-----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, Pg074mhz+3hlYHRL0/B3VQo3E8cCq5z+YyL5rNFQTKfRF6T1WwYk0krrvZAFzB6A EX/AFkGL+tiUdh1W19xQfg== 0001133884-02-000299.txt : 20020415 0001133884-02-000299.hdr.sgml : 20020415 ACCESSION NUMBER: 0001133884-02-000299 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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: 1934 Act SEC FILE NUMBER: 000-07617 FILM NUMBER: 02590889 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 g10k-27665.txt 10-K 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, 2001 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 18964 Souderton, Pennsylvania ----- ----------------------- (Zip Code) (Address of principal executive offices) 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 -------------------------- (Title of Class) 6,991,358 --------- (Number of shares outstanding at 2/28/02) The approximate aggregate market value of voting stock held by non affiliates of the registrant is $197,951,574 as of February 28, 2002. 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 9, 2002. Parts I, II, and IV incorporate information by reference from the annual report to shareholders for the year ended December 31, 2001. PAGE 1 OF 26 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. Univest elected to become a Financial Holding Company in 2000 as provided under Title I of the Gramm-Leach-Bliley Act. 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 Delaware, Inc., Univest Financial Services Corporation, Univest Reinsurance Corporation, 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 the general public and investing such deposits primarily in loans secured by residential properties and consumer loans. Delview, Inc., a wholly owned subsidiary of Pennview, is a passive investment holding company operating in Delaware. Univest Financial Services Corporation, a subsidiary of Delview, provides various financial management services and insurance products to individuals and businesses through its subsidiaries Univest Investments, Inc. (formerly Fin Plan Group) and Univest Insurance, Inc. (formerly George Becker Associates). Univest Insurance Inc. acquired Gum Insurance on December 3, 2001. This will allow Univest Corporation to provide a broader range of insurance products. Univest Investments, Inc. allows Univest Corporation to provide a range of financial services including financial planning, investment management, insurance products and brokerage services. Univest Realty Corporation was established to obtain, hold and operate properties for the holding company and its subsidiaries. Univest Delaware, Inc. is a passive investment holding company operating in Delaware. Univest Leasing Corporation offers services of leasing commercial, industrial, and institutional equipment to firms and individuals. Univest Reinsurance Corporation (formerly 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-seven (27) banking offices, five off-premise automated teller machines, one work site office and provides banking and trust services to the residents and employees of ten retirement homes. Sixteen banking offices are in Montgomery County and eleven banking offices are in Bucks County. A work site office is located in Montgomery County. Three off-premise automated teller machines are located in Montgomery County and two are located in Bucks 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, 2002, Univest and its subsidiaries employed four hundred and ninety-two (492) 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. 2 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, Pennview Savings Bank, Univest Investments, Inc. and Univest Insurance Inc. 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 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. 