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 June 30, 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
(State or other jurisdiction of 23-1886144
incorporation of organization) (IRS Employer Identification No.)
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 7,224,161
(Title of Class) (Number of shares outstanding
at 6/30/99)
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
Page Number
Part I. Financial Information:
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 1999 and 1998 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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: 16
Other Information
Part III. Financial Data Schedule 18
<PAGE>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (SEE NOTE)
June 30, 1999 December 31, 1998
------------- -----------------
(In thousands)
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS $ 32,109 $ 26,011
INTEREST BEARING DEPOSITS WITH OTHER BANKS 3,348 3,940
INVESTMENT SECURITIES HELD-TO-MATURITY 150,898 216,404
(MARKET VALUE $149,355 AT 6/30/99
AND $217,515 AT 12/31/98)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 170,653 111,261
FEDERAL FUNDS SOLD AND OTHER
SHORT TERM INVESTMENTS 7,300 12,700
LOANS 681,640 660,449
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (10,988) (10,538)
----------- ------------
NET LOANS 670,652 649,911
OTHER ASSETS 55,869 50,243
----------- ------------
TOTAL ASSETS $ 1,090,829 $ 1,070,470
=========== ============
LIABILITIES
DEMAND DEPOSITS, NON INTEREST BEARING $ 149,948 $ 152,094
DEMAND DEPOSITS, INTEREST BEARING 246,725 238,622
SAVINGS DEPOSITS 141,773 138,936
TIME DEPOSITS 352,731 344,852
----------- ------------
TOTAL DEPOSITS 891,177 874,504
SHORT-TERM BORROWINGS 67,641 64,045
OTHER LIABILITIES 17,114 19,669
LONG-TERM DEBT 13,075 9,075
----------- ------------
TOTAL LIABILITIES 989,007 967,293
SHAREHOLDERS' EQUITY
COMMON STOCK 39,272 39,272
ADDITIONAL PAID-IN CAPITAL 14,908 14,908
RETAINED EARNINGS 68,221 62,992
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (1,615) 582
TREASURY STOCK (18,964) (14,577)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 101,822 103,177
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,090,829 $ 1,070,470
============ ============
</TABLE>
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>
<TABLE>
<CAPTION>
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
(in thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST INCOME
INTEREST AND FEES ON LOANS
TAXABLE INTEREST AND FEES ON LOANS $12,950 $13,290 $25,784 $26,254
EXEMPT FROM FEDERAL INCOME TAXES 643 604 1,220 1,187
------- ------- ------- -------
TOTAL INTEREST AND FEES ON LOANS 13,593 13,894 27,004 27,441
INTEREST AND DIVIDENDS ON
INVESTMENT SECURITIES 4,358 4,023 8,817 7,878
OTHER INTEREST INCOME 374 279 525 468
------- ------- ------- -------
TOTAL INTEREST INCOME 18,325 18,196 36,346 35,787
------- ------- ------- -------
INTEREST EXPENSE
INTEREST ON DEPOSITS 7,058 7,405 14,008 14,466
OTHER INTEREST EXPENSE 715 570 1,392 1,110
------- ------- ------- -------
TOTAL INTEREST EXPENSE 7,773 7,975 15,400 15,576
------- ------- ------- -------
NET INTEREST INCOME 10,552 10,221 20,946 20,211
PROVISION FOR LOAN LOSSES 275 275 550 608
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,277 9,946 20,396 19,603
OTHER INCOME 3,489 2,574 7,064 5,169
GAINS ON SALES OF SECURITIES 74 12 74 12
------- ------- ------- -------
TOTAL OTHER INCOME 3,563 2,586 7,138 5,181
OTHER EXPENSES
SALARIES AND BENEFITS 4,622 3,880 9,124 7,728
OTHER EXPENSES 3,870 3,493 7,518 6,803
------- ------- ------- -------
TOTAL OTHER EXPENSES 8,492 7,373 16,642 14,531
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 5,348 5,159 10,892 10,253
APPLICABLE INCOME TAXES 1,580 1,508 3,214 3,042
------- ------- ------- -------
NET INCOME $ 3,768 $ 3,651 $ 7,678 $ 7,211
======= ======= ======= =======
PER COMMON SHARE DATA:
NET INCOME PER SHARE:
BASIC $ 0.52 $ 0.48 $ 1.05 $ 0.95
DILUTED $ 0.52 $ 0.48 $ 1.04 $ 0.94
CASH DIVIDENDS DECLARED PER SHARE $ 0.17 $ 0.15 $ 0.32 $ 0.275
</TABLE>
2
<PAGE>
Univest Corporation of Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the six months ended,
(in thousands)
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,678 $ 7,211
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses in excess of net charge-offs 450 105
Depreciation of premises and equipment 1,160 1,268
Discount accretion on investment securities (5) (129)
Deferred tax benefit (209) (334)
Realized gains on investment securities (74) (12)
