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 March 31, 1999.
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 7,324,294
- -------------------------- ---------
(Title of Class) (Number of shares outstanding
at 3/31/99)
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 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: 15
Other Information
Part III. Financial Data Schedule 17
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(SEE NOTE)
(UNAUDITED) December 31,
March 31, 1999 1998
----------- -----------
(In thousands)
ASSETS
CASH AND DUE FROM BANKS $ 32,817 $ 26,011
INTEREST BEARING DEPOSITS WITH OTHER BANKS 5,863 3,940
INVESTMENT SECURITIES HELD-TO-MATURITY 161,647 216,404
(MARKET VALUE $162,549 AT 3/31/99
AND $217,515 AT 12/31/98)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 126,120 111,261
FEDERAL FUNDS SOLD AND OTHER
SHORT TERM INVESTMENTS 30,000 12,700
LOANS 672,437 660,449
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (10,985) (10,538)
----------- -----------
NET LOANS 661,452 649,911
OTHER ASSETS 55,122 50,243
----------- -----------
TOTAL ASSETS $ 1,073,021 $ 1,070,470
=========== ===========
LIABILITIES
DEMAND DEPOSITS, NON INTEREST BEARING $ 147,103 $ 152,094
DEMAND DEPOSITS, INTEREST BEARING 231,937 238,622
SAVINGS DEPOSITS 144,323 138,936
TIME DEPOSITS 356,514 344,852
----------- -----------
TOTAL DEPOSITS 879,877 874,504
SHORT-TERM BORROWINGS 59,461 64,045
OTHER LIABILITIES 16,318 19,669
LONG-TERM DEBT 13,075 9,075
----------- -----------
TOTAL LIABILITIES 968,731 967,293
SHAREHOLDERS' EQUITY
COMMON STOCK 39,272 39,272
ADDITIONAL PAID-IN CAPITAL 14,908 14,908
RETAINED EARNINGS 65,693 62,992
ACCUMULATED OTHER COMPREHENSIVE INCOME 245 582
TREASURY STOCK (15,828) (14,577)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 104,290 103,177
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,073,021 $ 1,070,470
=========== ===========
NOTE: THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31,1998 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.
1
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1999 1998
------- -------
(In thousands, except
per share data)
INTEREST INCOME
INTEREST AND FEES ON LOANS
TAXABLE INTEREST AND FEES ON LOANS $12,834 $12,964
EXEMPT FROM FEDERAL INCOME TAXES 577 583
------- -------
TOTAL INTEREST AND FEES ON LOANS 13,411 13,547
INTEREST AND DIVIDENDS ON
INVESTMENT SECURITIES 4,459 3,855
OTHER INTEREST INCOME 151 189
------- -------
TOTAL INTEREST INCOME 18,021 17,591
------- -------
INTEREST EXPENSE
INTEREST ON DEPOSITS 6,950 7,061
OTHER INTEREST EXPENSE 677 540
------- -------
TOTAL INTEREST EXPENSE 7,627 7,601
------- -------
NET INTEREST INCOME 10,394 9,990
PROVISION FOR LOAN LOSSES 275 333
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,119 9,657
OTHER INCOME 3,575 2,595
------- -------
TOTAL OTHER INCOME 3,575 2,595
OTHER EXPENSES
SALARIES AND BENEFITS 4,502 3,848
OTHER EXPENSES 3,648 3,310
------- -------
TOTAL OTHER EXPENSES 8,150 7,158
------- -------
INCOME BEFORE INCOME TAXES 5,544 5,094
INCOME TAXES 1,634 1,534
------- -------
NET INCOME $ 3,910 $ 3,560
======= =======
PER COMMON SHARE DATA:
NET INCOME PER SHARE:
BASIC $ 0.53 $ 0.47
DILUTED $ 0.53 $ 0.46
CASH DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.125
2
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Univest Corporation of Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the three months ended,
(in thousands)
--------------------
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,910 $ 3,560
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses (less than) in excess of net charge-offs 447 (23)
Depreciation of premises and equipment 578 640
Discount accretion on investment securities (23) (69)
Deferred tax benefit 44 (38)
Realized gains on sales of mortgages (17) (78)
Increase in net deferred loan fees 33 --
Increase in interest receivable and other assets (944) (952)
(Decrease) Increase in accrued expenses and other liabilities (2,805) 3,242
-------- --------
Net cash provided by operating activities 1,223 6,282
Cash flows from investing activities:
Proceeds from sales of securities available for sale 2,974 --
Proceeds from maturing securities held to maturity 59,844 15,952
Proceeds from maturing securities available for sale 11,874 5,457
Increase in interest-bearing deposits (1,923) (3,437)
Purchases of time deposits -- (900)
Purchases of investment securities held to maturity (5,075) (18,202)
Purchases of investment securities available for sale (30,214) (7,770)
Net increase in federal funds sold and
other short-term investments (17,300) (3,600)
Proceeds from sales of mortgages 3,469 6,477
Net increase in loans (15,473) (10,772)
Capital expenditures (513) (499)
