEARING DEPOSITS WITH OTHER BANKS 11,906 5,001
INVESTMENT SECURITIES HELD-TO-MATURITY
(MARKET VALUE $180,484 AT 9/30/98
AND $142,205 AT 12/31/97) 178,319 141,972
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 102,957 116,193
FEDERAL FUNDS SOLD AND OTHER
SHORT TERM INVESTMENTS 18,900 2,000
LONG TERM FEDERAL FUNDS SOLD 20,000 --
LOANS 641,689 635,563
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (10,268) (10,270)
----------- -----------
NET LOANS 631,421 625,293
OTHER ASSETS 50,148 49,346
----------- -----------
TOTAL ASSETS $ 1,047,826 $ 973,157
=========== ===========
LIABILITIES
DEMAND DEPOSITS, NON INTEREST BEARING $ 133,568 $ 129,892
DEMAND DEPOSITS, INTEREST BEARING 226,940 176,115
SAVINGS DEPOSITS 132,813 127,965
TIME DEPOSITS 355,770 358,896
----------- -----------
TOTAL DEPOSITS 849,091 792,868
SHORT-TERM BORROWINGS 62,103 49,546
OTHER LIABILITIES 22,898 17,064
LONG-TERM DEBT 9,075 9,075
----------- -----------
TOTAL LIABILITIES 943,167 868,553
SHAREHOLDERS' EQUITY
COMMON STOCK 39,272 39,272
ADDITIONAL PAID-IN CAPITAL 14,908 14,908
RETAINED EARNINGS 61,107 53,691
ACCUMULATED OTHER COMPREHENSIVE INCOME 1,117 350
TREASURY STOCK (11,745) (3,617)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 104,659 104,604
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,047,826 $ 973,157
=========== ===========
</TABLE>
NOTE: THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31,1997 HAS BEEN
DERIVED FROM THE AUDITED FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE
ALL OF THE INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES FOR COMPLETE FINANCIAL STATEMENTS.
3
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
1998 1997 1998 1997
(in thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
INTEREST AND FEES ON LOANS
TAXABLE INTEREST AND FEES ON LOANS $13,096 $13,190 $39,350 $38,812
EXEMPT FROM FEDERAL INCOME TAXES 607 520 1,794 1,509
------- ------- ------- -------
TOTAL INTEREST AND FEES ON LOANS 13,703 13,710 41,144 40,321
INTEREST AND DIVIDENDS ON
INVESTMENT SECURITIES 4,058 3,671 11,936 11,110
OTHER INTEREST INCOME 699 111 1,167 174
------- ------- ------- -------
TOTAL INTEREST INCOME 18,460 17,492 54,247 51,605
------- ------- ------- -------
INTEREST EXPENSE
INTEREST ON DEPOSITS 7,642 6,726 22,108 19,691
OTHER INTEREST EXPENSE 618 575 1,728 1,669
------- ------- ------- -------
TOTAL INTEREST EXPENSE 8,260 7,301 23,836 21,360
------- ------- ------- -------
NET INTEREST INCOME 10,200 10,191 30,411 30,245
PROVISION FOR LOAN LOSSES 275 315 883 895
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,925 9,876 29,528 29,350
OTHER INCOME 2,660 2,075 7,829 5,693
GAINS ON SALES OF SECURITIES 85 41 97 99
------- ------- ------- -------
TOTAL OTHER INCOME 2,745 2,116 7,926 5,792
OTHER EXPENSES
SALARIES AND BENEFITS 3,851 3,852 11,579 11,359
OTHER EXPENSES 3,373 2,814 10,176 9,264
------- ------- ------- -------
TOTAL OTHER EXPENSES 7,224 6,666 21,755 20,623
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 5,446 5,326 15,699 14,519
APPLICABLE INCOME TAXES 1,623 1,653 4,665 4,550
------- ------- ------- -------
NET INCOME $ 3,823 $ 3,673 $11,034 $ 9,969
======= ======= ======= =======
PER COMMON SHARE DATA:
NET INCOME PER SHARE:
BASIC $ 0.51 $ 0.47 $ 1.45 $ 1.28
DILUTED $ 0.50 $ 0.47 $ 1.44 $ 1.28
CASH DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.125 $ 0.425 $ 0.355
</TABLE>
4
<PAGE>
Univest Corporation of Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the nine months ended,
(in thousands)
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,034 $ 9,969
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses (less than) in excess of net charge-offs (2) 590
Depreciation of premises and equipment 1,887 1,782
Discount accretion on investment securities (174) (342)
Deferred tax benefit (242) (5)
Realized gains on investment securities (97) (99)
Realized gains on sales of mortgages (201) (59)
Decrease in net deferred loan fees (24) (314)
Increase in interest receivable and other assets (1,327) (2,987)
Increase in accrued expenses and other liabilities 5,492 299
-------- --------
Net cash provided by operating activities 16,346 8,834
Cash flows from investing activities:
Proceeds from sales of securities available for sale 25,079 21,028
Proceeds from maturing securities held to maturity 52,690 61,748
Proceeds from maturing securities available for sale 20,167 7,624
Purchases of time deposits (1,599) (1,321)
Purchases of investment securities held to maturity (88,953) (26,163)
Purchases of investment securities available for sale (30,642) (59,424)
Premium paid to purchase Bank Owned Life Insurance -- (10,000)
Net (increase) decrease in federal funds sold and
