-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tv8AlnPUbEFtKbr6rZSdHORIZWb8ZRrAceIdw6xwQXEtMAg9R6GJIr3EJJ8lHuxl NOjruIXEYphXkVBqPgEJgw== 0000950116-98-000663.txt : 19980330 0000950116-98-000663.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950116-98-000663 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVEST CORP OF PENNSYLVANIA CENTRAL INDEX KEY: 0000102212 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 231886144 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07617 FILM NUMBER: 98575800 BUSINESS ADDRESS: STREET 1: 10 W BROAD ST CITY: SOUDERTON STATE: PA ZIP: 18964 BUSINESS PHONE: 2157212400 MAIL ADDRESS: STREET 1: 10 W BROAD STREET CITY: SOUDERTON STATE: PA ZIP: 18964 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File number 0-7617 ----------------- ------ UNIVEST CORPORATION OF PENNSYLVANIA ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-1886144 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation of organization) 14 North Main Street Souderton, Pennsylvania 18964 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 721-2400 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $5 par value 3,816,873 - -------------------------- ----------------------------- (Title of Class) (Number of shares outstanding at 2/28/98) The approximate aggregate market value of voting stock held by non affiliates of the registrant is $200,788,848 as of February 28, 1998. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 ninety days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. ( ) Parts I and Part III incorporate information by reference from the proxy statement for the annual meeting of shareholders on April 7, 1998. Parts I, II, and IV incorporate information by reference from the annual report to shareholders for the year ended December 31, 1997. PAGE 1 OF 25 PART I Item 1. Business General Univest Corporation of Pennsylvania ("Univest") is a Pennsylvania corporation organized in 1973 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956. It owns all of the capital stock of Union National Bank and Trust Company ("Union National Bank"), Pennview Savings Bank, Univest Realty Corporation, Univest Leasing Corporation, Univest Mortgage Company, Univest Financial Planning Corporation, Univest Insurance Company, and Univest Electronic Services Corporation. Union National Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers. Pennview Savings Bank is engaged in attracting deposits from general public and investing such deposits primarily in loans secured by residential properties and consumer loans. The Realty Corporation was established to obtain, hold and operate properties for the holding company and its subsidiaries. Both the Leasing Corporation and Univest Mortgage Company are inactive. Univest Insurance Company offers credit-related reinsurance plans. Univest Electronic Services Corporation was established to provide data processing services to Union National Bank in Souderton and other subsidiaries of Univest Corporation of Pennsylvania. Union National Bank and Trust Company, with its head office in Souderton, Montgomery County, serves the area through twenty-six (26) banking offices, one off-premises automated teller machines and provides banking and trust services to the residents and employees of ten retirement homes. Fifteen banking offices are in Montgomery County and eleven banking offices are in Bucks County. One off-premises automated teller machine is located in Montgomery County. Pennview Savings Bank conducts operations through five (5) full-service offices located in Souderton, Hatfield, Franconia, Silverdale and Montgomeryville, Pennsylvania and provides banking services to the residents and employees of two retirement homes. As of January 31, 1998, Univest and its subsidiaries employed four hundred and forty-one (441) persons. Competition Univest's service areas are characterized by intense competition for banking business among commercial banks, savings and loan associations, savings banks and other financial institutions. Each of the Corporation's subsidiary banks actively compete with such banks and financial institutions for local retail and commercial accounts, in Bucks and Montgomery Counties, as well as other financial institutions outside their primary service area. In competing with other banks, savings and loan associations, and other financial institutions, Union National Bank and Pennview Savings Bank seek to provide personalized services through management's knowledge and awareness of their service area, customers and borrowers. Other competitors, including credit unions, consumer finance companies, insurance companies and mutual funds, compete with certain lending and deposit gathering services offered by Union National Bank and Pennview Savings Bank. Supervision and Regulation Union National Bank is subject to supervision and is regularly examined by the Office of the Comptroller of the Currency. Also, Union National Bank is subject to examination by the Federal Deposit Insurance Corporation and by the 2 Federal Reserve System. Pennview Savings Bank is regulated by the Federal Deposit Insurance Corporation and by the Department of Banking of the Commonwealth of Pennsylvania. Univest is subject to the provisions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. The Act prohibits the acquisition by a bank holding company of a direct or indirect ownership of more than five percent of the voting shares of any bank within the United States without prior approval of the Board of Governors of the Federal Reserve System, and also prohibits the granting of such approval in respect to any bank within the United States located outside of the state where the bank holding company's principal operations are conducted, unless the acquisition is specifically authorized by the statutes of the state in which the bank is located. With certain exceptions, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank, and from engaging directly or indirectly in businesses unrelated to the business of banking, or managing, or controlling banks. Under the Bank Holding Company Act Amendments of 1970, which became effective on December 3, 1970, the Federal Reserve Board may approve the acquisition by bank holding companies of non bank subsidiaries to engage in activities that are closely related to banking and are in the public interest. The amendments include a provision which prohibits banks, bank holding companies and subsidiaries from engaging in tie-in arrangements. Bank tie-ins involving a loan, discount, deposit, or trust service are specifically exempted, and the Federal Reserve Board is authorized to make exceptions by regulations. As a bank holding company, Univest is subject to the reporting requirements of the Board of Governors of the Federal Reserve System, and Univest, together with its subsidiaries, is subject to examination by the Board. The Federal Reserve Act limits the amount of credit which a member bank may extend to its affiliates, and the amount of its funds which it may invest in or lend on the collateral of the securities of its affiliates. Under the Federal Deposit Insurance Act, insured banks are subject to the same limitations. FDICIA In December 1991, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") was enacted, which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements in order to minimize losses to the FDIC. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized" and imposes significant restrictions on the operations of a bank that is not at least adequately capitalized. A depository institution's capital tier will depend upon where its capital levels are in relation to various relevant capital measures, which will include a risk-based capital measure, a leverage ratio capital measure and certain other factors. Under the requirements, Univest has Tier I capital ratios of 14.1% and 14.3%, and total risk-based capital ratios of 15.2% and 15.5% at December 31, 1997 and 1996, respectively. These ratios place Univest in the "well-capitalized" category under regulatory standards. Regulations promulgated under FDICIA also require that an institution monitor its capital levels closely and notify its appropriate federal banking regulators within 15 days of any material events that affect the capital position of the institution. FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, a 3 maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares (if feasible) and such other standards as the agency deems appropriate. FDICIA also contains a variety of other provisions that affect the operations of the Corporation, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, certain restrictions on investments and activities of state-chartered insured banks and their subsidiaries and limitations on credit exposure between banks. Finally, FDICIA limits the discretion of the FDIC with respect to deposit insurance coverage by requiring that, except in very limited circumstances, the FDIC's course of action in resolving a problem bank must constitute the "least costly resolution" for the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"), as the case may be. The FDIC has interpreted this standard as requiring it not to protect deposits exceeding the $100,000 insurance limit in more situations than was previously the case. In addition, FDICIA prohibits payments by the FDIC on uninsured deposits in foreign branches of U.S. banks and will severely limit the "too big to fail" doctrine under which the FDIC formerly protected deposits exceeding the $100,000 insurance limit in certain failed banking institutions. Implementation of FDICIA has not had a material impact on the business or operations of the Corporation. Credit and Monetary Policies Union National Bank is affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve System. An important function of the policies is to curb inflation and control recessions through control of the supply of money and credit. The Federal Reserve System uses its powers to regulate reserve requirements of member banks, the discount rate on member-bank borrowings, interest rates on time and savings deposits of member banks, and to conduct open-market operations in United States Government securities to exercise control over the supply of money and credit. The policies have a direct effect on the amount of bank loans and deposits and on the interest rates charged on loans and paid on deposits, with the result that the policies have a material effect on bank earnings. Future policies of the Federal Reserve Bank System and other authorities cannot be predicted, nor can their effect on future bank earnings be predicted. Pennview Savings Bank and Union National Bank are members of the Federal Home Loan Bank System which consists of 12 regional Federal Home Loan Banks, with each subject to supervision and regulation by the newly created Federal Housing Finance Board. The Federal Home Loan Banks provide a central credit facility primarily for member institutions. The Banks, as members of the Federal Home Loan Bank of Pittsburgh, are required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount equal to at least 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances (borrowings) from the Federal Home Loan Bank of Pittsburgh, whichever is greater. Market Risk When used or incorporated by reference in disclosure documents, the words "anticipate," "estimate," "expect," "project," "target," "goal" and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the document. The Corporation expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Corporation's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. 4 Market risk is the risk of loss from adverse changes in market prices and rates. In the course of its lending and deposit taking activities, Univest is subject to changes in the economic value and/or earnings potential of these assets and liabilities due to changes in interest rates. Univest's Asset/Liability Management Committee (ALMC) manages interest rate risk in a manner so as to provide adequate and predictable earnings. This is accomplished through the establishment of policy limits on maximum risk exposures, as well as the regular and timely monitoring of reports designed to quantify risk and return levels. Univest uses both GAP and simulation techniques to quantify its exposure to interest rate risk. The company uses GAP techniques to identify and monitor long term rate exposure and uses a simulation model to measure the short term rate exposures. The company runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a 1 year horizon. The simulation uses existing portfolio rate and repricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is permitted to use interest rate swaps and interest rate caps/floors with indices that correlate to on-balance sheet instruments, to modify its indicated net interest sensitivity to levels deemed to be appropriate based on the corporation's current economic outlook. The effect of the interest rate swaps that the bank uses to reduce its earnings volatility due to rate risk are also included in the results of the simulation. At December 31, 1997, the simulation, based upon forward-looking assumptions, projects that Univest's greatest interest margin exposure to interest rate risk would occur if interest rates decline from present levels. Given the assumptions, a 200 basis point parallel shift in the yield curve applied on a ramp-down basis would cause Univest's interest margin, over a 1 year horizon, to be approximately 2.5% less than it would be if market rates would remain unchanged. Policy limits have been established which allow a tolerance for no more than approximately a 3.5% negative impact to the interest margin resulting from a gradual 200 basis point parallel yield curve shift over a forward looking 12 month period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Interest Income" in the Annual Report and the Interest Rate Sensitivity Analysis on page 16. Interstate Banking Legislation was passed, and signed by President Clinton on September 29, 1994, which will eliminate many currently existing restrictions on interstate banking. The legislation will authorize interstate acquisition of banks by bank holding companies without geographic limitations one year after enactment. Beginning June 1, 1997, the legislation will allow interstate branching in states that have not passed legislation prohibiting interstate branching, except that de novo branching or acquisition of a branch in another state without acquisition of the entire bank will only be permitted if expressly permitted by the law of the state in which such branch would be located. Interstate branching prior to June 1, 1997, will be possible in states that pass laws affirmatively authorizing such interstate branching. The effect of this legislation on Univest cannot be predicted at this time. Statistical Disclosure Univest was incorporated under Pennsylvania law in 1973 for the purpose of acquiring the stock of Union National Bank and subsequently to engage in other business activities permitted under the Bank Holding Company Act. On September 28, 1973, pursuant to an exchange offer, Univest acquired the outstanding stock of Union National Bank and on August 1, 1990 acquired the stock of Pennview Savings Bank. The following financial data appearing on pages 6 through 17 reflects consolidated information. Where averages are reported, daily information has been used for all subsidiaries. 5 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL ($ in thousands)
1997 1997/1996 Average Income/ Avg. Volume Rate Average ASSETS: Balance Expense Rate Change Change Total Balance ------- ------- ---- ------ ------ ----- ------- Cash and due from banks $ 29,244 $ 30,866 Time deposits with other banks 1,522 $ 83 5.5 $ 51 $ 2 $ 53 588 U.S. Government obligations 199,733 12,274 6.1 (709) (214) (923) 213,981 Oblig. of states & political sub. 4,728 219 4.6 35 12 47 3,967 Other securities 36,547 2,372 6.5 1,322 16 1,338 16,278 Federal Reserve bank stock 761 46 6.0 1 0 1 752 Federal funds sold and other short-term investments 4,204 223 5.3 7 (4) 3 4,083 -------- ------ -------- Total investments 245,973 15,134 6.2 239,061 -------- ------ ---- -------- Commercial loans 137,520 12,632 9.2 1,239 (124) 1,115 124,372 Real estate loans 361,089 31,612 8.8 (245) 363 118 363,050 Installment loans 75,395 6,373 8.5 1,157 (61) 1,096 61,190 Home equity loans 15,300 1,647 10.8 (127) 16 (111) 16,393 Municipal loans 36,545 2,059 5.6 389 (268) 121 29,827 -------- ------ -------- Gross loans 625,849 54,323 8.7 594,832 ------ ---- Less: valuation reserve (10,159) (9,582) -------- -------- Net loans 615,690 585,250 -------- -------- Property and equipment, net 16,761 16,436 Other assets 20,047 17,656 -------- -------- Total assets $929,237 $889,857 ======== ========
(TABLE RESTUBBED FROM PREVIOUS PAGE)
1996 1996/1995 1995 Income/ Avg. Volume Rate Average Income/ Avg. ASSETS: Expense Rate Change Change Total Balance Expense Rate ------- ---- ------ ------ ----- ------- ------- ---- Cash and due from banks $ 30,645 Time deposits with other banks $ 30 5.1 $ 9 $ (2) $ 7 406 $ 23 5.7 U.S. Government obligations 13,197 6.2 2,402 349 2,751 174,355 10,446 6.0 Oblig. of states & political sub. 172 4.3 64 (10) 54 2,535 118 4.7 Other securities 1,034 6.4 87 (29) 58 14,697 976 6.6 Federal Reserve bank stock 45 6.0 0 0 0 746 45 6.0 Federal funds sold and other short-term investments 220 5.4 (343) (53) (396) 10,527 616 5.9 ------ -------- ------ Total investments 14,668 6.1 202,860 12,201 6.0 ------- ---- --------- ------ ---- Commercial loans 11,517 9.3 (6,162) - (6,162) 190,451 17,679 9.3 Real estate loans 31,494 8.7 5,914 586 6,500 292,751 24,994 8.5 Installment loans 5,277 8.6 674 (54) 620 53,702 4,657 8.7 Home equity loans 1,758 10.7 (219) (93) (312) 18,501 2,070 11.2 Municipal loans 1,938 6.5 101 (85) 16 28,415 1,922 6.8 ------ -------- ------ Gross loans 51,984 8.7 583,820 51,322 8.8 ------ ---- ------ ---- Less: valuation reserve (8,965) -------- Net loans 574,855 -------- Property and equipment, net 14,857 Other assets 20,409 ------ Total assets $844,032 ========
6