Realized gains on sales of mortgages (40) (156)
Decrease in net deferred loan fees (14) (36)
Increase in interest receivable and other assets (1,741) (210)
(Decrease) increase in accrued expenses and other liabilities (1,286) 1,265
-------- --------
Net cash provided by operating activities 5,919 8,972
Cash flows from investing activities:
Proceeds from sales of securities available for sale 15,815 6,011
Proceeds from maturing securities held to maturity 70,567 31,846
Proceeds from maturing securities available for sale 20,273 13,106
Decrease (increase) in interest-bearing deposits 592 (12,423)
Purchases of time deposits -- (1,599)
Purchases of investment securities held to maturity (5,075) (36,638)
Purchases of investment securities available for sale (98,767) (21,613)
Net decrease (increase) in federal funds sold and
other short-term investments 5,400 (17,600)
Proceeds from sales of mortgages 8,019 13,566
Net increase in loans (29,156) (29,042)
Capital expenditures (1,045) (725)
Other investing activities (4,000) --
-------- --------
Net cash provided by (used in) investing activities (17,377) (55,111)
Cash flows from financing activities:
Net increase in deposits 16,673 39,693
Net increase in short-term borrowings 3,596 8,961
Proceeds from long-term debt 4,000 --
Purchases of treasury stock (5,236) (5,518)
Stock issued under dividend reinvestment and
employee stock purchase plans 624 577
Proceeds from exercise of stock options 102 275
Cash dividends (2,203) (1,915)
-------- --------
Net cash provided by financing activities 17,556 42,073
Net increase (decrease) in cash and due from banks 6,098 (4,066)
Cash and due from banks at beginning of period 26,011 33,352
-------- --------
Cash and due from banks at end of period $ 32,109 $ 29,286
======== ========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 16,182 $ 15,561
</TABLE>
3
<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 six-month period ended June
30, 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):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Net Income $3,768 $3,651 $7,678 $7,211
Numerator for basic and diluted earnings per
share - income available to common
shareholders 3,768 3,651 7,678 7,211
Denominator:
Denominator for basic earnings per share-
weighted-average shares outstanding 7,264 7,602 7,300 7,623
Effect of dilutive securities:
Employee stock options 49 68 50 67
---------------------- ----------------------
Denominator for diluted earnings per share
adjusted weighted-average shares
outstanding 7,313 7,670 7,350 7,690
Basic earnings per share .52 .48 1.05 .95
Diluted earnings per share .52 .48 1.04 .94
</TABLE>
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:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 3,768 $ 3,651 $ 7,678 $ 7,211
Change in unrealized (loss) gain on available
for sale investment securities (1,860) 116 (2,197) 63
------- ------- ------- -------
Total comprehensive income $ 1,908 $ 3,767 $ 5,481 $ 7,274
======= ======= ======= =======
</TABLE>
5
<PAGE>
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which was required to be
adopted in years beginning after June 15, 1999. On May 20, 1999, the FASB issued
an Exposure Draft that provides for a one-year delay in the effective date. The
new effective date is for fiscal years beginning after June 15, 2000. 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 reviewed the current use and positioning of derivatives.
There should be no material impact of SFAS No. 133 on the earnings and financial
position of the Corporation.
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 June 30, 1999 increased 2.7% or $0.1
million from $3.7 million for the three months ended June 30, 1998 to $3.8
million for the three months ended June 30, 1999. Net income also increased $0.5
million or 6.9% to $7.7 million for the six months ended June 30, 1999 as
compared to $7.2 million for the six months ended June 30, 1998. The net income
growth for the three and six months ended June 30, 1999 was due mainly to an
increase in net interest income.
Net Interest Income
Interest and fees on loans decreased $0.3 million from $13.9 million for
the three months ended June 30, 1998 to $13.6 million for the three months ended
June 30, 1999. For the six months ended June 30, 1999, interest and fees on
loans decreased $0.4 million from $27.4 million at June 30, 1998 to $27.0
million at June 30, 1999. While there was an increase in loan volume, it was
offset by a decrease in rate.