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 that a member bank may extend to its affiliates, and the amount of its funds that 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. Univest elected to become a Financial Holding Company in 2000 as provided under Title I of the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act provides a new regulatory framework for regulation through the financial holding company, which has as its umbrella regulator the Federal Reserve Board. The Gramm-Leach-Bliley Act requires "satisfactory" or higher Community Reinvestment Act compliance for insured depository institutions and their financial holding companies in order for them to engage in new financial activities. The Gramm-Leach-Bliley Act provides a federal right to privacy of non-public personal information of individual customers. 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 12.4% and 12.6%, and total risk-based capital ratios of 13.6% and 13.9% at December 31, 2001 and 2000, 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 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 3 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. INTERSTATE ACQUISITIONS The Interstate Banking Act allows federal regulators to approve mergers between adequately capitalized banks from different states regardless of whether the transaction is prohibited under any state law, unless one of the banks' home states has enacted a law expressly prohibiting out-of-state mergers before June 1997. This act also allows a state to permit out-of-state banks to establish and operate new branches in this state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger provision. Therefore, the prior requirement that interstate acquisitions would only be permitted when another state had "reciprocal" legislation that allowed acquisitions by Pennsylvania-based bank holding companies has been eliminated. The new Pennsylvania legislation, however, retained the requirement that an acquisition of a Pennsylvania institution by a Pennsylvania or a non-Pennsylvania-based holding company must be approved by the Banking Department. 4 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. Two new subsidiaries were incorporated on September 8, 1998 in the State of Delaware. Univest Delaware, Inc. and Delview, Inc. were formed as passive investment companies. Univest Delaware, Inc. is wholly owned by the Corporation and Delview, Inc. is wholly owned by Pennview. Univest Financial Services Corporation is wholly owned by Delview. Univest Insurance, Inc., (formerly George Becker Associates), is wholly owned by Univest Financial Service Corporation. Univest Insurance, Inc. acquired Gum Insurance on December 31, 2001. This will allow Univest Corporation to provide a broader range of insurance products. Univest Investments, Inc. (formerly Fin Plan Group) is wholly owned by Univest Financial Services Corporation and allows Univest Corporation to provide a range of financial services. 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 TABLE I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
2001 2001/2000 2000 Average Income/ Avg. Volume Rate Average Income/ Avg. Volume ASSETS: Balance Expense Rate Change Change Total Balance Expense Rate Change ------- ------- ---- ------- ------- ------ ------- ------- ---- ------- Cash and due from banks $ 36,260 $ 35,309 Time deposits with other banks 9,472 $ 345 3.6 $ 183 $ (123) $ 60 4,544 $ 285 6.3 $ 5 U.S. Government obligations 98,290 5,233 5.3 (1,470) (630) (2,100) 125,937 7,333 5.8 (2,244) Oblig. of states & political sub. 41,034 1,938 4.7 570 29 599 29,054 1,339 4.6 349 Other securities 192,616 12,483 6.5 2,442 (155) 2,287 154,777 10,196 6.6 2,134 Trading account 538 14 2.6 (2) 3 1 617 13 2.1 2 Federal Reserve bank stock 761 46 6.0 - - - 761 46 6.0 - Federal funds sold and other short-term investments 16,303 746 4.6 (436) (490) (926) 25,791 1,672 6.5 1,042 ------- ---- ------- ------ Total investments 349,542 20,460 5.9 336,937 20,599 6.1 -------- ------- -------- ------- Commercial loans 232,609 17,950 7.7 