1997 1997/1996 LIABILITIES: Average Income/ Avg. Volume Rate Average Balance Expense Rate Change Change Total Balance ------- ------- ---- ------ ------ ----- ------- Demand deposits $118,960 $107,993 --------- --------- Interest checking deposits 73,521 $ 991 1.3 $ (6) $ - $ (6) 73,973 Money market savings 77,013 2,617 3.4 475 319 794 63,849 Regular savings 128,546 3,183 2.5 51 0 51 126,118 Certificates of deposit 312,517 17,556 5.6 (83) - (83) 313,867 Time open & club accounts 44,447 2,269 5.1 246 40 286 39,576 ------- ------- Total time, int., and inv. checking deposits 636,044 26,616 4.2 617,383 -------- ------- --- -------- Total deposits 755,004 725,376 -------- -------- Federal funds purchased 3,541 203 5.7 (51) 9 (42) 4,433 Loans & securities sold under agreement to repurchase 49,133 1,608 3.3 160 - 160 44,001 Other borrowings 8,592 485 5.6 56 15 71 7,612 Subordinated notes - - 0.0 0 - - - -- -- -- Total borrowings 61,266 2,296 3.7 56,046 ------- ------ --- ------- Accrued expenses & other liab. 11,787 14,939 ------- ------- Total liabilities 828,057 796,361 -------- -------- SHAREHOLDERS' EQUITY: Common stock 19,636 19,636 Capital surplus 34,539 34,545 Retained earnings 47,005 39,315 ------- ------- Total shareholders' equity 101,180 93,496 -------- ------- Total liabilities and share- holders' equity $929,237 $889,857 ========= ========= Weighted avg. yield on interest-earning assets 8.0% Weighted avg. rate paid on interest-bearing liab. 4.1% Net yield 4.7%
(RESTUBBED FROM PREVIOUS PAGE)
1996 1996/1995 1995 LIABILITIES: Income/ Avg. Volume Rate Average Income/ Avg. Expense Rate Change Change Total Balance Expense Rate ------- ---- ------ ------ ----- ------- ------- ---- Demand deposits $ 99,547 -------- Interest checking deposits $ 997 1.3 $ 23 $ (292) $ (269) 72,886 $ 1,266 1.7 Money market savings 1,823 2.9 (113) 0 (113) 67,858 1,936 2.9 Regular savings 3,132 2.5 53 0 53 125,419 3,079 2.5 Certificates of deposit 17,639 5.6 872 599 1,471 299,498 16,168 5.4 Time open & club accounts 1,983 5.0 444 (61) 383 30,576 1,600 5.2 ------- ------ Total time, int., and inv. checking deposits 25,574 4.1 596,237 24,049 4.0 ------- --- -------- ------- --- Total deposits 695,784 ------- Federal funds purchased 245 5.5 185 (7) 178 1,093 67 6.1 Loans & securities sold under agreement to repurchase 1,448 3.3 212 (38) 174 37,760 1,274 3.4 Other borrowings 414 5.4 125 21 146 5,338 268 5.0 Subordinated notes - 0.0 0 (305) (305) 2,986 305 10.2 -- ------ ---- Total borrowings 2,107 3.8 47,177 1,914 4.1 ------ --- ------- ------ --- Accrued expenses & other liab. 15,979 ------ Total liabilities 758,940 ------- SHAREHOLDERS' EQUITY: Common stock 15,727 Capital surplus 8,163 Retained earnings 61,202 ------ Total shareholders' equity 85,092 ------ Total liabilities and share- holders' equity $844,032 ======== Weighted avg. yield on interest-earning assets 8.0% 8.1% Weighted avg. rate paid on interest-bearing liab. 4.1% 4.0% Net yield 4.7% 4.8%
7 Note: (1) For rate calculation purposes, average loan categories include unearned discount. (2) Nonaccrual loans have been included in the average loan balances. (3) Certain amounts have been reclassified to conform with the current-year presentation. (4) Included in interest income are loan fees of $1,253 for 1997, $1,364 for 1996 and $1,310 for 1995. (5) Table I has not been tax equated. * The change due to the volume/rate variance and average volume and percent roundings have been allocated to volume. 8 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE II. INVESTMENT PORTFOLIO (BOOK VALUE) (Thousands of Dollars)
CARRYING AMOUNT OF INVESTMENT SECURITIES December 31, December 31, December 31, 1997 (a) 1996 (a) 1995 (a) ------------ ------------ ------------ U. S. Treasury, government corporations and agencies $ 195,048 $ 213,360 $ 206,117 State and political subdivisions 4,676 4,980 3,873 Mortgage-backed securities 53,996 18,529 9,256 Other 4,445 5,344 5,273 --------- --------- --------- Total $ 258,165 $ 242,213 $ 224,519 ========= ========= =========
MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD December 31, December 31, December 31, December 31, December 31, December 31, 1997 1997 1996 1996 1995 1995 Amount (a) Yield (b) Amount (a) Yield (b) Amount (a) Yield (b) ------------ ------------ ------------ ------------ ------------ ------------ 1 Year or less $ 69,916 5.88% $ 73,215 6.50% $ 52,749 5.85% 1 Year - 5 Years 136,317 6.19% 155,662 6.06% 159,807 6.19% 5 Years - 10 Years 11,652 6.54% 6,784 6.09% 5,315 5.65% After 10 Years 40,280 6.51% 6,552 6.16% 6,648 6.44% --------- ---- --------- ---- --------- ---- Total $ 258,165 6.17% $ 242,213 6.20% $ 224,519 6.10% ========= ==== ========= ==== ========= ====
Refer to Note 3 to the consolidated financial statements. a. Held to maturity and available for sale portfolios are combined. b. Weighted average yield is calculated by dividing income, which has not been tax equated on tax-exempt obligations, within each maturity range by outstanding amount of the related investment. 9 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE III. LOAN PORTFOLIO, PART A. TYPES OF LOANS (Thousands of Dollars)
December 31, December 31, December 31, December 31, December 31, 1997 1996 1995 1994 1993 Real estate Loans Construction and land development $ 30,951 $ 34,733 $ 54,840 $ 50,954 $ 60,437 Secured by 1-4 family residential properties 217,782 217,631 216,180 221,098 200,018 Other real estate loans 189,251 178,644 157,925 160,234 164,304 Commercial and industrial loans 138,812 124,788 120,692 114,103 115,375 Loans to individuals 53,500 47,466 40,648 36,810 34,130 All other loans 6,143 5,821 4,084 5,639 4,402 -------- -------- -------- -------- -------- Total loans $636,439 $609,083 $594,369 $588,838 $578,666 ======== ======== ======== ======== ========
10 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE III. LOAN PORTFOLIO, PART B. MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES (Thousands of Dollars) The commercial mortgages and Industrial Development Authority mortgages that are presently being written at both fixed and floating rates of interest are written for a three (3) year term with a monthly payment based on a fifteen (15) year amortization schedule. At each three-year anniversary date of the mortgages, the interest rate is renegotiated and the term of the loan is extended for an additional three years. At each three-year anniversary date of the mortgages, the Bank also has the right to require payment in full. These are included in the "Due in One to Five Years" category on issue. The borrower has the right to prepay the loan at any time. The residential mortgages are presently being written on a one (1) or three (3) year rollover basis. The monthly payment on these mortgages is based on a thirty (30) year amortization schedule, unless the borrower requests a shorter payout period. These are included in the "Due in One to Five Years" category on issue. Fixed rate residential mortgages are also being written for terms of 15 and 30 years and are included in the "Due in over Five Years" category.
As of December 31, 1997 Due in One Due in One Due in Over Year or Less to Five Years Five Years Total ------------ ------------- ----------- ---------- Real estate loans Construction and land development $ 19,611 $ 11,340 $ -- $ 30,951 Secured by 1-4 family residential properties 70,082 83,873 63,827 217,782 Other real estate loans 75,955 52,466 60,830 189,251 Commercial and industrial loans 110,653 21,725 6,434 138,812 Loans to individuals 19,428 30,156 3,916 53,500 All other loans 3,070 2,447 626 6,143 -------- -------- -------- -------- Total loans $298,799 $202,007 $135,633 $636,439 ======== ======== ======== ======== Loans with a predetermined interest rate $ 73,281 $119,989 $131,732 $325,002 Loans with a floating or variable interest rate 225,518 82,018 3,901 311,437 -------- -------- -------- -------- $298,799 $202,007 $135,633 $636,439 ======== ======== ======== ========
11 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE III. LOAN PORTFOLIO, PART C. RISK ELEMENTS (Thousands of Dollars) Nonaccrual, Past-Due and Restructured Loans and Other Assets Performance of the entire loan portfolio is reviewed on a regular basis by bank management and loan officers. A number of factors regarding the borrower, such as overall financial strength, collateral values, and repayment ability, are considered in deciding on what actions should be taken when determining the collectibility of interest for accrual purposes. Potential Problem Loans When collectibility of interest and/or principal on a particular loan is questionable, the loan is placed on nonaccrual status. If, at the time a decision is made to cease accruing interest, it is determined that the collection of previously accrued but unpaid interest is uncertain, a stipulated amount is charged against current income. Conversly, if a loan on nonaccrual status is paid in full, including interest, a credit is made to current income. The $3,342 of nonaccruing and restructured loans in 1997 includes $664 which although nonaccruing is performing on current contractual status. If nonaccrual loans had been performing in accordance with their contractual terms, additional income of $187 would have been recorded in 1997. Interest income of $94 was recognized on these 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. Loan Concentrations At December 31, 1997, there were no concentrations of loans exceeding 10% of total loans other than disclosed in Table III, Part A. Other Assets At December 31, 1997, $250 in Other Real Estate Owned was classified as nonperforming. This amount represents all Other Real Estate Owned as of December 31, 1997.
1997 1996 1995 1994 1993 Principal Principal Principal Principal Principal Balance Balance Balance Balance Balance --------- --------- --------- --------- --------- Nonaccruing loans $3,136 $4,671 $5,855 5,149 $6,991 ====== ====== ====== ====== ====== Accruing loans 90 days or more past due: Real estate loans Construction and land development -- -- -- -- -- Secured by 1-4 family dwellings 308 373 234 76 87 Other real estate 36 12 93 172 36 Commercial and industrial loans 21 19 -- -- 67 Loans to individuals 159 180 174 247 108 All other loans -- -- -- -- -- ------ ------ ------ ------ ------ Total loans, 90 days or more past due 524 584 501 495 298 ====== ====== ====== ====== ====== Restructured loans, not included above 206 281 352 422 -- ====== ====== ====== ====== ======
12 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE IV. SUMMARY OF LOAN LOSS EXPERIENCE (Thousands of Dollars) 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 and the provisions to 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 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 under FAS 114, which was adopted by the Corporation effective January 1, 1995. Any of the above factors may cause the provision to fluctuate. As the accompanying table indicates, the amount of loan loss provision charged to expense for 1997 was $1,310 compared to $1,045 in 1996 and $1,895 in 1995. 13
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Average amount of loans outstanding $617,082 $590,144 $583,398 $585,644 $563,678 Loan loss reserve at beginning of period $ 9,801 $ 8,854 $ 8,876 $ 7,198 $ 8,240 Charge-offs: Real estate loans 552 990 1,842 701 1,367 Commercial and industrial loans 319 20 416 615 2,270 Loans to individuals 286 175 236 127 215 Home equity -- -- -- -- -- Other -- -- -- -- -- -------- -------- -------- -------- -------- Total charge-offs: 1,157 1,185 2,494 1,443 3,852 ======== ======== ======== ======== ======== Recoveries: Real estate loans 167 458 316 146 139 Commercial and industrial loans 78 529 157 816 9 Loans to individuals 66 76 75 170 114 Home equity -- -- -- -- -- Other 5 24 29 39 68 -------- -------- -------- -------- -------- Total recoveries: 316 1,087 577 1,171 330 ======== ======== ======== ======== ======== Net charge-offs: 841 98 1,917 272 3,522 Additions to loan loss reserve 1,310 1,045 1,895 1,950 2,480 Loan loss reserve at end of period $ 10,270 $ 9,801 $ 8,854 $ 8,876 $ 7,198 ======== ======== ======== ======== ========
Loan type Loan type Loan type Loan type Loan type as % as % as % as % as % Amount in reserve by category: of loans of loans of loans of loans of loans -------- -------- -------- -------- -------- Real estate loans 68.8 $ 3,511 70.8 $3,146 72.2 $ 817 73.4 $2,999 73.4 $2,468 Commercial and industrial loans 21.8 610 20.5 1,332 20.3 2,459 19.4 2,495 19.9 2,384 Loans to individuals 8.4 617 7.8 354 6.8 347 6.3 490 5.9 402 All other loans 1.0 11 0.9 11 0.7 11 1 15 0.8 538 Unallocated portion 5,521 4,958 5,220 2,876 1,406 ------- ------ ------- ------ ------ Total $10,270 $9,801 $ 8,854 $8,875 $7,198 ======= ====== ======= ====== ====== Ratio of Net charge-offs versus average loans 0.1% 0.0% 0.3% 0.0% 0.6%
Total cash-basis and nonaccrual loans of $3,136 at December 31, 1997, were generally comprised of $1,356 in residential real estate loans and $1,780 in commercial real estate loans. 14 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE V. DEPOSITS (Thousands of Dollars)
1997 1996 1995 ---- ---- ---- A. Average: Noninterest-bearing demand deposits $ 118,960 $ 107,993 $ 99,547 Interest checking 73,521 73,973 72,886 Money Market savings 77,013 63,849 67,858 Saving deposits 128,546 126,118 125,419 Time deposits 356,964 353,443 330,074 --------- --------- --------- Total $ 755,004 $ 725,376 $ 695,784 ========= ========= =========
Due 3 months Due 3 - 6 Due 6 - 12 Due over or less months months 12 months ------- ------ ------ --------- B. Year-end balance: ($100 or more) outstanding as of December 31, 1997 Certificates of deposit $ 1,700 $ 1,463 $6,578 $ 10,834 Other time deposits $ 25,778 $ 6,678 $ 618 $ 1,520
Note: Univest and its subsidiaries do not have any foreign offices or foreign deposits TABLE VI. RETURN ON EQUITY AND ASSETS (RATIOS) (Shown as percentages) 1997 1996 1995 ---- ---- ---- Return on assets 1.4 1.4 1.3 Return on equity 13.0 12.9 13.2 Dividend payout ratio 28.2 23.1 24.9 Equity to assets ratio 10.9 10.5 10.1 15 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES INTEREST RATE SENSITIVITY ANALYSIS (Thousands of dollars)
Within 1 - 5 Over 1 Year Years 5 Years ------ ----- ------- Rate Sensitive Interest Earnings Assets Federal funds sold $ 2,000 $ -- $ -- Investment securities 100,696 157,126 6,254 Loans 357,182 241,361 36,110 Hedging instruments (30,000) 30,000 -- -------- -------- -------- $429,878 $428,487 $ 42,364 Rate Sensitive Liabilities Interest bearing deposits 362,991 298,846 812 Borrowed funds 58,544 -- -- Net non-interest bearing funds (a) -- -- 179,536 -------- -------- -------- 421,535 298,846 180,348 Excess interest-earning assets (liabilities) 8,343 129,641 (137,984) Cumulative excess interest earning assets (liabilities) 8,343 137,984 -- ======== ======== ========
Notes to interest sensitivity analysis: (a) Net non-interest bearing funds is the sum of non-interest bearing liabilities and shareholders equity minus non-interest earning assets. 16 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE VII. SHORT TERM BORROWINGS (Thousands of Dollars) LOANS AND SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
1997 1996 1995 ---- ---- ---- Balance at December 31 $48,389 $48,661 $45,657 Weighted average interest rate at year end 3.3% 3.3% 3.4% Maximum amount outstanding at any month's end $58,521 $53,109 $45,657 Average amount outstanding during the year $49,133 $44,001 $37,760 Weighted average interest rate during the year 3.3% 3.3% 3.4%
17 Item 2. Properties Univest and its subsidiaries occupy thirty-one properties in Montgomery and Bucks Counties in Pennsylvania, which are used principally as banking offices. Note 6, appearing on page 22 of the Annual Report to Shareholders (Exhibit 13), is hereby incorporated in this item. Item 3. Legal Proceedings There are no proceedings pending other than the ordinary routine litigation incident to the business of the corporation. Item 4. Submission of Matters to a Vote of Security Holders Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 7, 1998. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Incorporated by reference from the 1997 Annual Report to Shareholders (Exhibit 13), pages 40-41. Dividend and other restrictions are incorporated by reference from Note 16 of the 1997 Annual Report to Shareholders (Exhibit 13), pages 27 and 28. The number of shareholders as of February 28, 1998, was 1,918. Item 6. Selected Financial Data Incorporated by reference from the 1997 Annual Report to Shareholders (Exhibit 13), page 33. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Incorporated by reference from the 1997 Annual Report to Shareholders (Exhibit 13), pages 34 through 39. Dividend and other restrictions are incorporated by reference from Note 16 of the 1997 Annual Report to Shareholders (Exhibit 13), pages 27 and 28. Item 7 (a). Qualitative and Quantitative Disclosures About Market Risk The information contained under "Business - Market Risk" in Part I of this Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data Consolidated balance sheets of the registrant at December 31, 1997 and 1996, and consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years ended December 31, 1997, and the independent auditors' report thereon are incorporated by reference from the 1997 Annual Report to Shareholders (Exhibit 13), pages 13 through 16. Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosures None 18 PART III Item 10. Directors and Executive Officers of the Registrant Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 7, 1998. Executive Officers The names and ages of all executive officers of Univest are as follows:
Principal Occupation Officer Title during past 5 years Age Merrill S. Moyer Chairman Chairman and Chief Executive 64 Officer of the Corporation and Chairman of Union National Bank Norman L. Keller Executive Vice President and CEO of Pennview 60 President Savings Bank and Executive Vice President of the Corporation Marvin A. Anders Vice Chairman Vice Chairman of the Corporation 58 and Union National Bank William S. Aichele President President of the Corporation 47 and President and CEO of Union National Bank Wallace H. Bieler Executive Vice Executive Vice President 52 President and CFO of the Corporation and Union National Bank