other short-term investments (22,206) 69
Net increase in long term federal funds sold (20,000) --
Proceeds from sales of mortgages 18,268 5,071
Net increase in loans (24,169) (26,285)
Capital expenditures (1,362) (1,310)
-------- --------
Net cash used in investing activities (72,727) (28,963)
Cash flows from financing activities:
Net increase in deposits 56,223 14,341
Net increase (decrease) in short-term borrowings 12,557 (2,948)
Proceeds from long-term debt -- 2,000
Purchases of treasury stock (9,712) (2,246)
Stock issued under dividend reinvestment and
employee stock purchase plans 878 625
Proceeds from exercise of stock options 311 59
Cash dividends (3,053) (2,677)
-------- --------
Net cash provided by financing activities 57,204 9,154
Net increase (decrease) in cash and due from banks 823 (10,975)
Cash and due from banks at beginning of period 33,352 38,934
-------- --------
Cash and due from banks at end of period $ 34,175 $ 27,959
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 23,881 $ 21,646
Income taxes $ 4,666 $ 4,375
</TABLE>
5
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Financial Information
The accompanying condensed consolidated financial statements include the
accounts of Univest Corporation of Pennsylvania (Univest) and its wholly owned
subsidiaries, including Union National Bank and Trust Company (Union) and
Pennview Savings Bank (Pennview), collectively referred to herein as the
"Banks". The condensed consolidated financial statements included herein have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The accompanying condensed consolidated financial
statements reflect all adjustments which are, in the opinion of management,
necessary to present a fair statement of the results and condition for the
interim periods presented. Operating results for the three and nine-month period
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. It is suggested that these
condensed 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, 1997, which has been filed with the
Securities and Exchange Commission.
Note 2. Per Share Data
The following weighted average shares were used for the computation of earnings
per share:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Weighted Average Shares 7,532,907.9 7,722,094.8 7,592,623.6 7,742,836.4
</TABLE>
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings per Share, which was adopted on December 31, 1997 by
the Corporation. SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. At that
time, the Corporation changed the method currently used to compute earnings per
share and restated all prior periods. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options is excluded.
Note 3. Stock Split
On January 28, 1998 the Corporation's board of directors declared a 100% stock
dividend in the form of a stock split which was paid on May 1, 1998, to
shareholders of record as of April 14, 1998. All share and per share amounts
have been retroactively adjusted to give effect to the stock split.
6
<PAGE>
Note 4. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No. 129,
"Disclosure of Information about Capital Structure" (SFAS No. 129), which is
applicable to all companies. SFAS No. 129 consolidates the existing guidance in
authoritative literature relating to a company's capital structure. SFAS No. 129
is effective for financial statements for periods ending after December 15,
1997. The adoption of this standard did not have any impact on the Corporation's
financial statements.
As of January 1, 1998, the Corporation adopted Statement No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Corporation's net income or
shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the
Corporation's available- for-sale securities which prior to adoption were
reported separately in shareholders' equity, to be included in accumulated other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130. The following shows the
comprehensive income for the periods stated:
Three months Nine months
ended Sept. 30, ended Sept. 30,
1998 1997 1998 1997
------- ------- ------- -------
(in thousands)
Net income $ 3,823 $ 3,673 $11,034 $ 9,969
Change in unrealized gain on available
for sale investment securities 704 225 767 245
------- ------- ------- -------
Total comprehensive income $ 4,527 $ 3,898 $11,801 $10,214
======= ======= ======= =======
In June 1997, Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" became effective for fiscal periods beginning after
December 15, 1997, with early adoption permitted. The Corporation is currently
evaluating the additional disclosure requirements this statement is expected to
have on the Corporation's financial statements.