Other investing activities (4,000) --
-------- --------
Net cash provided by (used in) investing activities 3,663 (17,294)
Cash flows from financing activities:
Net increase in deposits 5,373 17,017
Net decrease in short-term borrowings (4,584) (5,653)
Proceeds from long-term debt 4,000 --
Purchases of treasury stock (1,794) (2,285)
Stock issued under dividend reinvestment and
employee stock purchase plans 333 269
Proceeds from exercise of stock options 96 275
Cash dividends (1,504) (961)
Net cash provided by financing activities 1,920 8,662
Net increase (decrease) in cash and due from banks 6,806 (2,350)
Cash and due from banks at beginning of period 26,011 33,352
-------- --------
Cash and due from banks at end of period $ 32,817 $ 31,002
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,910 $ 7,464
</TABLE>
3
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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-month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. 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, 1998, which has been filed with the
Securities and Exchange Commission.
Note 2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
For the Three Months
Ended March 31,
1999 1998
---- ----
Numerator:
Net Income 3,910 3,560
Numerator for basic and diluted earnings per
Share - income available to common
Shareholders 3,910 3,560
4
<PAGE>
Denominator:
Denominator for basic earnings per share-
weighted-average shares outstanding 7,337 7,644
Effect of dilutive securities:
Employee stock options 52 65
------------------
Denominator for diluted earnings per share
adjusted weighted-average shares
outstanding 7,389 7,709
Basic earnings per share .53 .47
Diluted earnings per share .53 .46
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.
Note 4. Recent Accounting Pronouncements
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 presented:
Three months
ended March 31,
1999 1998
------- -------
(in thousands)
Net income $ 3,910 $ 3,560
Change in unrealized gain on available
for sale investment securities (337) (53)
------- -------
Total comprehensive income $ 3,573 $ 3,507
======= =======
5
<PAGE>
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 SFAS No. 133 will be on the earnings and financial position of the
Company.
6
<PAGE>
Item 2.
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
Net Income
Net income for the three months ended March 31, 1999 increased 8.3% or $0.3
million from $3.6 million for the three months ended March 31, 1998 to $3.9
million for the three months ended March 31, 1999. The net income growth was due
mainly to an increase in investment interest income and other income offset by
an increase in other expense.
Net Interest Income
Interest and fees on loans decreased $0.1 million from $13.5 million for
the three months ended March 31, 1998 to $13.4 million for the three months
ended March 31, 1999. While there was an increase in loan volume, it was offset
by a decrease in rate.
Interest on investment securities increased $0.6 million from $3.9 million
for the three-month period ended March 31, 1998 to $4.5 million for the
three-month period ended March 31, 1999. The increase was due to higher average
volume.
Interest expense remained constant at $7.6 million for the three months
ended March 31, 1998 and March 31, 1999.
The asset/liability management process continues with its goal of providing
stable reliable earnings through varying interest rate environments. Net
interest income is the amount by which interest income on earnings' assets
exceeds interest paid on interest bearing liabilities. Changes in interest
rates, account balances or volume, and the mix of earning assets and interest
bearing liabilities affect the amount of net interest income. The three months
ended March 31, 1999 shows net interest income of $10.4 million, which is a $0.4
million increase over the $10.0 million recorded for the three months ended
March 31, 1998. The increase in net interest income for the three months ended
March 31, 1999 was attributed to growth in net interest earning assets of $13.6
million and was offset by a decline in the net interest margin. Average interest
earning assets increased by $85.8 million for the three-month period ended March
31, 1999, as compared to the prior year. Average interest bearing liabilities
increased by $72.2 million for the three-month period ended March 31, 1999 as
compared to the prior year. Average earning assets grew primarily from an
increase in deposits providing the funds for the investment growth already
mentioned. 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
22 basis points to 4.20% in March 1999 from 4.42% in March 1998.