There is no family relationship among any of the executive officers of Univest. Item 11. Executive Compensation Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 7, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 7, 1998. Item 13. Certain Relationships and Related Transactions During 1997, the Corporation and its subsidiaries paid $568,568 to H. Mininger & Son, Inc. for building expansion projects which were in the normal course of business on substantially the same terms as available from others. H. Ray Mininger, Alternate Director, is president of H. Mininger & Sons, Inc. 19 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a) 1. & 2. Financial Statements and Schedules The financial statements listed in the accompanying index to financial statements are filed as part of this annual report. 3. Listing of Exhibits The exhibits listed on the accompanying index to exhibits are filed as part of this annual report. (b) There were no reports on Form 8-K filed in the fourth quarter of 1997. (c) Exhibits - The response of this portion of item 14 is submitted as a separate section. (d) Financial Statement Schedules - none. 20 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES [Item 14(a)]
Annual Report to Shareholders* ---------------- Report of Independent Auditors 32 Consolidated balance sheets at 13 December 31, 1997 and 1996 Consolidated statements of income for each of the 14 three years in the period ended December 31, 1997 Consolidated statements of changes in shareholders' equity 15 for each of the three years in the period ended December 31, 1997 Consolidated statements of cash flows for 16 each of the three years in the period ended December 31, 1997 Notes to consolidated financial statements 17-31
Financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. * Refers to page numbers in the Annual Report to Shareholders for 1997 (Exhibit 13) which is incorporated by references. 21 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-02513) pertaining to the Univest 1996 Employee Stock Purchase Plan of Univest Corporation of Pennsylvania and in the related Prospectus, in the Registration Statement (Form S-8 No. 333-24987) pertaining to the Univest Corporation of Pennsylvania 1993 Long Term Incentive Plan and in the related Prospectus, and in the Registration Statement (Form S-3 No. 333-02509) pertaining to the Univest Dividend Reinvestment and Stock Purchase Plan of Univest Corporation of Pennsylvania of our report dated January 28, 1998, with respect to the consolidated financial statements of Univest Corporation of Pennsylvania included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 24, 1998 22 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES INDEX TO EXHIBITS [Item 14(a)] Description ----------- (3) Articles of Incorporation and By-Laws Articles of Incorporation and Charter are incorporated by reference to the 1973 Form 10-K. (4) Instruments Defining the Rights of Security Holders, Including Debentures Specimen Copy of Common Stock is incorporated herein by reference to the 1973 Form 10-K. (10) Material Contracts - Not Applicable. (11) Statement Re Computation of Per Share Earnings - See Footnote 13 in Item (13). (12) Statements Re Computation of Ratios - Not Applicable. (13) Annual Report to Shareholders (18) Letter Re Change in Accounting Principles - Not Applicable. (19) Previously Unfiled Documents - Not Applicable. (21) Subsidiaries of the Registrant (23) Consent of independent auditors (24) Power of Attorney - Not Applicable. 23 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES EXHIBIT [Item 14(c)] Subsidiaries ------------ (1) Union National Bank and Trust Company is chartered in the Commonwealth of Pennsylvania. (2) Pennview Savings Bank is chartered in the Commonwealth of Pennsylvania. (3) Univest Leasing Corporation is chartered in the Commonwealth of Pennsylvania. (4) Univest Realty Corporation is chartered in the Commonwealth of Pennsylvania. (5) Univest Mortgage Company is chartered in the Commonwealth of Pennsylvania. (6) Univest Financial Planning Company is chartered in the Commonwealth of Pennsylvania. (7) Univest Insurance Company is chartered in the State of Arizona. (8) Univest Electronic Services Corporation is chartered in the Commonwealth of Pennsylvania. All the subsidiaries do business under the above names. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIVEST CORPORATION OF PENNSYLVANIA Registrant By: /s/ Robert H. Schong --------------------------------- Robert H. Schong Secretary, March 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ Merrill S. Moyer /s/ James L. Bergey - -------------------------------------------------- --------------------------------- Merrill S. Moyer James L. Bergey Chairman and Director, March 25, 1998 Director, March 25, 1998 /s/ Marvin A. Anders /s/ Harold M. Mininger - -------------------------------------------------- --------------------------------- Marvin A. Anders Harold M. Mininger Vice Chairman, March 25,1998 Director, March 25, 1998 /s/ Wallace H. Bieler /s/ Paul G. Shelly - ------------------------------------------------- --------------------------------- Wallace H. Bieler Paul G. Shelly Executive Vice President and CFO, March 25, 1998 Director, March 25, 1998 /s/ Charles H. Hoeflich /s/ R. Lee Delp - -------------------------------------------------- --------------------------------- Charles H. Hoeflich R. Lee Delp Chairman Emeritus, March 25, 1998 Director, March 25, 1998 /s/ Norman L. Keller /s/ Clair W. Clemens - -------------------------------------------------- --------------------------------- Norman L. Keller Clair W. Clemens Executive Vice President, March 25, 1998 Director, March 25, 1998 /s/ John U. Young /s/ Thomas K. Leidy - -------------------------------------------------- --------------------------------- John U. Young Thomas K. Leidy Director, March 25, 1998 Director, March 25, 1998
25 Consolidated Financial Highlights (in thousands, except per share data) Percentage 1997 1996 Change ------------------------------------------------------------------------------------------------------------------------ Earnings Net interest income............................................ $ 40,628 $ 39,001 4.2% Income before income taxes..................................... 19,164 17,066 12.3 Applicable income taxes........................................ 5,987 5,028 19.1 Net income..................................................... 13,177 12,038 9.5 Per Share* Average shares outstanding..................................... 7,730 7,820 (1.2) Income before income taxes..................................... $ 2.47 $ 2.18 13.3 Applicable income taxes........................................ $ .77 $ .64 20.3 Net income: Basic.......................................................... $ 1.70 $ 1.54 10.4 Diluted........................................................ $ 1.69 $ 1.54 9.7 Book value..................................................... $ 13.64 $ 12.51 9.0 Balance Sheets Investments.................................................... $ 258,165 $ 242,213 6.6 Net loans...................................................... 625,293 597,268 4.7 Deposits....................................................... 792,868 733,768 8.1 Shareholders' equity........................................... 104,604 97,267 7.5 Assets......................................................... 973,157 912,459 6.7 - -------------------------------------------------------------------------------------------------------------------------------
* Per share amounts and shares outstanding have been adjusted to reflect all stock dividends and stock splits declared through January 1998. 1
Consolidated Balance Sheets (in thousands, except share data) - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 1996 ---------------------------------- Assets Cash and due from banks................................................................... $ 33,352 $ 38,934 Time deposits with other banks............................................................ 5,001 360 Investment securities held to maturity (market value $142,205 and $173,013 at December 31, 1997 and 1996, respectively)............................................................ 141,972 172,785 Investment securities available for sale.................................................. 116,193 69,428 Federal funds sold and other short-term investments....................................... 2,000 69 Loans..................................................................................... 635,563 607,069 Less: Reserve for possible loan losses.................................................. (10,270) (9,801) ---------------------------------- Net loans............................................................................. 625,293 597,268 ---------------------------------- Premises and equipment, net............................................................... 16,604 16,843 Accrued interest and other assets......................................................... 32,742 16,772 ================================== Total assets.......................................................................... $ 973,157 $ 912,459 ================================== Liabilities Demand deposits, noninterest bearing...................................................... $ 129,892 $ 122,087 Demand deposits, interest bearing......................................................... 176,115 138,953 Savings deposits.......................................................................... 127,965 125,483 Time deposits............................................................................. 358,896 347,245 ---------------------------------- Total deposits........................................................................ 792,868 733,768 ---------------------------------- Securities sold under agreements to repurchase............................................ 48,389 48,661 Other short-term borrowings............................................................... 1,157 12,055 Accrued expenses and other liabilities.................................................... 17,064 13,633 Long-term debt............................................................................ 9,075 7,075 ---------------------------------- Total liabilities..................................................................... 868,553 815,192 ---------------------------------- Shareholders' equity Common stock, $5 par value; 12,000,000 shares authorized at December 31, 1997 and 1996 and 7,854,322 and 3,927,161 shares issued at December 31, 1997 and 1996 and 7,671,305 and 3,888,594 shares outstanding at December 31, 1997 and 1996, respectively................................................ 39,272 19,636 Additional paid-in capital................................................................ 14,908 34,544 Retained earnings......................................................................... 53,691 44,260 Net unrealized securities gains........................................................... 350 18 Treasury stock, 183,017 shares at cost at December 31, 1997 and 38,567 shares at cost at December 31, 1996.............................................. (3,617) (1,191) ---------------------------------- Total shareholders' equity............................................................ 104,604 97,267 ---------------------------------- Total liabilities and shareholders' equity................................................ $ 973,157 $ 912,459 ==================================
See accompanying notes to consolidated financial statements. 2
Consolidated Statements of Income (in thousands, except share data) - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1997 1996 1995 ---------------------------------------------------- Interest income Interest and fees on loans: Taxable............................................................... $ 52,264 $ 50,046 $ 49,400 Exempt from federal income taxes...................................... 2,059 1,938 1,922 ---------------------------------------------------- Total interest and fees on loans........................................ 54,323 51,984 51,322 Interest and dividends on investment securities: U.S. Government obligations........................................... 12,274 13,197 10,445 Obligations of state and political subdivisions....................... 219 172 118 Other securities...................................................... 2,418 1,079 1,021 Interest on time deposits with other banks.............................. 83 30 23 Interest on federal funds sold.......................................... 223 220 616 ---------------------------------------------------- Total interest income............................................... 69,540 66,682 63,545 ---------------------------------------------------- Interest expense Interest on demand deposits............................................. 3,608 2,820 3,202 Interest on savings deposits............................................ 3,183 3,132 3,078 Interest on time deposits............................................... 19,825 19,622 17,769 Interest on long-term debt.............................................. 425 358 314 Interest--all other...................................................... 1,871 1,749 1,600 ---------------------------------------------------- Total interest expense.............................................. 28,912 27,681 25,963 ---------------------------------------------------- Net interest income........................................................ 40,628 39,001 37,582 Provision for loan losses.................................................. 1,310 1,045 1,895 ---------------------------------------------------- Net interest income after provision for loan losses........................ 39,318 37,956 35,687 ---------------------------------------------------- Other income Trust................................................................... 2,695 2,290 2,032 Service charges on demand deposits...................................... 1,924 1,814 1,629 Gains (losses) on sales of securities................................... 95 (9) (66) Gains on sales of mortgages............................................. 95 43 101 Other................................................................... 3,078 2,091 2,399 ---------------------------------------------------- Total other income.................................................. 7,887 6,229 6,095 ---------------------------------------------------- Other expenses Salaries and benefits................................................... 15,476 14,461 13,320 Net occupancy........................................................... 2,178 2,073 1,856 Equipment............................................................... 2,500 2,428 1,898 Other................................................................... 7,887 8,157 8,484 ---------------------------------------------------- Total other expenses................................................ 28,041 27,119 25,558 ---------------------------------------------------- Income before income taxes................................................. 19,164 17,066 16,224 Applicable income taxes.................................................... 5,987 5,028 4,997 ---------------------------------------------------- Net income $ 13,177 $ 12,038 $ 11,227 ==================================================== Net income per share: Basic.................................................................... $ 1.70 $ 1.54 $ 1.43 ==================================================== Diluted.................................................................. $ 1.69 $ 1.54 $ 1.43 ====================================================
See accompanying notes to consolidated financial statements. 3
Consolidated Statements of Changes in Shareholders' Equity (in thousands, except share data) - ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Additional Securities Common Paid-in Retained Gains (Losses) Treasury Stock Capital Earnings Stock Total ------------------------------------------------------------------------------ Balance at December 31, 1994..................... $ 15,717 $ 8,090 $ 56,983 $(482) $ (150) $ 80,158 Change in unrealized gains and (losses) on investment securities available for sale, net of income taxes of $394................. 743 743 Cash dividends declared ($.355 per share)..... (2,792) (2,792) 25% stock dividend payable March 1, 1996, 1,568,508 shares at fair market value....... 3,921 26,469 (30,390) - Net income for 1995........................... 11,227 11,227 ------------------------------------------------------------------------------ Balance at December 31, 1995..................... 19,638 34,559 35,028 261 (150) 89,336 Change in unrealized gains and (losses) on investment securities available for sale, net of income taxes of $(135)............... (243) (243) Cash dividends declared ($.355 per share)..... (2,773) (2,773) Cash paid in lieu of fractional shares........ (2) (15) (17) Stock issued under dividend reinvestment and employee stock purchase plans........... (2) 249 247 Exercise of stock options..................... (31) 140 109 Acquisition of treasury stock (88,182 shares)............................. (1,430) (1,430) Net income for 1996........................... 12,038 12,038 ------------------------------------------------------------------------------ Balance at December 31, 1996..................... 19,636 34,544 44,260 18 (1,191) 97,267 Change in unrealized gains on investment securities available for sale, net of income taxes of $179........................ 332 332 Cash dividends declared ($0.48 per share)..... (3,707) (3,707) 100% stock dividend payable May 1, 1998....... 19,636 (19,636) - Stock issued under dividend reinvestment and employee stock purchase plans........... (7) 863 856 Exercise of stock options..................... (32) 91 59 Acquisition of treasury stock (151,964 shares)............................ (3,380) (3,380) Net income for 1997........................... 13,177 13,177 ------------------------------------------------------------------------------ Balance at December 31, 1997..................... $ 39,272 $ 14,908 $ 53,691 $ 350 $ (3,617) $104,604 ==============================================================================
See accompanying notes to consolidated financial statements. 4