The FASB has recently issued Statement No. 132, Employers' "Disclosures about
Pensions and Other Postretirement Benefits", (SFAS No. 132) which is effective
for financial statements issued for periods beginning after December 31, 1997.
SFAS No. 132 does not change the recognition or measurement associated with
pension or postretirement plans. It standardizes certain disclosures, requires
additional information about changes in the benefit obligations and about change
in the fair value of plan assets to facilitate analysis, and it eliminates
certain disclosures that were not deemed useful.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which is required to be
adopted in years beginning after June 15, 1999. The Statement will require the
Corporation to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Corporation has not yet determined what
the effect of Statement 133 will be on the earnings and financial position of
the Company.
7
<PAGE>
The FASB has recently issued Statement No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" (SFAS No. 134) which is effective for financial
statements issued for the first fiscal quarter beginning after December 15,
1998. Statement 134 is not expected to have an impact on the Corporation's
financial statements since the Corporation presently does not securitize
mortgage loans.
8
<PAGE>
Item 2.
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
Net Income
Net income for the three months ended September 30, 1998 increased 2.7% or
$0.1 million from $3.7 million for the three months ended September 30, 1997 to
$3.8 million for the three months ended September 30, 1998. Net income also
increased $1.0 million or 10.0% to $11.0 million for the nine months ended
September 30, 1998 as compared to $10.0 million for the nine months ended
September 30, 1997. The increases for both the three and nine month periods were
due mainly to an increase in other income.
Net Interest Income
Interest and fees on loans remained constant at $13.7 million for the three
months ended September 30, 1997 and September 30, 1998. For the nine months
ended September 30, 1998, interest and fees on loans increased $0.8 million from
$40.3 million at September 30, 1997 to $41.1 million at September 30, 1998.
There was growth in loan volume for both periods. However, the increase for the
three months ended September 30, 1998 was offset by a decrease in rate. The
increase for the nine months ended September 30, 1998 was partially offset by a
decrease in rate.
Interest on investment securities increased $0.4 million from $3.7 million
for the three month period ended September 30, 1997 to $4.1 million for the
three month period ended September 30, 1998. The increase was due to higher
average volume. For the nine months ended September 30, 1998, interest on
investments increased by $0.8 million from $11.1 million for the nine months
ended September 30, 1997 to $11.9 million for the same period in 1998. This
increase is also attributed to higher average volume for the period.
Other interest income increased $0.6 million from $0.1 million for the
three month period ended September 30, 1997 to $0.7 million for the three month
period ended September 30, 1998. The investment in long term federal funds sold
is the reason for the increase. For the nine months ended September 30, 1998,
other interest income increased by $1.0 million from $0.2 million for the nine
months ended September 30, 1997 to $1.2 million for the same period in 1998.
This increase is also due to the higher volume of long term federal funds sold.
Interest expense increased from $7.3 million for the three months ended
September 30, 1997 to $8.3 million for the three months ended September 30,
1998, an
9
<PAGE>
increase of $1.0 million. Interest expense increased $2.4 million from $21.4
million for the nine months ended September 30, 1997 to $23.8 million for the
nine months ended September 30, 1998. The increase in both periods is attributed
to volume and rate increases in certain types of money market accounts and
special certificates of deposit for Individual Retirement Accounts.
The asset/liability management process continues with its goal of providing
stable reliable interest earnings through varying rate environments. Net
interest income is the amount by which interest income on earnings' assets
exceeds interest paid on interest bearing liabilities. The amount of net
interest income is affected by changes in interest rates, account balances or
volume, and the mix of earning assets and interest bearing liabilities. Nine
months ended September 30, 1998 shows net interest income of $30.4 million that
is a $0.2 million increase over the $30.2 million recorded for the nine months
ended September 30, 1997. The increase in net interest income for the nine
months ended September 30, 1998 was attributed to growth in net interest earning
assets of $4.2 million and was offset by a decline in the net interest margin.
Average interest earning assets increased by $69.0 million for the nine month
period ended September 30, 1998, as compared to the prior year. Average interest
bearing liabilities increased by $64.8 million for the nine month period ended
September 30, 1998 as compared to the prior year. Average earning assets grew
mainly due to investment growth and average interest bearing liabilities grew
due to increased deposits. The increase in net interest income resulting from
the increase in net interest earning assets was offset by a decline in interest
rate margin of 32 basis points to 4.33% in September 1998 from 4.65% in
September 1997.