1,911 (2,493) (582) 207,766 18,532 8.9 2,110 Mortgage loans 336,952 25,930 7.7 601 (986) (385) 328,517 26,315 8.0 (569) Installment loans 119,414 10,002 8.4 535 - 535 112,784 9,467 8.4 701 Home equity loans 12,716 1,202 9.5 (55) (237) (292) 13,190 1,494 11.3 (30) Municipal loans 59,949 3,319 5.5 245 (111) 134 55,492 3,185 5.7 540 ------- ------ ------- ------ Gross loans 761,640 58,403 7.7 717,749 58,993 8.2 ------- ------- Less: valuation reserve (10,647) (10,242) -------- -------- Net loans 750,993 706,988 -------- -------- Property, net 15,551 15,520 Other assets 49,083 47,079 ------- ------- Total assets $ 1 ,210,901 $ 1,146,377 ------------ ------------ 2000/1999 1999 Rate Average Income Avg. ASSETS: CHANGE TOTAL BALANCE EXPENS RATE ------- ------ ------- ------ ---- Cash and due from banks $ 34,496 Time deposits with other banks $ 53 $ 58 4,415 $ 227 5.1 U.S. Government obligations - (2,244) 166,343 9,577 5.8 Oblig. of states & political sub. 43 392 21,684 947 4.4 Other securities 489 2,623 122,207 7,573 6.2 Trading account (8) (6) 548 19 3.5 Federal Reserve bank stock - - 761 46 6.0 Federal funds sold and other short-term investments 156 1,198 9,735 474 4.9 ------ --- Total investments 321,278 18,636 5.8 -------- ------ Commercial loans 552 2,662 184,019 15,870 8.6 Mortgage loans 337 (232) 337,153 26,547 7.9 Installment loans 209 910 104,348 8,557 8.2 Home equity loans 162 132 13,505 1,362 10.1 Municipal loans - 540 46,619 2,645 5.7 ------- ----- Gross loans 685,644 54,981 8.0 ------ Less: valuation reserve (10,577) -------- Net loans 674,548 -------- Property, net 15,684 Other assets 38,901 -------- Total assets $1,089,322 ----------
6
2001 2001/2000 2000 LIABILITIES: Average Income/ Avg. Volume Rate Average Income/ Avg. Volume Balance Expense Rate Change Change Total Balance Expense Rate Change Demand deposits $ 152,716 $ 150,911 Interest checking deposits 99,644 $ 1,015 1.0 $ 90 $ - $ 90 90,785 $ 925 1.0 $ 23 Money market savings 208,268 6,858 3.3 709 (2,826) (2,117) 188,394 8,975 4.8 1,401 Regular savings 134,073 2,555 1.9 29 (134) (105) 134,450 2,660 2.0 (116) Certificates of deposit 351,751 19,376 5.5 351 - 351 345,076 19,025 5.5 1,344 Time open & club accounts 22,666 972 4.3 (103) (277) (380) 25,163 1,352 5.4 (233) Total time, int., and inv. checking deposits 816,402 30,776 3.8 783,868 32,937 4.2 Total deposits 969,118 934,779 Federal funds purchased 876 25 2.9 10 (14) (4) 496 29 5.8 (176) Loans & securities sold under agreement to repurchase 75,386 2,174 2.9 304 (387) (83) 64,525 2,257 3.5 (88) Other borrowings 26,012 1,466 5.6 332 (102) 230 20,389 1,236 6.1 344 Subordinated notes - - - - - - - - 0.0 - ------- ------ Total borrowings 102,274 3,665 3.6 85,410 3,522 4.1 -------- ------ ------- ------ Accrued expenses & other liab. 20,298 19,224 ------- ------- Total liabilities 1,091,690 1,038,894 ---------- ---------- SHAREHOLDERS' EQUITY: - -------------------- Common stock 41,037 40,608 Capital surplus 20,912 19,422 Retained earnings 57,262 47,453 ------- ------- Total shareholders' equity 119,211 107,483 -------- -------- Total liabilities and share- holders' equity $ 1,210,901 $ 1,146,377 ----------- ----------- Weighted avg. yield on interest-earning assets 7.1 7.5 Weighted avg. rate paid on interest-bearing liab. 3.7 4.2 Net yield 4.0 4.1 2000/1999 1999 LIABILITIES: Rate Average Income/ Avg. Change Total Balance Expense Rate Demand deposits $ 150,455 Interest checking deposits $ - $ 23 86,583 $ 902 1.0 Money market savings 1,422 2,823 158,014 6,152 3.9 Regular savings - (116) 140,313 2,776 2.0 Certificates of deposit 642 1,986 321,097 17,039 5.3 Time open & club accounts 234 1 29,253 1,351 4.6 Total time, int., and inv. checking deposits 735,260 28,220 3.8 Total deposits 885,715 Federal funds purchased 14 (162) 3,515 191 5.4 Loans & securities sold under agreement to repurchase 135 47 67,612 2,210 3.3 Other borrowings 132 476 14,695 760 5.2 Subordinated notes - - - - 0.0 Total borrowings 85,822 3,161 3.7 ------- ------ Accrued expenses & other liab. 15,536 ------- Total liabilities 986,554 ------- SHAREHOLDERS' EQUITY: - -------------------- Common stock 39,272 Capital surplus 14,908 Retained earnings 48,588 ------- Total shareholders' equity 102,768 ------- Total liabilities and share- holders' equity $ 1,089,322 ----------- Weighted avg. yield on interest-earning assets 7.3 Weighted avg. rate paid on interest-bearing liab. 3.8 Net yield 4.2