Consolidated Statements of Cash Flows (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1997 1996 1995 ---------------------------------------------------- Cash flows from operating activities Net income.............................................................. $ 13,177 $ 12,038 $ 11,227 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses in excess of (less than) net charge-offs.... 469 947 (22) Depreciation of premises and equipment................................ 2,407 2,239 1,725 Discount accretion on investment securities and time deposits........................................ (412) (613) (346) Deferred (benefit) income tax......................................... (162) (119) 353 Realized (gains) losses on investment securities...................... (95) 9 66 Realized gains on sales of mortgages.................................. (95) (43) (101) Decrease in net deferred loan fees.................................... (497) (116) (258) Decrease (increase) in interest receivable and other assets........... 717 (604) 1,115 Increase (decrease) in accrued expenses and other liabilities......... 3,350 (2,445) 2,069 ---------------------------------------------------- Net cash provided by operating activities........................... 18,859 11,293 15,828 Cash flows from investing activities Proceeds from maturing time deposits.................................... - 96 45 Proceeds from maturing securities held to maturity...................... 75,289 48,528 47,288 Proceeds from maturing securities available for sale.................... 9,471 6,380 5,873 Proceeds from sales of securities available for sale.................... 24,024 10,991 14,994 Purchases of time deposits.............................................. (4,641) - - Purchases of investment securities held to maturity..................... (44,144) (52,329) (76,059) Purchases of investment securities available for sale................... (79,576) (31,039) (13,138) Premium paid to purchase Bank-Owned Life Insurance...................... (15,000) - - Net (increase) decrease in federal funds sold and other short-term investments.......................................... (1,931) 16,458 (9,679) Proceeds from sales of mortgages........................................ 8,667 10,356 8,276 Net increase in loans................................................... (36,569) (31,295) (13,109) Capital expenditures.................................................... (2,168) (2,882) (3,976) ---------------------------------------------------- Net cash used in investing activities............................... (66,578) (24,736) (39,485) Cash flows from financing activities Assumption of deposits.................................................. 14,186 - 11,916 Net increase in deposits................................................ 43,227 8,741 13,470 Net (decrease) increase in short-term borrowings........................ (11,170) 13,904 1,889 Proceeds from long-term debt............................................ 2,000 7,000 - Purchases of treasury stock............................................. (3,380) (1,430) - Stock issued under dividend reinvestment and employee stock purchase plans......................................... 856 249 - Proceeds from exercise of stock options................................. 59 109 - Cash dividends.......................................................... (3,641) (3,087) (2,541) Repayments of long-term debt............................................ - (4,010) (5,353) ---------------------------------------------------- Net cash provided by financing activities........................... 42,137 21,476 19,381 ---------------------------------------------------- Net (decrease) increase in cash and due from banks...................... (5,582) 8,033 (4,276) Cash and due from banks at beginning of year............................ 38,934 30,901 35,177 ---------------------------------------------------- Cash and due from banks at end of year $ 33,352 $ 38,934 $ 30,901 ==================================================== Supplemental disclosures of cash flow information Cash paid during the year for: Interest.............................................................. $ 28,425 $ 27,058 $ 23,899 Income taxes.......................................................... $ 5,975 $ 5,100 $ 4,290
See accompanying notes to consolidated financial statements. 5 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies Organization Univest Corporation of Pennsylvania (the Corporation) through its wholly owned subsidiaries, Union National Bank and Trust Company (Union) and Pennview Savings Bank (Pennview), is engaged in domestic commercial and retail banking services and provides a full range of banking and trust services to its customers. Union and Pennview serve the Montgomery and Bucks Counties of Pennsylvania through 31 banking offices and provide banking and trust services to the residents and employees of 12 retirement communities. Principles of Consolidation The consolidated financial statements include the accounts of Univest Corporation of Pennsylvania and its wholly owned subsidiaries, including Union National Bank and Trust Company and Pennview Savings Bank, collectively referred to herein as the "Banks." All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investment Securities Securities are classified as investments and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Securities purchased with the intention of recognizing short-term profits are placed in the trading account and are carried at market value. Securities not classified as investment or trading are designated securities available for sale and carried at fair value with unrealized gains and losses reflected in shareholders' equity. The accumulated net unrealized gain on available-for-sale securities included in retained earnings was $350 at December 31, 1997 and $18 at December 31, 1996. Gains and losses on sales of securities are generally computed on a specific security basis. Loans Loans are stated at the principal amount less net deferred loan fees and unearned discount. Interest income on commercial, consumer, and mortgage loans is recorded on the outstanding balance method, using actual interest rates applied to daily principal balances. Unearned discount on installment loans for Pennview Savings Bank is recognized in income using the actuarial method, which materially approximates the interest method. Accrual of interest income on loans ceases when collectibility of interest and/or principal is questionable. If it is determined that the collection of interest previously accrued is uncertain, such accrual is reversed and charged to current earnings. Thereafter, income is only recognized as payments are received for loans on which there is no uncertainty as to the collectibility of principal. Loan Fees Fees collected upon loan origination and certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as yield adjustments. Upon prepayment or other disposition of the underlying loans before their contractual maturities, any associated unamortized fees or costs are recognized. Derivative Financial Instruments The Company uses interest-rate swap agreements to synthetically manage the interest-rate characteristics of its floating-rate loan portfolio to a more desirable fixed-rate basis. Interest-rate differentials to be paid or received as a result of interest-rate swap agreements are accrued and recognized as an adjustment of interest income related to the designated floating-rate loans. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The fair values of interest-rate swap agreements are not recognized in the financial statements. Realized and unrealized gains or losses at the time of maturity, termination, sale, or repayment of a derivative contract or designated item are recorded in a manner consistent with the original designation of the derivative in view of the nature of the termination, sale, or repayment transaction. Amounts related to interest-rate swaps are deferred and amortized as an adjustment to interest income over the original period of interest exposure, provided the designated asset continues to exist or is probable of occurring. Realized and unrealized changes in fair value or derivatives designated with items that no longer exist or are no longer probable of occurring are recorded as a component of the gain or loss arising from the disposition of the designated item. Reserve for Possible Loan Losses The reserve for loan losses is based on management's evaluation of the loan portfolio under current economic conditions and such other factors which deserve recognition in estimating possible loan losses. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Additions to the reserve arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge-offs reduce the reserve. Loans are charged off when there has been permanent impairment. 6 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- The Corporation adopted Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," effective January 1, 1995. As a result of applying the rules, certain impaired loans are reported at the present value of expected future cash flows using the loan's initial effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The adoption of these standards did not have any impact on the Corporation's financial position or results of operations. Premises and Equipment Land is stated at cost, and bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method and charged to operating expenses over the estimated useful lives of the assets (bank premises and improvements - average life 25 years; furniture and equipment - average life 10 years). Other Real Estate Owned Other real estate owned represents properties acquired through customers' loan defaults, and is included in accrued interest and other assets. The real estate is stated at an amount equal to the loan balance prior to foreclosure, plus costs incurred for improvements to the property, but no more than the fair market value of the property, less estimated costs to sell. Stock Options The Corporation grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Corporation has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) requires use of option valuation models in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, however, the effect of applying SFAS No. 123 to the Corporation's stock-based awards results in net income and earnings per share that are not materially different from amounts reported. Dividend Reinvestment and Employee Stock Purchase Plans In April 1996, the shareholders approved the Univest Dividend Reinvestment Plan (the "Reinvestment Plan") and the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). 500,000 shares of common stock are available for issuance under each of the plans. Employees may elect to make contributions to the Purchase Plan in an aggregate amount not less than 2% nor more than 10% of such employee's total compensation. These contributions are then used to purchase stock during an offering period determined by the Corporation's Administrative Committee. The purchase price of the stock is established by the Administrative Committee provided, however, that the purchase price will not be less than 85% of the lesser of the market price on the first day or last day of the offering period. During 1997 and 1996, 36,134 and 13,034 shares, respectively, were issued under the Reinvestment Plan, with 450,832 shares available for future purchase as of December 31, 1997. During 1997 and 1996, 5,614 and 2,602 shares, respectively, were issued under the Purchase Plan, with 491,784 shares available for future purchase as of December 31, 1997. Income Taxes Deferred income taxes are provided on temporary differences between amounts reported for financial statement and tax purposes in accordance with SFAS No. 109, "Accounting for Income Taxes." Intangible Assets The purchase price of Pennview in excess of the fair value of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over a 15-year period. At December 31, 1997, the unamortized balance is approximately $1.3 million ($1.5 million at December 31, 1996), net of accumulated amortization of approximately $1.4 million ($1.2 million at December 31, 1996). Other intangible assets, net of accumulated amortization, include core deposit intangibles, and are being amortized over their estimated useful lives ranging from seven to ten years. At December 31, 1997, the unamortized balance is approximately $2.4 million ($900 at December 31, 1996), net of accumulated amortization of approximately $600 ($400 at December 31, 1996.) 7 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Retirement Plan Substantially all employees are covered by a noncontributory retirement plan. The plan provides benefits based on a formula of each participant's final average pay. The amount funded is not more than the maximum amount deductible for federal income tax purposes. In addition, Univest sponsors a 401(k) deferred salary savings plan, which is a qualified defined contribution plan, and which covers all employees of Univest and its subsidiaries, and provides that the Corporation make matching contributions as defined by the plan. Postretirement Benefits Other Than Pensions The Corporation provides certain postretirement health care and life insurance benefits for retired employees. The Corporation accrues the costs associated with providing these benefits during the active service periods of employees in accordance with Statement of Financial Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106). Statement of Cash Flows Univest has defined those items included in the caption "Cash and due from banks" as cash and cash equivalents. Trust Assets Assets held by Union in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of Union. Trust service income is reported on a cash basis. Reporting such income on a cash basis instead of the accrual basis does not materially affect net income or financial position. Stock Split On January 28, 1998 the Corporation's board of directors declared a 100% stock dividend in the form of a stock split to be 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. Recent Accounting Pronouncements Effective January 1, 1997, the Corporation adopted Statement of Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." (SFAS No. 125) provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, for certain secured borrowings, and collateral transactions, and for extinguishments of liabilities. The adoption of Statement 125 did not to have a material impact on the Corporation's financial condition or results of operations. In 1997, the Financial 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 effective for financial statements for periods ending after December 15, 1997. The Company does not believe the adoption of this standard will have any impact on the Company's financial statements. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both Statements become effective for fiscal periods beginning after December 15, 1997, with early adoption permitted. The Company is evaluating the additional disclosure requirements these Statements are expected to have on the Company's financial statements. Note 2. Restrictions on Cash and Due from Bank Accounts Union is required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for 1997 was $1.1 million and for 1996 was $3.8 million. 8 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Note 3. Investment Securities Securities with a market value of $161.6 million and $101.5 million at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and for other purposes as required by law. The following table shows the amortized cost and approximate market value of the held-to-maturity securities and available-for-sale securities at December 31, 1997 and 1996, by maturity within each type:
December 31, 1997 December 31, 1996 ------------------------------------------------- ----------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized UnrealizedUnrealized Market Held-to-Maturity Securities Cost Gains Losses Value Cost Gains Losses Value ------------------------------------------------- ----------------------------------------- U.S. Treasury, government corporations and agencies obligations: Within 1 year................ $ 42,903 $ 28 $ (67) $ 42,864 $ 58,448 $ 421 $ (2) $ 58,867 1 to 5 years................. 85,215 311 (83) 85,443 95,510 234 (391) 95,353 ------------------------------------------------- ----------------------------------------- 128,118 339 (150) 128,307 153,958 655 (393) 154,220 ------------------------------------------------- ----------------------------------------- State and political subdivisions: Within 1 year................ 980 2 - 982 265 - - 265 1 to 5 years................. 3,696 43 - 3,739 4,715 29 (5) 4,739 ------------------------------------------------- ----------------------------------------- 4,676 45 - 4,721 4,980 29 (5) 5,004 ------------------------------------------------- ----------------------------------------- Mortgage-backed securities: 1 to 5 years................. 6,309 21 (8) 6,322 9,337 30 (66) 9,301 5 to 10 years................ 2,469 - (18) 2,451 3,110 - (28) 3,082 ------------------------------------------------- ----------------------------------------- 8,778 21 (26) 8,773 12,447 30 (94) 12,383 ------------------------------------------------- ----------------------------------------- Other: 1 to 5 years................. 200 - - 200 1,200 - - 1,200 5 to 10 years................ 200 4 - 204 200 6 - 206 ------------------------------------------------- ----------------------------------------- 400 4 - 404 1,400 6 - 1,406 ------------------------------------------------- ----------------------------------------- Total........................... $ 141,972 $ 409 $ (176) $ 142,205 $172,785 $ 720 $ (492) $ 173,013 ================================================= ========================================= Securities Available for Sale U.S. Treasury, government corporations and agencies obligations: Within 1 year................ $ 25,963 $ 70 $ - $ 26,033 $ 14,489 $ 24 $ (11) $ 14,502 1 to 5 years................. 40,621 284 (8) 40,897 44,824 166 (90) 44,900 ------------------------------------------------- ----------------------------------------- 66,584 354 (8) 66,930 59,313 190 (101) 59,402 ------------------------------------------------- ----------------------------------------- Mortgage-backed securities: 5 to 10 years................ 8,919 77 (13) 8,983 3,516 - (42) 3,474 Over 10 years................ 36,106 216 (87) 36,235 2,627 - (19) 2,608 ------------------------------------------------- ----------------------------------------- 45,025 293 (100) 45,218 6,143 - (61) 6,082 ------------------------------------------------- ----------------------------------------- Other: Over 10 years................ 4,045 - - 4,045 3,944 - - 3,944 ------------------------------------------------- ----------------------------------------- 4,045 - - 4,045 3,944 - - 3,944 ------------------------------------------------- ----------------------------------------- Total........................... $ 115,654 $ 647 $ (108) $ 116,193 $ 69,400 $ 190 $ (162) $ 69,428 ================================================= =========================================