The following demonstrates the aforementioned effects:
NINE MONTHS ENDED
-------------------------------------------
9/30/98 9/30/97
AVG. BALANCE RATE AVG. BALANCE RATE
----------------- -----------------
Interest Earnings Assets $935,988 7.73% $867,020 7.94%
Interest Bearing Liabilities 756,416 4.20% 691,647 4.12%
Net Interest Income 30,411 30,245
Net Interest Spread 3.53% 3.82%
Net Interest Margin 4.33% 4.65%
The Corporation is permitted to use interest-rate swap agreements which
convert a portion of its floating rate commercial loans to a fixed basis, thus
reducing the impact of interest changes on future income. In these swaps, the
Corporation agrees to exchange, at specified intervals, the difference between
fixed and floating-interest rates calculated on
10
<PAGE>
an agreed upon notional principal amount. Because the Corporation's
interest-earning assets tend to be short-term floating rate instruments while
the Corporation's interest-bearing liabilities tend to be longer-term fixed rate
instruments, interest rate swaps in which the Corporation pays a floating rate
and receives a fixed rate are used to reduce the impact of changes in interest
rates on the Corporation's net interest income.
At September 30, 1998, September 30, 1997 and December 31, 1997, $50.0
million in notional amount of "Pay Floating, Receive Fixed" swaps were
outstanding. The net payable or receivable from interest rate swap agreements is
accrued as an adjustment to interest income. The $50.0 million in notional
amount interest rate swaps outstanding at September 30, 1998 expire as follows:
$20.0 million in notional principal amount in first quarter 1999, $10.0 million
in notional principal amount in third quarter 1999, $10.0 million in first
quarter 2000 and $10.0 million in second quarter 2000. The impact of interest
rate swaps on net interest income for the quarter ended September 30, 1998 was a
positive $23 thousand as compared to a positive $14 thousand for the quarter
ended September 30, 1997. For the nine months ended September 30, 1998 the
impact was a positive $63 thousand as compared to a positive $58 thousand for
the nine months ended September 30, 1997.
The Corporation's current credit exposure on swaps is limited to the value
of interest-rate swaps that have become favorable to the Corporation. As of
September 30, 1998 the market value of interest-rate swaps in a favorable
position was $467 thousand. There were no interest rate swaps with the market
value in an unfavorable position.
Asset Quality
Management believes the allowance for loan losses is maintained at a level
which is adequate to absorb potential losses in the loan portfolio. Management's
methodology to determine the adequacy of the allowance considers specific credit
reviews, past loan loss experience, current economic conditions and trends, and
the volume, growth and composition of the loan portfolio.
The allowance for loan losses is determined through a quarterly evaluation
of reserve adequacy which takes into consideration the growth of the loan
portfolio, the status of past-due loans, current economic conditions, various
types of lending activity, policies, real estate and other loan commitments, and
significant change in the charge-off activity. Loans are also reviewed for
impairment based on discounted cash flows using the loans initial effective
interest rate or the fair value of the collateral for certain collateral
dependent loans as provided for under SFAS 114. Any of the above criteria may
cause the provision to fluctuate. For both the three and nine months ended
September 30, 1998 and September 30, 1997, the provisions for loan losses happen
to round the same at $0.3 million and $0.9 million respectively.
At September 30, 1998, the recorded investment in loans that are considered
to be impaired was $2.8 million, all of which were on a non-accrual basis. The
related
11
<PAGE>
allowance for credit losses for those loans was $0.7 million. At September 30,
1997, the recorded investment in loans considered to be impaired was $2.3
million and the related allowance for credit losses for these loans was $0.4
million.
Generally, a loan (including a loan impaired) is classified as non-accrual
and the accrual of interest on such loan is discontinued when the contractual
payment of principal or interest has become 90 days due or management has
serious doubts about the further collectibility of principal or interest, even
though the loan is currently performing. A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well secured.