7
<PAGE>
The following demonstrates the aforementioned effects:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
3/31/99 3/31/98
----------------------- -------------------------
AVG. BALANCE RATE AVG. BALANCE RATE
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Interest Earnings Assets $990,840 7.28% $905,058 7.77%
Interest Bearing Liabilities 802,518 3.80% 730,322 4.16%
Net Interest Income 10,394 9,990
Net Interest Spread 3.48% 3.61%
Net Interest Margin 4.20% 4.42%
</TABLE>
The Corporation uses 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 an agreed upon notional principal amount.
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 March 31, 1999, $40.0 million in notional amount of "Pay Floating,
Receive Fixed" swaps were outstanding. At March 31, 1998 and December 31, 1998,
$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 $40.0 million in notional
amount interest rate swaps outstanding at March 31, 1999 expire as follows:
$10.0 million in notional principal amount in third quarter 1999, $10.0 million
in first quarter 2000, $10.0 million in second quarter 2000, and $10.0 million
in second quarter 2001. The impact of interest rate swaps on net interest income
for the quarter ended March 31, 1999 was a positive $99 thousand as compared to
a positive $18 thousand for the quarter ended March 31, 1998.
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
March 31, 1999 the market value of interest-rate swaps in a favorable position
was $193 thousand. The market value of interest-rate swaps in a negative
position was $17 thousand.
8
<PAGE>
Asset Quality
Management believes the reserve for possible loan losses is maintained at a
level that is adequate to absorb potential losses inherent in the loan
portfolio. Management's methodology to determine the adequacy of and the
provisions to the reserve considers specific credit reviews, past loan loss
experience, current economic conditions and trends, and the volume, growth and
composition of the loan portfolio.
The reserve for possible loan losses is determined through a periodic
evaluation 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
changes 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 No.114. Any of the above criteria may cause the provision to
fluctuate. For the three months ended March 31, 1999 and March 31, 1998, the
provision for possible loan losses remained constant at $0.3 million.
At March 31, 1999, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $2.2 million, all of which were on a
non-accrual basis. The related reserve for credit losses for those loans was
$0.6 million. At March 31, 1998, the recorded investment in loans considered to
be impaired was $2.1 million and the related reserve for credit losses for these
loans was $0.4 million.
Generally, when a loan (including a loan impaired under SFAS No. 114) is
classified as non-accrual, the accrual of interest on such loan is discontinued.
A loan 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 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 are charged against
"other expense." Interest received on nonaccrual loans 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 March 31, 1999 was $3.1 million and
consist mainly of real estate related commercial loans. Cash basis, non-accrual
and restructured loans at March 31, 1998 were $3.9 million. For the quarter
ended March 31, 1999, non-accrual loans resulted in lost interest income of $73
thousand as compared to $76 thousand for the quarter ended March 31, 1998. At
March 31, 1999, the Corporation had no commitments to lend additional funds with
respect to nonperforming loans. In management's evaluation of the loan portfolio
risks, any
9
<PAGE>
significant future increases in nonperforming loans are dependent to a large
extent on the economic environment, or specific industry problems.
At March 31, 1999, and December 31, 1998, the reserve for possible loan
losses remained constant at 1.6% of total loans. For more information on the
reserve, please refer to the Corporation's 1998 10-K.
At March 31, 1999, the Corporation has a total of $367 thousand of Other
Real Estate Owned ("OREO") consisting of three commercial properties and one
residential property. 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
and increases in the cash surrender value of Bank-Owned Life Insurance (BOLI).
Other income increased $1.0 million or 38.5% from $2.6 million for the three
months ended March 31, 1998 to $3.6 million for the three months ended March 31,
1999. The increase is attributed to trust income, which continues to be a major
source of non-interest income and fee income. Trust income for the three months
ended March 31, 1999 of $1.1 million was $0.2 million or 22.2% more than the
$0.9 million reported for the three months ended March 31, 1998. Fee income grew
from $1.2 million for the three months ended March 31, 1998 to $2.0 million for
the three months ended March 31, 1999, an increase of $0.8 million or 66.7%. The
increase in fee income is attributed to increases in various transaction fees
and deposit service fees of $0.4 million from $0.9 million for the three months
ended March 31, 1998 to $1.3 million for the three months ended March 31, 1999
and commission income, of $0.4 million for the three months ended March 31,
1999. Commission income is the primary source of income for the newly acquired
Fin-Plan Group.
There were no gains or losses on sales of securities for the quarters ended
March 31, 1999 and 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 of debt and equity securities held in the available-for-sale
portfolio, as of March 31, 1999, is $126.1 million as compared to $111.3 million
at December 31, 1998. Accumulated other comprehensive income of $245 thousand,
net of taxes, has been credited to shareholders' equity as of March 31, 1999.