9 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. During the year ended December 31, 1997, available-for-sale debt securities with a fair value at the date of sale of $24,024 were sold ($10,981 in 1996). Gross realized gains on such sales totaled $102 during 1997 ($12 in 1996 and $0 in 1995), and the gross realized losses totaled $7 during 1997 ($21 in 1996 and $66 in 1995). The net adjustment to unrealized holding gains on available-for-sale securities included as a separate component of shareholders' equity totaled $350 in 1997 and $18 in 1996. Unrealized losses in investment securities at December 31, 1997 and 1996 do not represent permanent impairments. At December 31, 1997 and 1996, there were no investments in any single non-federal issuer representing more than 10% of shareholders' equity. Note 4. Loans The following is a summary of the major loan categories:
December 31, 1997 1996 ---------------------------------- Real estate--construction.................................................................... $ 30,951 $ 34,733 Real estate--commercial...................................................................... 189,251 178,644 Real estate--residential..................................................................... 217,782 217,631 Commercial and industrial.................................................................... 138,812 124,788 Loans to individuals......................................................................... 53,500 47,466 All other.................................................................................... 6,143 5,821 ---------------------------------- Total loans.................................................................................. 636,439 609,083 Less: Unearned income........................................................................ (876) (2,014) ---------------------------------- $ 635,563 $ 607,069 ==================================
At December 31, 1997, loans to directors and executive officers of Univest and companies in which directors have an interest aggregated $9,825. These loans have been made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with customers and did not involve more than the normal risk of collectibility or present other unfavorable terms. The summary of activity for the past year is as follows:
Balance at Amounts Balance at January 1, 1997 Additions Collected December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ $12,480 $6,606 $9,261 $9,825
Note 5. Reserve for Possible Loan Losses A summary of the transactions in the reserve for possible loan losses is as follows:
1997 1996 1995 ---------------------------------------------------- Balance at beginning of year............................................... $ 9,801 $ 8,854 $ 8,876 Provision charged to operating expenses.................................... 1,310 1,045 1,895 Recoveries................................................................. 316 1,087 577 Loans charged off.......................................................... (1,157) (1,185) (2,494) ---------------------------------------------------- Balance at end of year..................................................... $ 10,270 $ 9,801 $ 8,854 ====================================================
Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS No.114) and Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (SFAS No. 118). Under SFAS No. 114, the allowance for credit losses related to loans that are identified for evaluation in accordance with SFAS No. 114 is based on discounted cash flows using the loans' initial effective interest rate or the fair value of collateral for certain collateral-dependent loans. Included in the total impaired loans is $652 ($1,375 at December 31, 1996) against which $204 ($495 at December 31, 1996) of the allowance for loan losses is allocated. SFAS No. 118 amended SFAS No. 114's income recognition policy and clarifies SFAS No. 114's disclosure requirements. At December 31, 1997, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $1,197, all of which were on a 10 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - ------------------------------------------------------------------------------- nonaccrual basis, ($2,640 at December 31, 1996). The average recorded investment in impaired loans during the year ended December 31, 1997 was approximately $2,360 ($2,823 at December 31, 1996). For the year ended December 31, 1997, the Corporation recognized $94 in interest income on those impaired loans ($93 at December 31, 1996). At December 31, 1997, the total of nonaccrual and restructured loans was $2,066 ($3,713 at December 31, 1996). If these loans had been performing in accordance with their contractual terms, additional interest income of $187, $275, and $530 would have been recorded in 1997, 1996, and 1995, respectively. In addition, Pennview had first residential mortgage loans of $1,276 at December 31, 1997 ($1,239 at December 31, 1996) which were over 90 days delinquent. The total of the real estate owned at December 31, 1997 was $250 ($553 at December 31, 1996). Other expenses for 1996 include costs of $225 associated with the write-down of other real estate owned. No such costs were incurred for the year ended December 31, 1997. Note 6. Premises and Equipment
December 31, 1997 1996 ---------------------------------- Land and land improvements................................................................... $ 3,288 $ 3,261 Premises and improvements.................................................................... 16,016 15,066 Furniture and equipment...................................................................... 17,210 16,569 ---------------------------------- 36,514 34,896 Less: accumulated depreciation............................................................... (19,910) (18,053) ---------------------------------- $ 16,604 $ 16,843 ==================================
As of December 31, 1997, Univest and its subsidiaries were obligated under noncancelable leases for various premises and equipment. A summary of the future minimum rental commitments under noncancelable operating leases net of related sublease revenue is as follows: 1998-$473; 1999-$472; 2000-$430; 2001-$324; 2002-$183. Rental expense charged to operations was $487, $350, and $232 for 1997, 1996, and 1995, respectively. Note 7. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The assets and liabilities giving rise to the Corporation's deferred tax liabilities and assets as of December 31, 1997 and 1996 are as follows:
1997 1996 ---------------------------------- Deferred tax assets: Loan loss................................................................................. $ 3,470 $ 3,119 Deferred compensation..................................................................... 257 275 Deferred fee income....................................................................... - 118 Postretirement benefits................................................................... 413 385 ---------------------------------- 4,140 3,897 Deferred tax liabilities: Accretion................................................................................. 284 406 Retirement plans.......................................................................... 214 188 Depreciation.............................................................................. 327 454 Intangible assets......................................................................... 325 351 Deferred fee income....................................................................... 223 - Mark-to-market adjustment................................................................. 73 34 Other..................................................................................... 473 233 ---------------------------------- Net deferred tax assets...................................................................... $ 2,221 $ 2,231 ==================================
The provision for federal and state income taxes included in the accompanying consolidated statements of income consists of the following:
1997 1996 1995 ---------------------------------------------------- Currently payable.......................................................... $ 6,149 $ 5,147 $ 4,644 Deferred................................................................... (162) (119) 353 ---------------------------------------------------- $ 5,987 $ 5,028 $ 4,997 ==================================================== 11
Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- The effective tax rates are less than the statutory federal rate of 35% because interest on loans and investment securities of state and political subdivisions is exempt from income tax. Deferred federal income taxes (tax benefits) arise from timing differences in the recognition of income and expenses for tax and financial reporting purposes. Pennview is permitted to deduct an annual addition to a tax reserve for bad debts, which differs from the method used for financial accounting purposes. As of December 31, 1997, Pennview has taken approximately $2,596 in bad debt deductions for which no deferred income taxes have been provided, since management does not intend to use the reserve for purposes other than to absorb bad debt losses. Note 8. Retirement Plan Net pension expense recognized in 1997, 1996, and 1995 amounted to $165, $360, and $185, respectively, and is summarized as follows:
1997 1996 1995 ---------------------------------------------------- Service cost--benefits earned during the period............................. $ 539 $ 553 $ 364 Interest cost on projected benefit obligation.............................. 887 824 733 Actual return on plan assets............................................... (2,702) (1,513) (2,240) Net amortization and deferral.............................................. 1,441 496 1,328 ---------------------------------------------------- $ 165 $ 360 $ 185 ====================================================
Assumptions used to measure the projected benefit obligation and the expected return on assests included in net periodic pension costs are set forth in the following table:
1997 1996 1995 ---------------------------------------------------- Discount rate.............................................................. 7.25% 6.75% 8.50% Increase in compensation levels............................................ 8.50% 8.50% 8.50% Expected long-term return on assets........................................ 5.60% 5.60% 5.60%
The funded status is reconciled to prepaid pension expense recognized in the financial statements at December 31, 1997 and 1996, as follows:
1997 1996 ---------------------------------- Fair value of plan assets.................................................................... $ 15,085 $ 12,270 Actuarial present value of benefit obligations: Vested 9,738 8,874 Nonvested................................................................................. 491 473 ---------------------------------- Accumulated benefit obligation............................................................... 10,229 9,347 Effect of projected future salary increase................................................... 2,478 2,560 ---------------------------------- Projected benefit obligation................................................................. 12,707 11,907 ---------------------------------- Plan assets in excess of projected benefit obligation........................................ 2,378 363 Unrecognized net asset at transition......................................................... (378) (504) Unrecognized prior service costs............................................................. (609) (685) Unrecognized net (gain) loss................................................................. (604) 1,086 ---------------------------------- Prepaid pension expense...................................................................... $ 787 $ 260 ================================== Assumed discount rate for obligation......................................................... 7.00% 7.25% Assumed salary increase rate................................................................. 5.10% 5.60%
The unrecognized net asset at transition is being amortized on the straight-line method over 15 years. Plan assets include marketable equity securities, corporate and government debt securities, and certificates of deposit. Pension expense for the 401(k) deferred salary savings plan for the years ended December 31, 1997, 1996, and 1995 was $243, $224, and $203, respectively. Note 9. Other Postretirement Benefit Plans The Corporation provides certain postretirement health care and life insurance benefits for retired employees. The liability for these postretirement benefits is unfunded. Statement of Financial Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106) establishes the accounting for postretirement benefits. SFAS No. 106 requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees. 12 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- The liability for postretirement benefits included in other liabilities at December 31, 1997 and 1996 was as follows:
1997 1996 ---------------------------------- Accumulated postretirement benefit obligation: Retirees.................................................................................. $ (766) $ (705) Fully eligible active plan participants................................................... (38) (35) Other active plan participants............................................................ (372) (342) Unrecognized net loss........................................................................ 138 91 ---------------------------------- Accrued postretirement benefit cost.......................................................... $ (1,038) $ (991) ==================================
Net periodic postretirement benefit cost for the years ended December 31, 1997, 1996, and 1995 includes the following components:
1997 1996 1995 ---------------------------------------------------- Service cost--benefits earned during the period............................. $ 19 $ 20 $ 13 Interest cost on accumulated postretirement benefit obligation............. 78 73 68 Net amortization and deferral of plan assets............................... - 3 - ---------------------------------------------------- $ 97 $ 96 $ 81 ====================================================
For measurement purposes, an 8.0 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 1997; the rate was assumed to decrease gradually by 1/2 percent per year, reaching 5 percent in 2003 and after. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $67 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $5. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.00 percent and 7.25 percent, at December 31, 1997 and 1996, respectively, and the assumed salary increase rate was 5.10 percent and 5.60 percent at December 31, 1997 and 1996, respectively. Note 10. Long-Term Incentive Plan The Corporation adopted the 1993 Long-Term Incentive Plan, whereby the Corporation may grant options to employees to purchase up to 500,000 shares of common stock. The plan provides for the issuance of options to purchase common shares at prices not less than 100 percent of the fair market value at the date of option grant. Options are exercisable as to 33 percent of the optioned shares each year from the date of grant for a period not exceeding six years. 334,742 common shares were available for future options at December 31, 1997. Transactions involving the plan are summarized as follows:
Shares Option Price Under Option Per Share ---------------------------------------------------- Outstanding at December 31, 1994......... 62,500 $13.60 Granted.................................. 109,626 15.50 Exercised................................ - - ---------------------------------------------------- Outstanding at December 31, 1995......... 172,126 13.60 - $15.50 Granted.................................. - - Exercised................................ (8,034) 13.60 ---------------------------------------------------- Outstanding at December 31, 1996......... 164,092 13.60 - 15.50 Granted.................................. 5,500 30.00 Exercised................................ (4,334) 13.60 ---------------------------------------------------- Outstanding at December 31, 1997......... 165,258 $13.60 - $30.00 ====================================================
Note 11. Time Deposits The aggregate amount of certificates of deposit in denominations of $100 or more was $20,575 at December 31, 1997, and $22,169 at December 31, 1996, with interest expense of $1,176 for 1997, and $1,111 for 1996. Other time deposits in denominations of $100 or more were $34,594 at December 31, 1997, and $30,514 at December 31, 1996, with interest expense of $2,139 for 1997 and $1,740 for 1996. 13 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Note 12. Long-Term Debt At December 31, 1997 and 1996, long-term debt consisted of the following:
December 31, December 31, Description 1997 1996 Interest Rate Maturity - ---------------------------------------- ---------------- ----------------- ---------------------------------- ------------------- Federal Home Loan Bank Advance $ 3,500 $ 3,500 5.35% (variable based on a May 2001 fed funds index) Federal Home Loan Bank Advance 3,500 3,500 5.31% (variable based on a March 2001 fed funds index) Federal Home Loan Bank Advance 75 75 4.00% September 2006 Federal Home Loan Bank Advance 2,000 - 5.47% (variable based on a September 2002 3 month LIBOR index) ================ ================= $ 9,075 $ 7,075 ================ =================
Advances from the Federal Home Loan Bank are collateralized by Federal Home Loan Bank stock and substantially all first mortgage loans of Pennview. The advances are subject to a prepayment fee in the event of repayment of the advance in whole or in part prior to maturity. Note 13. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands):