When a loan is placed on non-accrual status, unpaid interest credited to income
in the current year is reversed and unpaid interest accrued in prior years is
charged against "other expense." Interest received on non-accrual loans
generally is either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
Generally, loans are 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 collectibility of the total contractual
principal and interest is no longer in doubt. Total cash basis, non-accrual and
restructured loans at September 30, 1997 and 1998, was $4.7 million and $3.7
million respectively. They consist mainly of real estate related commercial
loans. For the quarter ended September 30, 1998, non-accrual loans resulted in
lost interest income of $84 thousand as compared to $48 thousand for the quarter
ended September 30, 1997. For the nine months ended September 30, 1998 lost
interest totaled $260 thousand as compared to $216 thousand for the same period
in 1997. At September 30, 1998, the Corporation had no commitments to lend
additional funds with respect to nonperforming loans. In management's evaluation
of the loan portfolio risks, any significant future increases in nonperforming
loans are dependent to a large extent on the economic environment, or specific
industry problems. The Corporation is currently in the process of evaluating
potential loss exposure for large commercial credits based on the results of a
questionnaire dealing with Year 2000 readiness. Completion of this process has
been extended to the end of the fourth quarter. The impact this analysis will
have on the reserve is not known at this time.
At September 30, 1998, and December 31, 1997, the reserve for loan losses
remained constant at 1.6% of total loans.
The Corporation, at September 30, 1998, has a total of $300 thousand of
Other Real Estate Owned ("OREO") consisting of three commercial properties. This
amount is recorded in "Other Assets" at lower of cost or fair market value in
the accompanying consolidated balance sheets.
Other Income
Other income which is non-interest related consists mainly of general fee
income, trust department fee income, and other miscellaneous non-recurring types
of income. It also includes various types of service charges, such as ATM fees,
gains on sales of
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<PAGE>
mortgages and for 1998 and third quarter of 1997, increases in the cash
surrender value of Bank-Owned Life Insurance (BOLI). Other income increased $0.6
million or 28.6% from $2.1 million for the three months ended September 30, 1997
to $2.7 million for the three months ended September 30, 1998. The increase is
attributed to trust income, which continues to be a major source of non-interest
income, fee income and gains on sales of mortgages. Trust income of $0.8 million
for the three months ended September 30, 1998 was $0.1 million or 14.3% more
than the $0.7 million reported for the three months ended September 30, 1997.
Fee income, mainly due to increases in various transaction fees and deposit
service fees, increased from $1.0 million for the three months ended September
30, 1997 to $1.4 million for the three months ended September 30, 1998, an
increase of $0.4 million or 40.0%. Gains on sales of mortgages increased from
$21 thousand for the three months ended September 30, 1997 to $45 thousand for
the three months ended September 30, 1998, an increase of $24 thousand or
114.3%. Other income for the nine months ended September 30, 1998 increased $2.1
million or 36.8% from $5.7 million for the nine months ended September 30, 1997
to $7.8 million for the nine months ended September 30, 1998. The increase is
attributed to a $0.5 million increase in the net cash surrender value of a $15.0
million Bank Owned Life Insurance Policy, trust income, fee income and gains on
sales of mortgages. Trust income of $2.4 million for the nine months ended
September 30, 1998 was $0.4 million or 20.0% more than the $2.0 million reported
for the nine months ended September 30, 1997. Fee income, again due to increases
in various transaction fees and deposit service fees, increased from $2.7
million for the nine months ended September 30, 1997 to $3.9 million for the
nine months ended September 30, 1998, an increase of $1.2 million or 44.4%.
Gains on sales of mortgages increased from $59 thousand for the nine months
ended September 30, 1997 to $201 thousand for the nine months ended September
30, 1998, an increase of $142 thousand or 240.7%. The reason for the increase is
lower long term interest rates that caused more refinancing.
During the quarter ended September 30, 1998, investment securities totaling
approximately $19 million were sold from the available for sale portfolio
resulting in a net gain of $85 thousand compared to the $41 thousand for the
quarter ended September 30, 1997. For the nine months ended September 30, 1998,
gains on sale of securities total $97 thousand compared to the $99 thousand for
the nine months ended September 30, 1997. Treasury securities were sold to
purchase agency securities and therefore take advantage of the higher spreads
between agency and treasuries in the market and the resulting gain on the sales
in both the three and nine month periods ended September 30, 1998.
Debt securities that the Corporation has both the positive intent and
ability to hold to maturity are carried at amortized cost. All other debt
securities and all marketable equity securities are classified as
available-for-sale or trading and carried at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are carried net
of taxes and included in Accumulated Other Comprehensive Income. Unrealized
holding gains and losses on securities classified as trading are reported in
earnings. The total debt and equity securities held in the available-for-sale
account as of
13
<PAGE>
September 30, 1998, is $103.0 million as compared to $116.2 million at December
31, 1997. At September 30, 1998, Accumulated Other Comprehensive Income was $1.1
million compared to $0.4 million at December 31, 1997.