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 $551 for 2001, $571 for 2000 and $683 for 1999. (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, 2001 (a) 2000 (a) 1999 (a) -------- -------- -------- U. S. Treasury, government corporations and agencies $ 90,823 $ 131,344 $ 150,096 State and political subdivisions 49,638 39,346 27,020 Mortgage-backed securities 152,159 122,601 111,516 Other 55,238 55,135 23,243 --------- --------- --------- Total $ 347,858 $ 348,426 $ 311,875 ========= ========= ========= MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD December 31, December 31, December 31, December 31, December 31, December 31, 2001 2001 2000 2000 1999 1999 Amount (a) Yield (b) Amount (a) Yield (b) Amount (a) Yield (b) ---------- --------- ---------- --------- ---------- --------- 1 Year or less $ 16,180 4.71% $ 77,825 5.80% $ 54,249 5.68% 1 Year - 5 Years 125,258 5.54% 112,536 6.07% 139,357 5.64% 5 Years - 10 Years 47,606 6.20% 38,713 6.41% 35,094 6.26% After 10 Years 158,814 6.22% 119,352 6.42% 83,175 6.17% ---------- ----- ---------- ----- --------- ----- Total $ 347,858 5.90% $ 348,426 6.17% $ 311,875 5.86% ========== ===== ========== ===== ========= =====
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, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Real estate loans Construction and land development $ 34,774 $ 39,707 $ 33,632 $ 33,530 $ 30,951 Secured by 1-4 family residential properties 226,962 214,973 219,292 214,798 217,782 Other real estate loans 195,872 168,761 173,780 169,402 189,251 Commercial and industrial loans 254,032 221,101 212,656 171,699 138,812 Loans to individuals 71,212 79,320 72,658 64,306 53,500 All other loans 15,495 15,425 10,591 7,117 6,143 --------- --------- --------- --------- --------- Total loans $ 798,347 $ 739,287 $ 722,609 $ 660,852 $ 636,439 ========= ========= ========= ========= =========
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, 2001 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 $ 14,756 $ 16,197 $ 3,821 $ 34,774 Secured by 1-4 family residential properties 41,899 58,349 126,714 226,962 Other real estate loans 16,785 108,233 70,854 195,872 Commercial and industrial loans 121,076 99,206 33,750 254,032 Loans to individuals 19,113 47,364 4,735 71,212 All other loans 2,011 13,484 - 15,495 --------- --------- --------- --------- TOTAL LOANS $ 215,640 $ 342,833 $ 239,874 $ 798,347 ========= ========= ========= ========= Loans with a predetermined interest rate $ 29,803 $ 280,015 $ 165,663 $ 475,481 Loans with a floating or variable interest rate 185,837 62,818 74,211 322,866 --------- --------- --------- --------- $ 215,640 $ 342,833 $ 239,874 $ 798,347 ========= ========= ========= =========
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 total of nonaccruing and restructured loans in 2001 was $1,617. There was no interest income recognized on these loans. If nonaccrual loans had been performing in accordance with their contractual terms, additional income of $176 would have been recorded in 2001. At December 31, 2001, there were no other potential problem loans that causes management to have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. 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, 2001, there were no concentrations of loans exceeding 10% of total loans other than disclosed in Table III, Part A. OTHER ASSETS At December 31, 2001, there was no Other Real Estate Owned classified as nonperforming.