1997 1996 1995 ---------------------- ---------------------- --------------------- Numerator: Numerator for basic and diluted earnings per share - income available to common shareholders............... 13,177 12,038 11,227 Denominator: Denominator for basic earnings per share - weighted-average shares........................ 7,730 7,820 7,842 Effect of dilutive securities: Employee stock options...................... 45 15 16 ---------------------- ---------------------- --------------------- ---------------------- ---------------------- --------------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions............................ 7,775 7,835 7,858 ====================== ====================== ===================== Basic earnings per share........................... $ 1.70 $ 1.54 $ 1.43 ====================== ====================== ===================== Diluted earnings per share......................... $ 1.69 $ 1.54 $ 1.43 ====================== ====================== =====================
For additional disclosures regarding the employee stock options, see Note 10. Note 14. Financial Instruments with Off-Balance-Sheet Risk and Commitments Loan commitments are made to accommodate the financial needs of the Institutions' customers. Standby letters of credit commit the Institutions to make payments on behalf of customers when certain specified future events occur. They primarily are issued to support commercial paper, medium- and long-term notes and debentures, including industrial revenue obligations. Historically, substantially all standby letters of credit expire unfunded. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Institutions' normal credit policies. Collateral is obtained based on management's credit assessment of the customer. 14 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- The Banks offer commercial, mortgage, and consumer credit products to their customers in the normal course of business which are detailed in Note 4. These products represent a diversified credit portfolio and are generally issued to borrowers within the Banks' branch office systems in eastern Pennsylvania. The ability of the customers to repay their credit is, to some extent, dependent upon the economy in the Banks' market areas. The Banks also control their credit risks by limiting the amount of credit to any business, institution, or individual, but as of December 31, 1997, the Banks have identified the due from banks' balance as a significant concentration of credit risk because it contains a balance due from a single depository institution in the amount of $16,864 which is unsecured. Management evaluates the creditworthiness of the institution on at least a quarterly basis in an effort to monitor its credit risk associated with this concentration. The following schedule summarizes the Corporation's off-balance-sheet financial instruments:
Contract or Notional Amount -------------------------- Financial instruments representing credit risk: Commitments to extend credit................................ $163,011 Standby letters of credit or commercial letters of credit... 22,366 Interest rate swaps, notional principal amount.............. 50,000
The Corporation may enter into interest-rate swaps in managing its interest-rate risk. In these swaps, the Corporation agrees to exchange, at specified intervals, the difference between fixed- and floating-interest amounts calculated on 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 December 31, 1997, $50.0 million in notional interest-rate swaps were outstanding as compared to $30.0 million outstanding at December 31, 1996. The contracts entered into by the Corporation expire as follows: $20.0 million in notional principal amount in March 1998, $20.0 million in notional principal amount in first quarter 1999, and $10.0 million in third quarter 1999. The impact of the interest-rate swaps on net interest income for the year ended December 31, 1997 was a positive $74 thousand and for the year ended December 31, 1996 a positive $69 thousand. 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 December 31, 1997, the market value of interest-rate swaps in a favorable value position was $119 thousand, while the market value of interest-rate swaps in an unfavorable position totaled $4 thousand. At December 31, 1996, the market value of interest-rate swaps in a favorable position was $38 thousand, while the market value of interest-rate swaps in an unfavorable position totaled $6 thousand. Credit risk also exists when the counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Note 15. Fair Values of Financial Instruments Statement of Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS No. 107), requires all entities to disclose the estimated fair value of its financial instruments whether or not recognized in the balance sheet. For Univest, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. Many of the Corporation's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporation's general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities other than residential mortgage loans held for sale and those investment securities classified as available for sale. Significant estimations and present value calculations, which are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows, were used by the Corporation for the purposes of this disclosure. Estimated fair values have been determined by the Corporation using the best available data, and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. Various methodologies are described in the accompanying notes. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of readily available active secondary market valuations for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Certain estimated fair values cannot be substantiated by comparison to independent valuation sources and, in many cases, might not be realized in immediate settlement of the instrument. 15 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- The following table represents the estimates of fair value of financial instruments:
December 31, 1997 December 31, 1996 --------------------------------------- --- ---------------------------------------- Carrying or Carrying or Notional/Contract Fair Notional/Contract Fair Amount Value Amount Value -------------------- ------------------ --- --------------------- ------------------ Assets: Cash and short-term assets............... $ 40,353 $ 40,353 $ 39,363 $ 39,363 Investment securities.................... 258,165 258,398 242,213 242,441 Net loans................................ 625,293 626,069 597,268 596,729 Liabilities: Demand deposits and savings deposits..... 433,972 433,972 386,523 386,523 Time deposits............................ 358,896 359,902 347,245 351,250 Short-term borrowings.................... 49,546 49,546 60,716 60,716 Long-term debt........................... 9,075 9,075 7,075 7,075 Off-Balance-Sheet: Commitments to extend credit............. 163,011 (196) 159,935 (219) Letters of credit........................ 22,366 (336) 18,671 (280) Interest-rate swap, notional principal amount................................. 50,000 115 30,000 32
The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: Cash and due from banks and short-term investments: The carrying amounts reported in the balance sheets for cash and due from banks, time deposits with other banks, and federal funds sold and other short-term investments approximates those assets' fair values. Investment securities (including mortgage-backed securities): Fair values for investment securities are based on quoted market prices. Loans: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. Off-balance-sheet instruments: Fair values for the Corporation's off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of securities sold under repurchase agreements, and other short-term borrowings approximate their fair values. Long-term debt: The fair values of the Corporation's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Corporation's current borrowing rates for similar types of borrowing arrangements. Note 16. Regulatory Matters The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 16 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). At December 31, 1997, the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 1997, the most recent notification from the Office of Comptroller of the Currency and Federal Deposit Insurance Corporation (FDIC) categorized the Banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Institutions' category. The Banks' actual capital amounts and ratios are also presented in the following table.
To Be Well- Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------- ----------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------- ----------------------------- -------------------------- As of December 31, 1997: Total Capital (to Risk-Weighted Assets): Consolidated $ 109,541 15.2% $ 57,532 8.0% $ 71,916 10.0% Union National Bank 87,883 14.0% 50,256 8.0% 62,820 10.0% Pennview Savings Bank 15,292 18.4% 6,666 8.0% 8,332 10.0% Tier I Capital (to Risk-Weighted Assets): Consolidated $ 101,399 14.1% $ 28,766 4.0% $ 43,149 6.0% Union National Bank 80,874 12.9% 25,128 4.0% 37,692 6.0% Pennview Savings Bank 14,462 17.4% 3,333 4.0% 4,999 6.0% Tier I Capital (to Average Assets): Consolidated $ 101,399 10.9% $ 37,065 4.0% $ 46,331 5.0% Union National Bank 80,874 10.3% 31,489 4.0% 39,362 5.0% Pennview Savings Bank 14,462 10.7% 5,396 4.0% 6,746 5.0% As of December 31, 1996: Total Capital (to Risk-Weighted Assets): Consolidated $ 102,200 15.5% $ 52,870 8.0% $ 66,088 10.0% Union National Bank 80,858 14.1% 45,750 8.0% 57,188 10.0% Pennview Savings Bank 14,769 17.9% 6,599 8.0% 8,248 10.0% Tier I Capital (to Risk-Weighted Assets): Consolidated $ 94,765 14.3% $ 26,435 4.0% $ 39,653 6.0% Union National Bank 74,533 13.0% 22,875 4.0% 34,313 6.0% Pennview Savings Bank 13,856 16.8% 3,299 4.0% 4,949 6.0% Tier I Capital (to Average Assets): Consolidated $ 94,765 10.7% $ 35,487 4.0% $ 44,359 5.0% Union National Bank 74,533 10.1% 29,536 4.0% 36,920 5.0% Pennview Savings Bank 13,856 9.8% 5,667 4.0% 7,084 5.0%
Dividend and Other Restrictions The approval of the Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, Union can declare dividends in 1998 without approval of the Comptroller of the Currency of approximately $16,191 plus an additional amount equal to the Bank's net profits for 1997 up to the date of any such dividend declaration. The Federal Reserve Act requires that extension of credit by the Bank to certain affiliates, including Univest (parent), be secured by readily marketable securities, that extension of credit to any one affiliate be limited to 10% of the Bank's capital and surplus as defined, and that extensions of credit to all such affiliates be limited to 20% of Union's capital and surplus. 17 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Note 17. Parent Company Financial Information Condensed financial statements of Univest, Parent Company only, follow: Balance Sheets
December 31, 1997 1996 ---------------- ----------------- Assets: Deposits with bank subsidiary............................................................. $ 556 $ 27 Loan to non-bank subsidiary............................................................... - 275 Investments in U.S. Government obligations held to maturity............................... 1,000 2,638 Investments in subsidiaries, at equity in net assets: Banks................................................................................... 99,482 90,891 Non-banks............................................................................... 5,543 5,423 Other assets.............................................................................. 1,969 2,332 ================ ================= Total assets.......................................................................... $ 108,550 $ 101,586 ================ ================= Liabilities: Dividends payable......................................................................... $ 961 $ 895 Other liabilities......................................................................... 2,985 3,424 ---------------- ----------------- Total liabilities..................................................................... 3,946 4,319 ---------------- ----------------- Shareholders' equity......................................................................... 104,604 97,267 ================ ================= Total liabilities and shareholders' equity............................................ $ 108,550 $ 101,586 ================ ================= Statements of Income Year ended December 31, 1997 1996 1995 ----------------- ---------------- ----------------- Dividends from banks....................................................... $ 5,150 $ 4,723 $ 5,251 Other income............................................................... 7,695 6,973 6,479 ----------------- ---------------- ----------------- Total operating income.................................................. 12,845 11,696 11,730 Operating expenses......................................................... 8,105 7,566 6,675 ----------------- ---------------- ----------------- Income before income tax benefit and equity in undistributed income of subsidiaries.................................... 4,740 4,130 5,055 Applicable income tax (benefit) expense.................................... (57) (133) (27) ----------------- ---------------- ----------------- Income before equity in undistributed income of subsidiaries............... 4,797 4,263 5,082 Equity in undistributed income (loss) of subsidiaries: Banks................................................................... 8,260 7,744 6,205 Non-banks............................................................... 120 31 (60) ----------------- ---------------- ----------------- ================= ================ ================= Net income................................................................. $ 13,177 $ 12,038 $ 11,227 ================= ================ =================
18 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Statements of Cash Flows
Year ended December 31, 1997 1996 1995 ----------------- ---------------- ----------------- Cash flows from operating activities Net income.............................................................. $ 13,177 $ 12,038 $ 11,227 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries.................. (8,380) (7,775) (6,145) Increase in other assets............................................ (135) (1,000) (750) Depreciation of premises and equipment.............................. 498 392 253 (Decrease) increase in other liabilities............................ (438) 1,098 338 ----------------- ---------------- ----------------- Net cash provided by operating activities......................... 4,722 4,753 4,923 Cash flows from investing activities Proceeds from maturities of securities held to maturity................. 2,638 1,999 5,838 Purchases of investment securities held to maturity..................... (1,000) (2,638) (1,999) Investment in non-bank subsidiaries..................................... - - (1,160) ----------------- ---------------- ----------------- Net cash provided by (used in) investing activities............... 1,638 (639) 2,679 Cash flows from financing activities Purchases of treasury stock............................................. (3,380) (1,430) - Stock issued under dividend reinvestment and employee stock purchase plans......................................... 856 249 - Proceeds from exercise of stock options................................. 59 109 - Repayment from subsidiary............................................... 275 - - Repayment of subordinated note.......................................... - - (5,000) Cash dividends.......................................................... (3,641) (3,087) (2,541) ----------------- ---------------- ----------------- Net cash used in financing activities............................. (5,831) (4,159) (7,541) ----------------- ---------------- ----------------- Net increase (decrease) in deposits with bank subsidiary................ 529 (45) 61 Deposits with bank subsidiary at beginning of year...................... 27 72 11 ================= ================ ================= Deposits with bank subsidiary at end of year............................ $ 556 $ 27 $ 72 ================= ================ =================
During 1997, 1996, and 1995, the parent company made income tax payments of $5,975, $5,100, and $4,250, respectively, and made interest payments of $0, $0, and $305, respectively. 19 Notes to Consolidated Financial Statements (Cont.) (dollars in thousands, except share data) - -------------------------------------------------------------------------------- Note 18. Quarterly Data (Unaudited) The unaudited results of operations for the quarters for the years ended December 31, 1997 and 1996 were as follows: 1997 Quarterly Financial Data