Other Expense
Other expenses make up the operating costs of the Corporation, including
but not limited to salaries and benefits, equipment, data-processing and
occupancy costs. This category is usually referred to as non-interest expense
and receives ongoing management attention in an attempt to contain and minimize
the growth of the various expense categories, while encouraging technological
innovation in conjunction with the expansion of the Corporation. Other expenses
increased 7.5% or $0.5 million from $6.7 million for the quarter ended September
30, 1997 to $7.2 million for the quarter ended September 30, 1998. For the nine
months ended September 30, 1998 other expenses increased 5.8% or $1.2 million
from $20.6 million at September 30, 1997 to $21.8 million at September 30, 1998.
Increases in both periods are due to increases in expenses such as advertising,
other fee expense, intangible expense and software expense.
Cautionary Statement for the Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The discussion regarding the Corporation's preparedness for Year 2000 as
discussed in the following section entitled "Year 2000" contains certain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These forward-looking statements involve risks and
uncertainties including changes in the Corporations' ability to execute its plan
to address the Year 2000 issue, and the ability of third parties to effectively
address their Year 2000 issues. The Corporation wishes to advise readers not to
place undue reliance on any such forward-looking statements which reflect
Management's analysis only as of the date hereof. Although the Corporation
believes that the expectations reflected in such forward-looking statements are
reasonable, actual results may differ materially from the results discussed in
these forward-looking statements.
Year 2000
As reported in the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997 a Year 2000 (Y2K) committee has been established. This
group has developed a plan, inventoried software, identified hardware, contracts
with external vendors, and insurance issues all of which are under review.
The Corporation has fully completed the assessment phase related to Y2K
issues as it relates to the Corporation's hardware and software applications.
The Corporation's assessment indicated that most of the significant information
technology systems, particularly the general ledger and subsidiary applications
including loans, deposits, payroll and trust systems could be affected. All of
these software applications are
14
<PAGE>
licensed from vendors and run on hardware operated by the Corporation. These
vendors have represented that such applications are Y2K compliant.
At present, testing of these software applications is approximately fifty
percent complete with satisfactory results. Testing of the Corporation's
computer hardware is complete and determined to be Y2K compliant. Testing of
effected software applications is expected to be fully completed by December 31,
1998. The Corporation's contingency plans include self-remediation of licensed
software, manual workarounds, and the use of outsourcing alternatives in the
case of the payroll application. The assessment also indicated that certain
internally developed programs were affected by the Y2K issue. Such programs have
been remedied, tested and successfully implemented.
Additionally, the Corporation has substantially completed the assessment of
the potential effects on the Corporation related to its commercial customers'
preparedness for Year 2000. Specifically, the Corporation is subject to the risk
of loss of customer deposits and customers' inability to meet contracted loan
obligations in the event customers experience disruptions in their operations
and experience loss of business and liquidity problems. This assessment is
expected to be completed by year end 1998. The results of this assessment will
enable the Corporation to more closely monitor those higher risk customers so as
to promptly determine the possible effects on the Corporation's liquidity and
loan loss reserves. The inability of customers to complete their Y2K resolution
process in a timely manner could materially impact the Corporation.
In early 1999, the Corporation will conduct external testing with third
parties, including ATMs, major customers, other financial institutions and
payment systems providers. This testing is expected to be completed by June 30,
1999.
The total cost of the Y2K project cost is estimated at $400 thousand. To
date, the Corporation has incurred approximately $105 thousand, all of which has
been expensed. The remaining $295 thousand will be expensed as incurred.
Management believes it has an effective program in place to resolve the Y2K
issue in a timely manner. Failure to complete the project as herein described
may have a negative impact on our ability to effectively serve our customers. In
this event, the Corporation may experience the loss of customers, strain on
liquidity and a material negative effect on the results of operations.
Management of the Corporation believes that our readiness program will be
completed and if any need to rely on contingency plans arises, the impact will
not have a material financial impact on the Corporation. However, there can be
no guarantee that the estimates to complete the Y2K project or the contingency
plans will be achieved and actual results could differ from those anticipated.
15
<PAGE>
Tax Provision
An income tax provision of $1.6 million was recorded for the quarter ended
September 30, 1998 and $1.7 million for the quarter ended September 30, 1997.
The effective tax rates were 29.8% and 31.0% respectively. For the nine months
ended September 30, 1998 the provision was $4.7 million as compared to $4.6
million for the nine months ended September 30, 1997 with effective tax rates of
29.7% and 31.3% respectively. The effective tax rates reflect the benefits of
tax credits generated from investments in low-income housing projects, tax-free
income from investment in securities, loans and bank-owned life insurance.