Interest on investment securities increased $0.4 million from $4.0 million
for the three-month period ended June 30, 1998 to $4.4 million for the
three-month period ended June 30, 1999. The increase was due to higher average
volume offset by a lower average yield. For the six months ended June 30, 1999
interest on investments increased by $0.9 million from $7.9 million for the six
months ended June 30, 1998 to $8.8 million for the same period in 1999. This
increase is also attributed to higher average volume for the period offset by a
decrease in yield.
Interest expense decreased from $8.0 million for the three months ended
June 30, 1998 to $7.8 million for the three months ended June 30, 1999, a
decrease of $0.2 million. Interest expense decreased $0.2 million from $15.6
million for the six months ended June 30, 1998 to $15.4 million for the six
months ended June 30, 1999. The decrease in both periods is attributed to an
increase in the volume of deposits offset by a decrease in rate.
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 earning 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 six months ended June
30, 1999 shows net interest income of $20.9 million, which is
7
<PAGE>
a $0.7 million increase over the $20.2 million recorded for the six months,
ended June 30, 1998. Average interest earning assets increased by $80.2 million
for the six-month period ended June 30, 1999 as compared to the six months ended
June 30, 1998, primarily from an increase in deposits providing the funds for
investment growth. Average interest bearing liabilities increased by $67.3
million for the six-month period ended June 30, 1999 as compared to the same
period in 1998. Net interest earning assets grew $12.9 million for the six
months ended June 30, 1999 as compared to the six months ended June 30, 1998.
The increase in net interest income resulting from the increase in net interest
earning assets was offset by a decline in the net interest rate margin of 20
basis points to 4.2% in June 1999 from 4.4% in June 1998. The net interest
spread declined 10 basis points to 3.5% in June 1999 from 3.6% in June 1998.
The following demonstrates the aforementioned effects:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
6/30/99 6/30/98
------- -------
AVG. BALANCE RATE AVG. BALANCE RATE
----------------- -----------------
<S> <C> <C> <C> <C>
Interest Earnings Assets $1,000,900 7.3% $ 920,738 7.8%
Interest Bearing Liabilities 811,053 3.8% 743,833 4.2%
Net Interest Income 20,946 20,211
Net Interest Spread 3.5% 3.6%
Net Interest Margin 4.2% 4.4%
</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 June 30, 1999, $50.0 million in notional amount of "Pay Floating,
Receive Fixed" swaps were outstanding. At June 30, 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 $50.0 million in notional
amount interest rate swaps outstanding at June 30, 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,
8
<PAGE>
and $20.0 million in second quarter 2001. The impact of interest rate swaps on
net interest income for the quarter ended June 30, 1999 was a positive $61
thousand as compared to a positive $22 thousand for the quarter ended June 30,
1998. For the six months ended June 30, 1999 the impact was a positive $160
thousand as compared to a positive $40 thousand for the six months ended June
30, 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 June
30, 1999 the market value of interest-rate swaps in a favorable position was $47
thousand. The market value of interest-rate swaps in a negative position was
$188 thousand.
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 and six months ended June 30, 1999, the provisions for
loan losses were $0.3 million and $0.6 million respectively.
At June 30, 1999, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $1.4 million, all of which were on a
non-accrual basis. The related reserve for credit losses for those loans was
$0.5 million. At June 30, 1998, the recorded investment in loans considered to
be impaired was $3.1 million and the related reserve for credit losses for these
loans was $0.6 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
9
<PAGE>
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 June 30, 1999 was $2.3 million and consist
mainly of real estate related commercial loans. For the quarter ended June 30,
1999, non-accrual loans resulted in lost interest income of $44 thousand as
compared to $100 thousand for the quarter ended June 30, 1998. For the six
months ended June 30, 1999 lost interest totaled $117 thousand as compared to
$176 thousand for the same period in 1998. At June 30, 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 significant future
increases in nonperforming loans are dependent to a large extent on the economic
environment, or specific industry problems.
At June 30, 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 Form 10-K.