December 31 September 30 June 30 March 31 ---------------- ----------------- ---------------- ----------------- Interest income........................................... $ 17,935 $ 17,492 $ 17,456 $ 16,657 Interest expense.......................................... 7,552 7,301 7,176 6,883 ---------------- ----------------- ---------------- ----------------- Net interest income.................................. 10,383 10,191 10,280 9,774 Provision for loan losses................................. 415 315 370 210 ---------------- ----------------- ---------------- ----------------- Net interest income after provision for loan losses.. 9,968 9,876 9,910 9,564 Other income.............................................. 2,095 2,116 1,807 1,869 Other expenses............................................ 7,418 6,666 6,916 7,041 ---------------- ----------------- ---------------- ----------------- Income before income taxes................................ 4,645 5,326 4,801 4,392 Applicable income taxes................................... 1,437 1,653 1,518 1,379 ================ ================= ================ ================= Net income........................................... $ 3,208 $ 3,673 $ 3,283 $ 3,013 ================ ================= ================ ================= Per share data: Net income: Basic................................................ $ .42 $ .47 $ .42 $ .39 ================ ================= ================ ================= Diluted.............................................. $ .41 $ .47 $ .42 $ .39 ================ ================= ================ ================= ================ ================= ================ ================= Dividends per share ................................... $ .125 $ .125 $ .115 $ .115 ================ ================= ================ ================= 1996 Quarterly Financial Data December 31 September 30 June 30 March 31 ---------------- ----------------- ---------------- ----------------- Interest income........................................... $ 16,985 $ 16,849 $ 16,526 $ 16,322 Interest expense.......................................... 7,050 7,005 6,833 6,793 ---------------- ----------------- ---------------- ----------------- Net interest income.................................. 9,935 9,844 9,693 9,529 Provision for loan losses................................. 200 315 215 315 ---------------- ----------------- ---------------- ----------------- Net interest income after provision for loan losses.. 9,735 9,529 9,478 9,214 Other income.............................................. 1,648 1,452 1,500 1,629 Other expenses............................................ 6,858 7,157 6,572 6,532 ---------------- ----------------- ---------------- ----------------- Income before income taxes................................ 4,525 3,824 4,406 4,311 Applicable income taxes................................... 1,406 936 1,359 1,327 ================ ================= ================ ================= Net income........................................... $ 3,119 $ 2,888 $ 3,047 $ 2,984 ================ ================= ================ ================= Per share data: Net income: Basic................................................ $ .40 $ .37 $ .39 $ .38 ================ ================= ================ ================= Diluted.............................................. $ .40 $ .37 $ .39 $ .38 ================ ================= ================ ================= ================ ================= ================ ================= Dividends per share.................................... $ .115 $ .08 $ .08 $ .08 ================ ================= ================ =================
The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." 20 Report of Independent Auditors - -------------------------------------------------------------------------------- Board of Directors and Shareholders Univest Corporation of Pennsylvania We have audited the accompanying consolidated balance sheets of Univest Corporation of Pennsylvania as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Univest Corporation of Pennsylvania at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Philadelphia, Pennsylvania January 28, 1998 21
Five-Year Performance Highlights - ------------------------------------------------------------------------------------------------------------------------------------ Basic Earnings Per Share* Average Deposits (Millions of Dollars) _______________________________________________ ____________________________________________________ INSERT CHART HERE INSERT CHART HERE _______________________________________________ ____________________________________________________ Average Loans Income Before Change in Accounting Principle (Millions of Dollars) (Millions of Dollars) _______________________________________________ ____________________________________________________ INSERT CHART HERE INSERT CHART HERE _______________________________________________ ____________________________________________________ - ------------------------------------------------------------------------------------------------------------------------------------ Selected Financial Data (In Thousands, except per share data) Year ended December 31, 1997 1996 1995 1994 1993 ----------------- ---------------- ----------------- ---------------- ----------------- Total assets............................ $ 973,157 $ 912,459 $ 881,888 $ 847,154 $ 789,887 Long-term obligations................... 9,075 7,075 4,085 9,438 10,277 Interest income......................... 69,540 66,682 63,545 55,921 54,402 Net interest income..................... 40,628 39,001 37,582 34,648 31,633 Provision for loan losses............... 1,310 1,045 1,895 1,950 2,480 Net income.............................. 13,177 12,038 11,227 10,120 8,787 Net income per share: Basic................................ $1.70 $1.54 $1.43 $1.29 $1.12 Diluted.............................. $1.69 $1.54 $1.43 $1.29 $1.12 Dividends declared per share............ 0.48 0.355 0.355 0.30 0.28
22 Management's Discussion And Analysis Of Financial Condition And Results Of Operations - --------------------------------------------------------------------------------
Results of Operations Univest Corporation of Pennsylvania consolidated net income (in thousands) and earnings per share for 1997, 1996, and 1995 were as follows: 1997 1996 1995 ------------------- ------------------ ------------------ Net income $ 13,177 $ 12,038 $ 11,227 Net income per share: Basic..................................... 1.70 1.54 1.43 Diluted................................... 1.69 1.54 1.43
1997 versus 1996 - ---------------- The 1997 results compared to 1996 include the following significant pretax components: - Net interest income rose $1.6 million or 4.1% due to a 4.7% increase in average earning assets. The net interest margin remained constant at 4.7% - The provisions for loan losses increased $265 thousand or 25.4% due to higher net charge-offs during 1997. - Other income increased by $1.0 million or 47.6% due to earnings from the purchase of Bank-Owned Life Insurance, increased fee income, and a gain on the sale of a closed branch office building. - Salaries and benefits increased $1.0 million or 6.9% due to staff additions directly tied to the opening of 4 new branch locations, and normal salary increases. - Net occupancy expense increased $105 thousand or 5.1% due to the addition of several branch locations in 1997 and 1996. - Other expenses decreased $270 thousand or 3.3% mainly due to a one-time special assessment of $800 thousand paid by Pennview Savings Bank in 1996 to recapitalize the Savings Association Insurance Fund, and offset by increases in marketing consulting, and ATM expenses during 1997. 1996 versus 1995 - ---------------- The 1996 results compared to 1995 include the following significant pretax components: - Net interest income rose $1.4 million or 3.8% due to a 4.8% increase in average earning assets offset by a 2.1% decrease in the net interest margin. - The provision for loan losses decreased $850 thousand or 44.9% due to an improvement in asset quality. - Salaries and benefits increased $1.1 million or 9.0% due to staff additions directly tied to the opening of new branch locations, and normal salary increases. - Net occupancy expense increased $217 thousand or 11.7% due to the addition of several branch locations in 1995 and 1996. - Equipment expense rose $530 thousand or 27.9% also due to new branch locations and installation of a new computer system. - Other expenses decreased $327 thousand or 3.9% mainly due to decrease in costs associated with the disposition of real estate owned offset by an $800 thousand one-time special assessment paid by Pennview Savings Bank to recapitalize the Savings Association Insurance Fund (SAIF). Net Interest Income Net interest income is the difference between interest earned on loans, investments and other earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation's revenues. The following table demonstrates a trend of increasing amounts for 1995 through 1997. Sensitivities associated with the mix of assets and liabilities are numerous and very complex, thus the Corporation commits significant time to maximizing the net interest margin. The Asset/Liability Management and Investment Committees, along with the Funds Management Department, work to implement strategies with the intent and effort to at least maintain or improve the net interest margin. The investment portfolio is and has been primarily short-term in nature, resulting in frequent repricing opportunities for Univest over the three (3) year period analyzed in this report. It is important to again underscore the complexities associated with asset/liability pricing noting the competition within the marketplace that can dramatically impact the margin results. For this reason, as we look to the future, it must be understood that an improving or increasing net interest income is not certain. As discussed later in this section, Univest maintains a short-term positive gap resulting from a large floating-rate loan portfolio. 23 The following table presents a summary of Univest's average balances, the yields earned on average assets, the cost of average liabilities, and shareholders' equity for the years ended December 31, 1997, 1996, and 1995:
1997 1996 1995 -------------------------------- --------------------------------- --------------------------------- Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Rate Balance Expense Rate Balance Expense Rate ------------------------------------------------------------------------------------------------------- Interest-earning assets: Investments $ 247,495 $ 15,217 6.1% $ 239,649 $ 14,698 6.1% $ 203,266 $ 12,223 6.0% Loans 625,849 54,323 8.7% 594,832 51,984 8.7% 583,820 51,322 8.8% ------------------------------------------------------------------------------------------------------- Total interest-earning 873,344 69,540 8.0% 834,481 66,682 8.0% 787,086 63,545 8.1% assets Noninterest-earning assets 55,893 55,376 56,946 =========== =========== ============ Total assets $ 929,237 $ 889,857 $ 844,032 =========== =========== ============ Interest-bearing liabilities: Deposits $ 636,044 26,616 4.2% $ 617,383 25,574 4.1% $ 596,237 24,049 4.0% Borrowings 61,266 2,296 3.7% 56,046 2,107 3.8% 47,177 1,914 4.1% ------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 697,310 28,912 4.1% 673,429 27,681 4.1% 643,414 25,963 4.0% Noninterest-bearing 130,747 122,932 115,526 liabilities ----------- ----------- ------------ Total liabilities 828,057 796,361 758,940 Shareholders' equity 101,180 93,496 85,092 ----------- ----------- ------------ Total liabilities and shareholders' equity $ 929,237 $ 889,857 $ 844,032 ==========------------ =========== ============ ============ =========== Net interest income $ 40,628 $ 39,001 $ 37,582 ============ ============ =========== Interest-rate spread 3.9% 3.9% 4.1% =========== ============ ============ Net interest margin on weighted average 4.7% 4.7% 4.8% interest-earning assets =========== ============ ============ Ratio of average interest-earning assets to average 125.2% 123.9% 122.3% interest-bearing liabilities =========== ============ ============
Interest Income Interest and fees on loans increased 4.4% or $2.3 million from the $52.0 million recorded for the year ended December 31, 1996 as compared to the $54.3 million for the year ended December 31, 1997. The increase was due to increased volume. Although the prime rate increased from the 8.25% at January 1, 1997 to 8.50% in March 1997, the average interest yield on the portfolio remained constant at 8.7% for the year ended December 31, 1997. Interest and fees on loans increased $700 thousand or 1.4% when comparing the $52.0 million for 1996 to the $51.3 million for 1995. This increase was due to increased volume offset by a prime rate decrease. The prime rate decreased from 8.5% at January 1, 1996 to 8.25% in February 1996, reducing the average portfolio yield from 8.8% in 1995 to 8.7% in 1996. Tax-free interest remained fairly constant when comparing the $2.0 million for December 31, 1997 with the $1.9 million recorded for December 31, 1996 and 1995. Interest on U.S. Government obligations decreased from $13.2 million for the year ended December 31, 1996 to $12.3 million at December 31, 1997. The decrease was due to decreases in both volume and rate. Interest on government obligations increased from $10.4 million for the year ended December 31, 1995 to $13.2 million at December 31, 1996. The increase was due mostly to volume. Interest and dividends on state and political subdivisions shows an increasing trend from $118 thousand in 1995 to $172 thousand in 1996 and $219 thousand in 1997. Volumes grew in each of the periods. The other securities category consists mainly of U.S. Government Agency obligations. Income on other securities has grown from $1.0 million in 1995 to $1.1 million in 1996 and $2.4 million in 1997. The increases were all due to increased volume, especially in 1997 when average balances increased from $16.3 million for 1996 to $36.5 million for 1997. Interest on federal funds sold is the resulting daily investment activity that can be volatile in both rate and volume. Interest on federal funds sold increased from $220 thousand in 1996 to $223 thousand in 1997 due to increased volume offset by decreased yield. Income decreased from $616 thousand in 1995 to $220 thousand in 1996 due to decreased volume and decreased yield. 24 Interest Expense Interest expense on demand deposits increased 28.6% or $800 thousand from $2.8 million in 1996 to $3.6 million in 1997. The increase was due to volume and rate. Interest on demand deposits decreased 12.5% or $400 thousand from $3.2 million in 1995 to $2.8 million in 1996. The decrease was due to lower volume. Interest expense in savings deposits remained stable at $3.1 million when comparing years ended December 31, 1995, 1996, and 1997. Interest expense on time deposits for the year ended December 31, 1997 was $19.8 million or $200 thousand more than the $19.6 million paid in 1996. The increase was due to slightly higher average balances. Interest expense on time deposits increased from $17.8 million in 1995 to $19.6 million in 1996, an increase of $1.8 million or 10.1%. The increase was due to more volume and higher rates. Interest expense - all other consists of interest paid on short-term borrowings such as federal funds purchased, the corporate line of credit, repurchase agreements and treasury tax and loan deposit. In addition, Union National Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account. Interest expense increased to $1.9 million in 1997 from $1.7 million in 1996 and $1.6 million in 1995. Increases were due to higher volumes and yields on short-term purchased funds. Long-Term Debt Interest on long-term debt increased from $358 thousand at December 31, 1996 to $425 thousand at December 31, 1997. This increase was due to an increase of $2.0 million in borrowings from the Federal Home Loan Bank of Pittsburgh by Pennview Savings Bank during 1997. Interest on long-term debt increased from $314 thousand in 1995 to $358 thousand in 1996 due to an increase of $3.0 million in borrowings from the Federal Home Loan Bank of Pittsburgh by Union National during 1996. Allowance For Loan Losses 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 and the provisions to 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 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 114. Any of the above criteria may cause the provision to fluctuate. The provision for loan losses for the year ended December 31, 1997 was $1.3 million as compared to $1.0 million for 1996 and $1.9 million for 1995. The increase for 1997 was due primarily to loan growth and higher net charge-offs. At December 31, 1997, the recorded investment in loans that are considered to be impaired under Statement 114 was $1.2 million (all of which were on a nonaccrual basis); the related allowance for credit losses for those loans was $204 thousand. At December 31, 1996, the recorded investment in loans considered to be impaired was $2.6 million and the related allowance for credit losses for those loans was $495 thousand. Generally, a loan (including a loan impaired under SFAS114) is classified as nonaccrual and the accrual of interest on such loan is discontinued 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 nonaccrual 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 nonaccrual 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, restructured and nonaccrual loans at December 31, 1997 total $3.3 million (versus $5.0 million at December 31, 1996 and $6.3 million at December 1995) and consist mainly of real estate-related commercial loans. For the year ended December 31, 1997, nonaccrual loans resulted in lost interest income of $187 thousand as compared to $275 thousand in 1996 and $530 thousand in 1995. 