10
<PAGE>
Other Expense
The operating costs of the Corporation are known as other expenses, and
include but are not limited to, salaries and benefits, equipment expense, 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 from $7.2 million for the quarter ended March 31, 1998 to $8.2 million
for the quarter ended March 31, 1999. Salary increases, which include commission
expense generated by the new subsidiary, Fin-Plan Group, and other expenses such
as audit fees, MAC fees, and intangible expenses contributed to this increase.
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 that 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
The Year 2000 (Y2) issue is the result of computer programs that were
written using two digits rather than four to define the applicable year. Any of
the Corporation's computer programs or hardware that have date sensitive
software or embedded chips may recognize a date using "00" as the year 1900
rather that the year 2000. This could result in a system failure or
miscalculations causing disruptions in operations, including, among other
things, a temporary inability to process transactions, or engage in normal
business activities.
A Year 2000 Committee was established in 1997 and formed a plan to resolve
the Y2K issues in the following four phases: assessment, remediation, testing,
and implementation. The committee has inventoried software, identified hardware
and contracts with external vendors, and reviewed insurance issues.
11
<PAGE>
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 licensed from vendors and run on hardware
operated by the Corporation. These vendors have represented that such
applications are Y2K compliant.
Testing of these software applications is fully completed with satisfactory
results, and programs remediated where necessary. Testing of the Corporation's
computer hardware is complete and determined to be Y2K compliant. Any changes to
software or new software will be Y2K tested before the software is made
operational. 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 the
Y2K issue affected certain internally developed programs. Such programs have
been remedied, tested and successfully implemented.
Additionally, the Corporation has completed the assessment of the potential
effects on the Corporation related to its commercial customers' preparedness for
Y2K. 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. The results of this assessment enable the
Corporation to more closely monitor those higher risk customers 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 the first quarter of 1999, the Corporation successfully completed
testing with external third parties, including ATMs, other financial
institutions and payment systems providers. Testing with major customers and
credit bureaus will be conducted during second quarter 1999.
Contingency plans have been prepared for all mission critical applications.
Testing of mission critical contingency plans will be completed by June 30,
1999. Contingency plan training for all Univest employees will take place during
the second half of 1999. We also continue to address other areas of the
Corporation such as utilities, communications and networks.
The total cost of the Y2K project cost is estimated at $400 thousand. To
date, the Corporation has incurred approximately $251 thousand, all of which has
been expensed. At March 31, 1999, $42 thousand was expensed and for the year
ended December 31, 1998, $209 thousand was expensed.
12
<PAGE>
There is an effective program in place that management believes will
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.
Tax Provision
The provision for income taxes was $1.6 million for the quarter ended March
31, 1999 and $1.5 million for the quarter ended March 31, 1998. The effective
tax rates were 29.5% and 30.1% respectively. The effective tax rates reflects
the benefits of tax credits generated from investments in low-income housing
projects and tax-free income from investment in securities, loans and bank-owned
life insurance.
Financial Condition
Total assets increased $2.5 million or 0.2% from $1,070.5 million at
December 31, 1998 to $1,073.0 million at March 31, 1999. Net loans increased
$11.5 million and federal funds sold increased $17.3 million. These increases
were funded by a decrease in investments of $40.0 million and an increase in
deposits of $5.4 million.
Shareholders' equity increased to $104.3 million at March 31, 1999 from
$103.2 million at December 31, 1998, an increase of $1.1 million or 1.1%. Book
value per share increased from $14.02 at December 31, 1998 to $14.24 at March
31, 1999, an increase of $.22 per share or 1.6%.
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 SEC Form 10-K for the period ended December 31, 1998.
Recent Accounting Pronouncements
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,
13
<PAGE>
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 SFAS No. 133 will be on the earnings and financial position of the
Corporation.
Other
Univest Financial Services Corporation acquired Fin-Plan Group on January
29, 1999. This will allow Univest Corporation to provide a broader range of
financial services including financial planning, investment management,
insurance products and brokerage services. The impact on the Corporation's
financial position and results of operations was immaterial for the three months
ended March 31, 1999.
14
<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.
15
<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: 4/26/99 /s/ Merrill S. Moyer
-----------------------------
Merrill S. Moyer, Chairman
Date: 4/26/99 /s/ Wallace H. Bieler
-----------------------------
Wallace H. Bieler, Executive Vice President
and Chief Financial Officer
16
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