Financial Condition
Total assets increased $74.6 million or 7.7% from $973.2 million at
December 31, 1997 to $1,047.8 million at September 30, 1998. Interest bearing
deposits increased $6.9 million. Investments increased $23.1 million. Federal
funds sold and Term federal funds sold increased $36.9 million. Net loans
increased $6.1 million. Deposits increased $56.2 million mainly due to increased
activity in certain types of money market accounts paying higher rates.
Short-term borrowings increased $12.6 million due to the normal business cycle
volatility in the corporate daily sweep repurchase account.
Shareholders' equity increased to $104.7 million at September 30, 1998 from
$104.6 million at December 31, 1997, an increase of $0.1 million or 0.1%.
Treasury stock increased to $11.7 million at September 30, 1998 from $3.6
million at December 31, 1997. On November 26, 1997, the Board of Directors
approved the continuation of the Buyback Program for another two years. This
approval allows the Corporation to buy back up to 5% or approximately 385,000
shares of its outstanding common stock in open market or negotiated
transactions. The net number of shares purchased since November, 1997 is
211,440.
Book value per share increased from $13.64 at December 31, 1997 to $14.06
at September 30, 1998. An increase of $.42 per share or 3.1%.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (SFAS No. 128). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. All earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
The Financial Accounting Standards Board (FASB) has issued Statement No.
129, "Disclosure of Information about Capital Structure" (SFAS No. 129), which
is applicable to all companies. SFAS No. 129 consolidates the existing guidance
in authoritative literature relating to a company's capital structure. SFAS No.
129 is
16
<PAGE>
effective for financial statements for periods ending after December 15, 1997.
The adoption of this standard did not have any impact on the Corporation's
financial statements.
As of January 1, 1998, the Corporation adopted Statement No. 130,
"Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new
rules for the reporting and display of comprehensive income and its components.
However, the adoption of this Statement had no impact on the Corporation's net
income or shareholders' equity. SFAS No. 130 requires unrealized gains or losses
on the Corporation's available-for-sale securities which prior to adoption were
reported separately in shareholders' equity, to be included in accumulated other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirement of SFAS No. 130. The following shows the
comprehensive income for the periods stated:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 3,823 $ 3,673 $11,034 $ 9,969
Change in unrealized gain on available
for sale investment securities 704 225 767 245
------- ------- ------- -------
Total comprehensive income $ 4,527 $ 3,898 $11,801 $10,214
======= ======= ======= =======
</TABLE>
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement becomes
effective for fiscal periods beginning after December 15, 1997, with early
adoption permitted. The Corporation is evaluating the additional disclosure
requirements this Statement is expected to have on the Corporation's financial
statements.
The FASB has recently issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS No. 132) which is
effective for financial statements issued for periods beginning after December
31, 1997. SFAS No. 132 does not change the recognition or measurement associated
with pension or postretirement plans. It standardizes certain disclosures,
requires additional information about changes in the benefit obligations and
about change in the fair value of plan assets to facilitate analysis, and it
eliminates certain disclosures that were not deemed useful.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which is required to be
adopted in years beginning after June 15, 1999. The Statement will require the
Corporation to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either
17
<PAGE>
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Corporation has not yet determined what the effect of Statement 133 will be
on the earnings and financial position of the Corporation.
The FASB has recently issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" (SFAS No. 134) which is
effective for financial statements issued for the first fiscal quarter beginning
after December 15, 1998. Statement 134 is not expected to have an impact on the
Corporation's financial statements since the Corporation presently does not
securitize mortgage loans.
Other
Univest Corporation announced that it has reached an agreement in principle
to acquire Fin-Plan Group of Wayne, Pennsylvania. This will enable the
Corporation to provide a broader range of financial services including financial
planning, investment management, insurance products and brokerages services. The
transaction is expected to be completed in the first quarter of 1999.
18
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings--None
Item 2. Changes in Securities--None
Item 3. Defaults upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--Not applicable
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
No reports on Form 8-K were filed during the quarter for which this
report is filed.