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 ratio of the allowance for loan losses to total loans at December 31, 1997 and 1996 was 1.6%. The Corporation's ratio of nonperforming assets to total loans was .57% as of December 31, 1997 and .91% as of December 31, 1996. During the first quarter of 1997, the Office of the Comptroller of the Currency completed a safety and soundness examination at Union National Bank, the Corporation's subsidiary commercial bank and during the second quarter of 1997, a similar examination was completed by the Commonwealth of Pennsylvania Department of Banking at Pennview Savings Bank. The dollar value of identified 25 potential problem loans was not revised significantly as a result of either examination. Examination procedures require individual judgments about the borrower's ability to repay loans, sufficiency of collateral values, and the effects of changing economic circumstances. The procedures are similar to those employed by the Corporation in determining the adequacy of the allowance for loan losses and in classifying loans. Judgments made by regulatory examiners may differ from those made by management. At December 31, 1997, the Corporation has $250 thousand of Other Real Estate Owned ("OREO") consisting of one commercial property ($184 thousand) and one single-family residence ($66 thousand). This amount is recorded in "Other Assets" at the lower of cost or fair market value in the accompanying consolidated balance sheets. At December 31, 1996, the Corporation had $553 thousand in OREO, and included in other operating expense in the consolidated statements of income for the years ended December 31, 1995 and 1996 were adjustments of $1.1 million and $225 thousand, respectively, to the carrying value of OREO, to approximate net realizable value. There were no such adjustments during 1997. Noninterest Income Trust income continues to be a major source of noninterest income, generating income for the year ended December 31, 1997 of $2.7 million which was $400 thousand or 17.4% more than the $2.3 million reported for year ended December 31, 1996 versus an increase of 15.0% or $300 thousand from 1995 to 1996. The increases are attributed to higher market values of assets under management and growth in the number of trust accounts. Service charges on demand deposits increased $100 thousand from $1.8 million at December 31, 1996 to $1.9 million at December 31, 1997. The increase was due mainly to increased fees per transaction. Service charges for the year ended December 31, 1996 increased $200 thousand from $1.6 million for the year ended December 31, 1995 to $1.8 million for the year ended December 31, 1996. Other income which is noninterest related consists mainly of general fee income and other miscellaneous nonrecurring types of income. It also includes various types of service charges, such as ATM fees and, for 1997, increases in the cash surrender value of Bank-Owned Life Insurance (BOLI). Other noninterest income of $3.1 million for 1997 is $1.0 million or 47.6% greater than the $2.1 million earned in 1996. The increase is attributed to a $300 thousand increase in the net cash surrender value of a $15.0 million Bank-Owned Life Insurance Policy, a nonrecurring gain on the sale of a closed branch office building, and a nonrecurring gain on the sale of a piece of commercial real estate which was being held in OREO. These gains, which totaled $230 thousand, along with approximately $500 thousand of increased fee income, mainly from various other transaction fees. The 1996 income of $2.1 million is 12.5% or $300 thousand less than the $2.4 million shown for 1995. The decrease in 1996 was the result of a nonrecurring interest recovery on a previously charged-off loan. Asset Sales Sales of mortgage loans during the year ended December 31, 1997 resulted in a pretax gain of $95 thousand as compared to a gain of $43 thousand for the year ended December 31, 1996. The increase results from decreasing long-term interest rates during 1997. The Corporation currently sells all long-term fixed-rate conforming residential mortgage loans with terms in excess of fifteen (15) years. For the year ended December 31, 1996, sales of mortgage loans provided a pretax gain of $43 thousand as compared to a gain of $101 thousand for the year ended December 31, 1995. The decrease was due to increased long-term interest rates during 1996. During 1997, securities totaling approximately $39.0 million were sold from the available-for-sale portfolio or matured, resulting in a net gain of $95 thousand. Some of the proceeds were used to fund the purchase of $15.0 million of Bank-Owned Life Insurance. In 1996, securities totaling approximately $11.0 million were sold from the available-for-sale portfolio at a net loss of $9 thousand. In 1995, securities totaling approximately $15 million were sold from the available-for-sale portfolio at a net loss of $66 thousand. Except for the securities sold to fund the purchase of Bank-Owned Life Insurance, all other sales and maturities proceeds provided yield enhancement or extended maturities. The total of debt and equity securities held in the available-for-sale portfolio as of December 31, 1997 is $116.2 million versus $69.4 million at December 31, 1996. The cumulative unrealized gain of $350 thousand, net of taxes, has been credited to shareholders' equity as of December 31, 1997. Noninterest 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. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses, attempting to provide technological innovation whenever practical, as operations change or expand. Salaries and benefits increased $1.0 million or 6.9% from $14.5 million in 1996 to $15.5 million in 1997. Salaries and benefits also increased 9.0% or $1.2 million from $13.3 million in 1995 to $14.5 million in 1996. The increases were due to normal salary and staff increases and the opening of three additional offices during 1996 and four in 1997. Net occupancy expense increased by $100 thousand or 4.7% from $2.1 million for the year ended December 31, 1996 to $2.2 million for the year ended December 31, 1997. Net occupancy also increased 10.5% or $200 thousand from $1.9 million for the year ended December 31, 1995 to $2.1 million for the year ended December 31, 1996. The increases were due to the opening of four additional offices in 1997 and three in 1996. Equipment expense also increased $100 thousand or 4.2% from $2.4 million in 1996 to $2.5 million in 1997. Equipment expense increased 26.3% from $1.9 million in 1995 to $2.4 million in 1996, an increase of $500 thousand. The increase in 1997 was due to the four additional offices, while the 1996 increase was due to the new branches plus new hardware and software for the conversion to a new computer system. 26 Other expenses of $7.9 million decreased $300 thousand or 3.7% for the year ended December 31, 1997 as compared to $8.2 million expense for 1996. This decrease was mainly due to the decrease of $800 thousand representing the one-time SAIF special assessment paid by Pennview Savings Bank in 1996. This decrease was offset by increases in other expenses such as marketing, consulting, and ATM fees. Other expenses of $8.2 million decreased $300 thousand or 3.5% for the year ended December 31, 1996 as compared to $8.5 million expense for 1995. The decrease was due mainly to a reduction in the write-down of other real estate owned from $1.1 million in 1995 to $225 thousand for 1996. This decrease was also offset by the $800 thousand paid by Pennview Savings Bank in 1996, representing the one-time SAIF special assessment. Year 2000 The year 2000 date change issue that impacts almost every area of the Corporation is recognized as to scope and potential liability; and as a result, a Year 2000 Committee was established. This group of people representing most areaes of the Corporation has developed a plan, inventoried software, identified hardware, contracts and insurance issues, all of which are under review. Testing for Year 2000 compliance has already begun on all core applications, personal computers, and ancillary systems and is expected to be completed in 1998. Also, full integration testing is scheduled for the fall of 1998. The Corporation has initiated communications with all of its significant suppliers and customers. This will enhance the level of understanding and help to identify significant areas of third-party risk. These critical business areas may require contingency plans, which are now under study. The Year 2000 project cost is estimated at approximately $400 thousand in 1998. The cost of the project and the date on which the Corporation believes it will complete the project are based on best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those anticipated. Tax Provision The provision for income taxes was $6.0 million for the year ended December 31, 1997 and $5.0 million for the years ended December 31, 1996 and 1995. The provision for income taxes for 1997, 1996, and 1995 was at effective rates of 31.2%, 29.4%, and 30.8%, respectively. The effective tax rate for the year ended December 31, 1996 reflects the recognition of $200 thousand of tax benefits for a tax refund received by Pennview Savings Bank. In addition, the effective tax rate reflects the benefits of tax credits generated from investments in low-income housing tax projects and tax-free income from investment of securities, loans, and bank-owned life insurance. Financial Condition During 1997, total assets increased to $973.2 million, an increase of $60.7 million or 6.7% over the $912.5 million in 1996. Investment securities increased $16.0 million to $258.2 million as compared to the $242.2 million at December 31, 1996. Total loans increased by $28.5 million from $607.1 million at December 31, 1996 to $635.6 million at December 31, 1997. Accrued interest and other assets increased $15.9 million from $16.8 million at December 31, 1996 to $32.7 million at December 31, 1997. The main reason for the increase was due to the purchase of bank-owned life insurance which had a cash surrender value of $15.3 million at December 31, 1997. Total deposits grew from $733.8 million at December 31, 1996 to $792.9 million at December 31, 1997, an increase of $59.1 million. Deposit growth was aided by the purchase of approximately $14.0 million of deposit liabilities during the fourth quarter of 1997. Short-term borrowings (Federal Funds Purchased) decreased by $10.9 million while long-term borrowings increased by $2.0 million resulting in a net decrease of $8.9 million in borrowing when comparing 1996 to 1997. Shareholders' equity increased $7.3 million or 7.5% to $104.6 million at December 31, 1997 compared to $97.3 million at December 31, 1996. Asset/Liability Management, Liquidity The primary functions of Asset/Liability Management are to assure adequate liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates. Univest analyzes its position by the use of Gap analysis, flow of funds reports, and a simulation model. More emphasis continues to be placed on the simulations which show the impact of different rate environments and their respective projected results relative to the current and projected balance sheet makeup. Univest focuses on the management of the one-year interest-rate sensitivity gap. The one-year cumulative gap, which reflects the Corporation's interest sensitivity over that period of time was positive at December 31, 1997. This positive or asset-sensitive gap will generally benefit the Corporation's net interest-rate margin in a rising interest-rate environment while falling interest rates will negatively impact the Corporation. The Corporation remains asset sensitive mainly as a result of a large floating-rate portfolio held by the commercial bank subsidiary. The floating loans mentioned here are tied to prime, and fall into the one-month gap category causing the asset-sensitive position. 27 The Corporation is permitted to use interest-rate swap agreements which convert a portion of its floating-rate commercial loans to a fixed-rate 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 amounts calculated on 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 December 31, 1997, $50.0 million in notional interest-rate swaps were outstanding as compared to $30.0 million outstanding at December 31, 1996. The contracts entered into by the Corporation expire as follows: $20.0 million in notional principal amount in March 1998, $20.0 million in notional principal amount in first quarter 1999, and $10.0 million in third quarter 1999. The impact of the interest-rate swaps on net interest income for the year ended December 31, 1997 was a positive $74 thousand and for the year ended December 31, 1996 a positive $69 thousand. 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 December 31, 1997, the market value of interest-rate swaps in a favorable value position was $119 thousand, while the market value of interest-rate swaps in an unfavorable position totaled $4 thousand. At December 31, 1996, the market value of interest-rate swaps in a favorable position was $38 thousand, while the market value of interest-rate swaps in an unfavorable position totaled $6 thousand. Credit risk also exists when the counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Capital Adequacy Shareholders' equity at December 31, 1997 was $104.6 million or 10.8% of total assets compared to shareholders' equity of $97.3 million or 10.7% as of December 31, 1996. December 31, 1997 shareholders' equity includes a positive adjustment of $350 thousand related to the unrealized security gains, net of taxes on investment securities available for sale, while shareholders' equity at December 31, 1996 includes net unrealized securities gains of $18 thousand. Capital guidelines which banking regulators have adopted assign minimum capital requirements for categories of assets depending on their assigned risks. The components of risk-based capital are Tier I, which is composed of total shareholders' equity, excluding the adjustment for the unrealized securities gains and losses, and also excluding any goodwill, Tier II, also includes the applicable portion of the allowance for possible loan losses and applicable adjustment for subordinated debt. Minimum acquired Tier II total risk-based capital is 8.0%. Under the requirements, Univest has Tier I capital ratios of 14.1% and 14.3%, and total risk-based capital ratios of 15.2% and 15.5% at December 31, 1997 and 1996, respectively. These ratios place Univest in the "well-capitalized" category under regulatory standards. In November 1995, the Corporation's Board of Directors approved the repurchase of up to 5% (approximately 400,000 shares) of its outstanding common stock in open market or negotiated transactions. At December 31, 1997, a total of 240,146 shares have been repurchased at an aggregate cost of $4.8 million. Recent Accounting Pronouncements Effective January 1, 1997, the Corporation adopted Statement of Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). Statement 125 provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, for certain secured borrowings, and collateral transactions, and for extinguishments of liabilities. The adoption of Statement 125 did not have a material impact on the Corporation's financial condition or results of operations. In 1997, the Financial 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 effective for financial statements for periods ending after December 15, 1997. The Company does not believe the adoption of this standard will have any impact on the Company's financial statements. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Both Statements become effective for fiscal periods beginning after December 15, 1997, with early adoption permitted. The Company is evaluating the additional disclosure requirements these Statements are expected to have on the Company's financial statements. 28 Supplementary Information - -------------------------------------------------------------------------------- Range of Market Prices The following table shows the range of market values of the Corporation's stock. The Trust Department, Union National Bank and Trust Company, serves as the Corporation's Stock Transfer Agent and Registrar and Dividend Disbursement Agent pursuant to the trust powers of national banks. The prices shown on this page represent transactions between dealers and do not include retail markups, markdowns, or commissions. High Low ----------------- ---------------- 1997 January - March 20-1/8 17 April - June 21-1/2 19-1/2 July - September 24-3/4 20-3/4 October - December 30-3/4 24-1/4 High Low ----------------- ---------------- 1996 January - March 16 15 April - June 15-3/4 15 July - September 16-1/8 15-1/4 October - December 18 15-1/2 Cash Dividends Paid Per Share 1997 January 2 $ 0.115 April 1 0.115 July 1 0.115 October 1 0.125 ================= $ 0.47 for the year 1997 ================= 1996 January 2 $ 0.076 regular 0.076 extra ----------------- 0.152 April 1 0.08 July 1 0.08 October 1 0.08 ================= $ 0.392 for the year 1996 ================= 29 Supplementary Information - -------------------------------------------------------------------------------- Description of Business Univest Corporation of Pennsylvania is a multibank holding company with banking and financial subsidiaries operating in eastern Pennsylvania. Union National Bank and Trust Company of Souderton, Pennsylvania has 19 traditional offices and 7 supermarket branches offering all normal commercial bank and trust services. Union National also provides banking and trust services for the residents and employees of 10 retirement home communities. Pennview Savings Bank has 5 offices and emphasizes deposits from the general public and residential mortgage loans. Pennview also provides banking services at 2 retirement home communities. Univest Leasing Corporation offers services of leasing commercial, industrial, and institutional equipment to firms and individuals in the same geographical area. Univest Realty Corporation owns and manages real estate for all subsidiaries of the holding company. Univest Mortgage Company provides real estate financing for individuals, with funding through the secondary mortgage market. Univest Financial Planning Corporation provides various financial management services to individuals and businesses within the holding company's market area. Univest Insurance Company, as a reinsurer, offers life and disability insurance to individuals in connection with credit extended to them by the bank. Univest Electronic Services Corporation provides the data processing operation and electronic development for all subsidiaries of the holding company. Securities Market Univest Corporation of Pennsylvania stock is traded over the counter and is generally held by individuals residing within the market area of the Corporation as stated under Description of Business. The number of shareholders as of December 31, 1997 was 1,916. Securities and Exchange Commission Reports The Corporation will provide at no charge a copy of the SEC Form 10-K annual report for the year 1997 to each shareholder who requests one in writing after March 31, 1998. Requests should be directed to: Robert H. Schong, Secretary, Univest Corporation of Pennsylvania, Broad and Main Streets, Souderton, PA 18964. 30 EX-27.1 2 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1997 DEC-31-1997 33,352 5,001 2,000 0 116,193 141,972 142,205 635,563 10,270 973,157 792,868 49,546 17,064 9,075 0 0 39,272 65,332 973,157 54,323 14,911 306 69,540 26,616 28,912 40,628 1,310 95 28,041 19,164 19,164 0 0 13,177 1.70 1.69 4.7 3,137 524 206 566 9,801 1,157 316 10,270 10,270 0 5,521
EX-27.2 3 FINANCIAL DATA SCHEDULE
9 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 38,934 30,901 360 456 69 16,527 0 0 69,428 56,080 172,785 168,439 173,013 170,665 607,069 585,971 9,801 8,854 912,459 881,888 733,768 725,027 60,716 46,812 13,633 16,628 7,075 4,085 0 0 0 0 19,636 19,638 77,631 69,698 912,459 881,888 51,984 51,322 14,448 11,584 250 639 66,682 63,545 25,574 24,049 27,681 25,963 39,001 37,582 1,045 1,895 (9) (66) 27,119 25,558 17,066 16,224 17,066 16,224 0 0 0 0 12,038 11,227 1.54 1.43 1.54 1.43 4.84 4.97 4,671 5,855 584 397 281 352 0 0 8,854 8,876 1,185 2,494 1,087 577 9,801 8,854 9,801 8,854 0 0 4,958 5,220
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