2001 2000 1999 1998 1997 Principal Principal Principal Principal Principal Balance Balance Balance Balance Balance -------- -------- -------- -------- ------- Nonaccruing loans $ 1,617 $ 1,865 $ 2,285 $ 3,424 $ 3,136 ======== ======== ======== ======== ======= ACCRUING LOANS 90 DAYS OR MORE PAST DUE: Real estate loans Construction and land development - - - - - Secured by 1-4 family dwellings 128 138 304 705 308 Other real estate - - - 14 36 Commercial and industrial loans 3 - 63 - 21 Loans to individuals 186 208 214 204 159 All other loans - - - - - -------- -------- -------- -------- ------- Total loans, 90 days or more past due 317 346 581 923 524 ======== ======== ======== ======== ======= Restructured loans, not included above - - 38 125 206 ======== ======== ======== ======== =======
12 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE IV. SUMMARY OF LOAN LOSS EXPERIENCE (Thousands of Dollars) Management's methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth, and composition of the loan portfolio. Reserve for possible loan losses is determined through a monthly evaluation of reserve adequacy. Quarterly, this analysis 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. Non-accrual loans are evaluated individually. All other loans are evaluated as pools. Based on historical loss experience, loss factors are determined giving consideration to the areas noted in the first paragraph and applied to the pooled loan categories to develop the general or allocated portion of reserve. Loans are also reviewed for impairment based on discounted cash flows using the loans' initial effective interest rate or the fair value of the collateral for certain collateral-dependent loans as provided under SFAS No. 114. Management also reviews the activity within the allowance to determine what actions, if any, should be taken to address differences between estimated and actual losses. Any of the above factors may cause the provision to fluctuate. The reserve for possible loan losses is made up of the allocated or general reserve and the unallocated portion. The following table summarizes the two categories for the periods indicated. DECEMBER 31, 2001 2000 1999 ---- ---- ---- Allocated $ 8,920 $ 8,630 $ 8,786 Unallocated 1,374 1,578 1,918 -------- -------- --------- Total $ 10,294 $ 10,208 $ 10,704 ======== ======== ======== The $290,000 increase in the allocated portion of the reserve for the year ended December 31, 2001 occurred due to higher reserves for growing loan volume and migration of credit risk assessment towards weaker loan grades. Total loan outstandings increased by 8.0% as moderate growth amongst retail portfolios was accompanied by significant commercial portfolio growth of 11.6%. As weakness in the economy became apparent in the latter part of the year, the proportion of credits with identified credit issues also increased. The $204,000 reduction in the unallocated reserve position was reflective of the strong credit quality and favorable level of non-performing loans experienced throughout the first three quarters of the year. Analysis of unallocated adequacy is based on a stress testing model assessing loan grade migration as influenced by economic conditions and grading accuracy. The $156,000 decrease in the allocated portion of the reserve for the year ended December 31, 2000 occurred as higher loan volume was more than offset by the favorable impact of continuing portfolio quality improvements. Despite a $13.6 million increase in Commercial & Industrial (C&I) loans, fewer dollars were allocated to this loan pool due to a more favorable migration of losses associated with Uncriticized C&I loans. Lower allocations were also recognized for the residential mortgage, industry concentration and unfunded commitment pools, each reflecting improved portfolio quality. These allocation reductions combined to offset a rise in consumer installment allocations associated with weakening consumer trends across the industry and the introduction of additional risk in product offerings. The $340,000 reduction in the unallocated reserve position reflects the diminishing potential of losses attributable to Y2K-related business interruption, which offset consideration given to a stress testing model designed to measure the impact of a slowing economy. 13 Management believes that both the allocated and unallocated portions of the reserve are maintained at a level which is adequate to absorb potential losses in the loan portfolio. As the accompanying table indicates, the amount of loan loss provision charged to expense for 2001 was $763 compared to $205 in 2000 and $1,052 in 1999. 14