19
<PAGE>
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: October 27, 1998
/s/ Merrill S. Moyer
---------------------------------------
Merrill S. Moyer, Chairman
Date: October 26, 1998
/s/ Wallace H. Bieler
---------------------------------------
Wallace H. Bieler,
Executive Vice President
and Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 34,175
<INT-BEARING-DEPOSITS> 11,906
<FED-FUNDS-SOLD> 38,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 102,957
<INVESTMENTS-CARRYING> 178,319
<INVESTMENTS-MARKET> 180,484
<LOANS> 641,689
<ALLOWANCE> 10,268
<TOTAL-ASSETS> 1,047,826
<DEPOSITS> 849,091
<SHORT-TERM> 62,103
<LIABILITIES-OTHER> 22,898
<LONG-TERM> 9,075
0
0
<COMMON> 39,272
<OTHER-SE> 65,387
<TOTAL-LIABILITIES-AND-EQUITY> 1,047,826
<INTEREST-LOAN> 41,144
<INTEREST-INVEST> 11,936
<INTEREST-OTHER> 1,167
<INTEREST-TOTAL> 54,247
<INTEREST-DEPOSIT> 22,108
<INTEREST-EXPENSE> 23,836
<INTEREST-INCOME-NET> 30,411
<LOAN-LOSSES> 883
<SECURITIES-GAINS> 97
<EXPENSE-OTHER> 21,755
<INCOME-PRETAX> 15,699
<INCOME-PRE-EXTRAORDINARY> 15,699
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,034
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 4.45
<LOANS-NON> 3,535
<LOANS-PAST> 909
<LOANS-TROUBLED> 145
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,270
<CHARGE-OFFS> 1,129
<RECOVERIES> 244
<ALLOWANCE-CLOSE> 10,268
<ALLOWANCE-DOMESTIC> 10,268
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,298
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,959
<INT-BEARING-DEPOSITS> 1,681
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,724
<INVESTMENTS-CARRYING> 137,493
<INVESTMENTS-MARKET> 139,364
<LOANS> 628,656
<ALLOWANCE> 10,391
<TOTAL-ASSETS> 932,252
<DEPOSITS> 748,109
<SHORT-TERM> 57,768
<LIABILITIES-OTHER> 14,127
<LONG-TERM> 9,075
0
0
<COMMON> 19,636
<OTHER-SE> 83,537
<TOTAL-LIABILITIES-AND-EQUITY> 932,252
<INTEREST-LOAN> 40,321
<INTEREST-INVEST> 11,110
<INTEREST-OTHER> 174
<INTEREST-TOTAL> 51,605
<INTEREST-DEPOSIT> 19,691
<INTEREST-EXPENSE> 21,360
<INTEREST-INCOME-NET> 30,245
<LOAN-LOSSES> 895
<SECURITIES-GAINS> 99
<EXPENSE-OTHER> 20,623
<INCOME-PRETAX> 14,519
<INCOME-PRE-EXTRAORDINARY> 14,519
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,969
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 4.82
<LOANS-NON> 4,472
<LOANS-PAST> 448
<LOANS-TROUBLED> 225
<LOANS-PROBLEM> 100
<ALLOWANCE-OPEN> 9,801
<CHARGE-OFFS> 594
<RECOVERIES> 290
<ALLOWANCE-CLOSE> 10,391
<ALLOWANCE-DOMESTIC> 10,391
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,558
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 33,720
<INT-BEARING-DEPOSITS> 608
<FED-FUNDS-SOLD> 5,115
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,341
<INVESTMENTS-CARRYING> 177,606
<INVESTMENTS-MARKET> 177,201
<LOANS> 600,346
<ALLOWANCE> 9,998
<TOTAL-ASSETS> 906,177
<DEPOSITS> 727,633
<SHORT-TERM> 62,091
<LIABILITIES-OTHER> 13,956
<LONG-TERM> 7,075
0
0
<COMMON> 19,636
<OTHER-SE> 75,786
<TOTAL-LIABILITIES-AND-EQUITY> 906,177
<INTEREST-LOAN> 38,801
<INTEREST-INVEST> 10,714
<INTEREST-OTHER> 182
<INTEREST-TOTAL> 49,697
<INTEREST-DEPOSIT> 19,119
<INTEREST-EXPENSE> 20,631
<INTEREST-INCOME-NET> 29,066
<LOAN-LOSSES> 845
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 20,261
<INCOME-PRETAX> 12,541
<INCOME-PRE-EXTRAORDINARY> 12,541
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,919
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 4.85
<LOANS-NON> 4,866
<LOANS-PAST> 422
<LOANS-TROUBLED> 1411
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,854
<CHARGE-OFFS> 529
<RECOVERIES> 828
<ALLOWANCE-CLOSE> 9,998
<ALLOWANCE-DOMESTIC> 9,998
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,448
</TABLE>