At June 30, 1999, the Corporation has a total of $518 thousand of Other
Real Estate Owned ("OREO") consisting of two commercial properties and 4
residential properties. This amount is carried 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 June 30, 1998 to $3.6 million for the three months ended June 30,
1999. The increase is attributed to trust income and fee income. Trust income
for the three months ended June 30, 1999 of $0.8 million was $0.1 million or
14.3% more than the $0.7 million reported for the three months ended June 30,
1998. Fee income grew from $1.3 million for the three months ended June 30, 1998
to $2.2 million for the three months ended June 30, 1999, an increase of $0.9
million or 69.2%. Included in fee income is an increase in various transaction
fees and deposit service fees of $0.2 million from $1.1 million for the three
months ended June 30, 1998 to $1.3 million for the three months ended June 30,
1999. Also included in fee income is commission income of $0.6 million for the
three months ended June 30, 1999. Commission income is the primary source of
income for the newly acquired Fin-Plan Group. Other income for the six months
ended June 30, 1999
10
<PAGE>
increased $1.9 million or 36.5% from $5.2 million for the six months ended June
30, 1998 to $7.1 million for the six months ended June 30, 1999. This increase
is also attributed trust income and fee income. Trust income for the six months
ended June 30, 1999 of $2.0 million was $0.3 million or 17.7% more than the $1.7
million reported for the six months ended June 30, 1998. Fee income increased
from $2.5 million for the six months ended June 30, 1998 to $4.2 million for the
six months ended June 30, 1999, an increase of $1.7 million or 68.0%. Included
in fee income is an increase in various transaction fees and deposit service
fees of $0.6 million from $2.0 million for the six months ended June 30, 1998 to
$2.6 million for the six months ended June 30, 1999. Also included in fee income
is commission income of $1.1 million for the six months ended June 30, 1999.
During the quarter and six months ended June 30, 1999, income of $74
thousand was recorded relating to investment securities. Investment securities
totaling approximately $12.0 million were sold from the available for sale
portfolio to provide future yield enhancement and to extend maturities. $49
thousand was recorded as gain on the sale of those securities. During the
quarter ended June 30, 1998, securities totaling approximately $6 million were
sold resulting in a net gain of $12 thousand.
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
portfolio, as of June 30, 1999, is $170.7 million as compared to $111.3 million
at December 31, 1998. Accumulated other comprehensive loss of $1.6 million, net
of taxes, has been debited to shareholders' equity as of June 30, 1999.
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 $7.4 million for the quarter ended June 30, 1998 to $8.5 million
for the quarter ended June 30, 1999, an increase of 14.9%. For the six months
ended June 30, 1999 other expenses increased 14.5% or $2.1 million from $14.5
million at June 30, 1998 to $16.6 million at June 30, 1999. Salary increases,
which include commission expense generated by the new subsidiary, Fin-Plan
Group, and other expenses such as occupancy, MAC fees, and intangible expenses
contributed to the increases in both periods.
11
<PAGE>
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 Corporation's 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 Corporation began the process of preparing its computer systems and
applications for the Year 2000(Y2K) in 1997. A committee was established that
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.
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
12
<PAGE>
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 was
successfully conducted during second quarter 1999.
Contingency plans have been prepared for all mission critical applications.
The contingency plans have been verified by an independent third party.
Validation plans have also been verified. 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 $278 thousand, all of which has
been expensed. At June 30, 1999, $69 thousand was expensed and for the year
ended December 31, 1998, $209 thousand was expensed.
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 June
30, 1999 and $1.5 million for the quarter ended June 30, 1998. The effective tax
rates were 29.5% and 29.2% respectively. For the six months ended June 30, 1999
the provision was $3.2 million as compared to $3.0 million for the six months
ended June 30, 1998 with effective tax rates of 29.5% and 29.7% respectively.
The effective tax rates reflects
13
<PAGE>
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 $20.3 million 1.9% from $1,070.5 million at December
31, 1998 to $1,090.8 million at June 30, 1999. Net loans increased $20.7
million. Deposits increased $16.7 million mainly due to increased activity in
certain types of money market accounts that pay a higher rate.
Shareholders' equity decreased to $101.8 million at June 30, 1999 from
$103.2 million at December 31, 1998, a decrease of $1.4 million or 1.4%. The
primary reason for the reduction was the continued treasury stock activity, in
which net purchases total approximately $4.4 million since December 31, 1998.
Book value per share increased from $14.02 at December 31, 1998 to $14.09 at
June 30, 1999, an increase of $0.7 per share or 0.5%.
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 was required to be
adopted in years beginning after June 15, 1999. On May 20, 1999, the FASB issued
an Exposure Draft that provides for a one-year delay in the effective date. The
new effective date is for fiscal years beginning after June 15, 2000. 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 reviewed the current use and positioning of derivatives.
There should be no material impact of SFAS No. 133 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
14
<PAGE>
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 six months ended June 30, 1999.
15
<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.
16
<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: 7/28/99 /s/ Merrill S. Moyer
-------------------------------------------
Merrill S. Moyer, Chairman
Date: 7/28/99 /s/ Wallace H. Bieler
-------------------------------------------
Wallace H. Bieler, Executive Vice President
and Chief Financial Officer
17
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