2001 2000 1999 1998 ---- ---- ---- ---- Average amount of loans outstanding $751,030 $707,084 $674,798 $635,939 Loan loss reserve at beginning of period $ 10,208 $ 10,704 $ 10,019 $ 9,751 Charge-offs: Real estate loans 12 156 348 575 Commercial and industrial loans 602 794 1,105 370 Loans to individuals 603 423 304 427 Home equity - - - - Other - - - - -------- -------- -------- -------- Total charge-offs: 1,217 1,373 1,757 1,372 ======== ======== ======== ======== Recoveries: Real estate loans 143 98 857 324 Commercial and industrial loans 223 463 440 256 Loans to individuals 174 111 93 102 Home equity - - - - Other - - - - -------- -------- -------- -------- Total recoveries: 540 672 1,390 682 ======== ======== ======== ======== Net charge-offs: 677 701 367 690 Additions to loan loss reserve 763 205 1,052 958 Loan loss reserve at end of period $ 10,294 $ 10,208 $ 10,704 $ 10,019 ======== ======== ======== ======== Loan type Loan type Loan type Loan type as % as % as % as % Amount in reserve by category: of Loans of Loans of Loans of Loans -------- -------- -------- -------- Real estate loans 57.3 $ 3,515 57.3 $ 2,370 59.0 $ 2,571 63.2 $ 2,358 Commercial and industrial loans 31.8 3,939 29.9 4,848 29.4 5,356 26.0 3,575 Loans to individuals 8.9 1,455 10.7 1,401 10.1 848 9.7 1,049 All other loans 2.0 11 2.1 11 1.5 11 1.1 11 Unallocated portion 1,374 1,578 1,918 3,026 -------- -------- -------- -------- Total $ 10,294 $ 10,208 $ 10,704 $ 10,019 ======== ======== ======== ======== Ratio of net charge-offs versus average loans 0.1% 0.1% 0.1% 0.1%
1997 ---- Average amount of loans outstanding $617,082 Loan loss reserve at beginning of period $ 9,282 Charge-offs: Real estate loans 552 Commercial and industrial loans 319 Loans to individuals 286 Home equity - Other - -------- Total charge-offs: 1,157 ======== Recoveries: Real estate loans 167 Commercial and industrial loans 78 Loans to individuals 66 Home equity - Other 5 -------- Total recoveries: 316 ======== Net charge-offs: 841 Additions to loan loss reserve 1,310 Loan loss reserve at end of period $ 9,751 ======== Loan type as % Amount in reserve by category: of Loans -------- Real estate loans 68.8 $ 3,511 Commercial and industrial loans 21.8 610 Loans to individuals 8.4 617 All other loans 1.0 11 Unallocated portion 5,002 -------- Total $ 9,751 ======== Ratio of net charge-offs versus average loans 0.1% Total cash-basis and nonaccrual loans of $1,617 at December 31, 2001, were generally comprised of $242 in residential real estate loans, $617 in commercial real estate loans and $758 in commercial and other loans. 15 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE V. DEPOSITS (THOUSANDS OF DOLLARS) 2001 2000 1999 ---- ---- ---- A. Average: Noninterest-bearing demand deposits $ 152,716 $ 150,911 $ 150,455 Interest checking 99,644 90,785 86,583 Money Market savings 208,268 188,394 158,014 Saving deposits 134,073 134,450 140,313 Time deposits 374,417 370,239 350,350 --------- --------- --------- TOTAL $ 969,118 $ 934,779 $ 885,715 ========= ========= ========= DUE 3 MONTHS DUE 3 - 6 DUE 6 - 12 DUE OVER B. Year-end balance: ($100 or more) outstanding as of OR LESS MONTHS MONTHS 12 MONTHS December 31, 2001 ------- ------ ------ --------- Certificates of deposit $ 13,727 $ 8,376 $ 11,708 $ 4,056 Other time deposits $ 10,308 $ 1,829 $ 528 $ 649
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)
2001 2000 1999 ---- ---- ---- Return on assets 1.6 1.5 1.5 Return on equity 16.1 16.1 15.4 Dividend payout ratio* 30.6 31.3 30.4 Equity to assets ratio 9.8 9.4 9.4
*The payout ratios have been restated to give effect to a 5% stock dividend paid May 1, 2000. 16 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES TABLE VII. SHORT TERM BORROWINGS (Thousands of Dollars) LOANS AND SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
2001 2000 1999 ---- ---- ---- Balance at December 31 $ 73,745 $ 67,370 $ 70,943 Weighted average interest rate at year end 1.5% 3.7% 3.3% Maximum amount outstanding at any month's end $ 91,986 $ 71,830 $ 75,439 Average amount outstanding during the year $ 75,386 $ 64,525 $ 67,612 Weighted average interest rate during the year 2.9% 3.5% 3.3%
17 ITEM 2. PROPERTIES Univest and its subsidiaries occupy thirty-two properties in Montgomery and Bucks Counties in Pennsylvania, which are used principally as banking offices. Note 6, appearing on page 24 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 9, 2002. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Incorporated by reference from the 2001 Annual Report to Shareholders (Exhibit 13), pages 46-47. Dividend and other restrictions are incorporated by reference from Note 16 of the 2001 Annual Report to Shareholders (Exhibit 13), pages 30 and 31. The number of shareholders as of February 28, 2002, was 2,060. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from the 2001 Annual Report to Shareholders (Exhibit 13), page 36. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the 2001 Annual Report to Shareholders (Exhibit 13), pages 37 through 45. Dividend and other restrictions are incorporated by reference from Note 16 of the 2001 Annual Report to Shareholders (Exhibit 13), pages 30 and 31. ITEM 7 (A). QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference from the 2001 Annual Report to Shareholders (Exhibit 13), page 45. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated balance sheets of the registrant at December 31, 2001 and 2000, and consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years ended December 31, 2001, and the independent auditors' report thereon are incorporated by reference from the 2001 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 9, 2002. EXECUTIVE OFFICERS The names and ages of all executive officers of Univest are as follows:
PRINCIPAL OCCUPATION OFFICER TITLE DURING PAST 5 YEARS AGE William S. Aichele President President and CEO of the 51 Corporation and Union National Bank Marvin A. Anders Chairman Chairman of the Corporation 62 And Union National Bank Norman L. Keller Executive Vice President and CEO of Pennview 64 President Savings Bank and Executive Vice President of the Corporation Wallace H. Bieler Executive Vice Executive Vice President 56 President and CFO of the Corporation and Union National Bank K. Leon Moyer Executive Vice Executive Vice President 52 President 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 9, 2002. 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 9, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During 2001, the Corporation and its subsidiaries paid $70,767 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, 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 2001. (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 35 Consolidated balance sheets at 13 December 31, 2001 and 2000 Consolidated statements of income for each of the 14 three years in the period ended December 31, 2001 Consolidated statements of changes in shareholders' equity 15 for each of the three years in the period ended December 31, 2001 Consolidated statements of cash flows for 16 each of the three years in the period ended December 31, 2001 Notes to consolidated financial statements 17-34 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 2001 (Exhibit 13) which is incorporated by references. 21 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. 22 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/ Norman L. Keller --------------------------------- Norman L. Keller Secretary and Executive Vice President, March 27, 2002 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 William S. Aichele /s/ James L. Bergey - ------------------------------------------------ --------------------------------- William S. Aichele James L. Bergey President, CEO and Director, March 27, 2002 Director, March 27, 2002 /s/ Marvin A. Anders /s/ H. Ray Mininger - ------------------------------------------------ --------------------------------- Marvin A. Anders H. Ray Mininger Chairman and Director, March 27, 2002 Director, March 27, 2002 /s/ Wallace H. Bieler /s/ Paul G. Shelly - ------------------------------------------------ --------------------------------- Wallace H. Bieler Paul G. Shelly Executive Vice President and CFO, March 27, 2002 Director, March 27, 2002 /s/ K. Leon Moyer /s/ R. Lee Delp - ------------------------------------------------ --------------------------------- K. Leon Moyer R. Lee Delp Executive Vice President , March 27, 2002 Director, March 27, 2002 /s/ Charles H. Hoeflich /s/ Thomas K. Leidy - ------------------------------------------------ --------------------------------- Charles H. Hoeflich Thomas K. Leidy Chairman Emeritus, March 27, 2002 Director, March 27, 2002 /s/ Merrill S. Moyer /s/ John U. Young - --------------------------------- --------------------------------- Merrill S. Moyer John U. Young Director, March 27, 2002 Director, March 27, 2002
23 EX-13 3 gex13-27665.txt EX-13
Consolidated Financial Highlights (in thousands, except per share data) Percentage 2001 2000 Change --------------------------------------- Earnings Net interest income................................. $ 44,767 $ 43,418 3.11% Income before income taxes ......................... 26,181 24,139 8.46 Applicable income taxes ............................ 6,971 6,791 2.65 Net income ......................................... 19,210 17,348 10.73 Per Share* Average shares outstanding ......................... 7,136 7,394 (3.49) Income before income taxes ......................... 3.67 3.27 12.23 Applicable income taxes ............................ .98 .92 6.52 Net income: Basic ........................................... 2.69 2.35 14.47 Diluted ......................................... 2.68 2.34 14.53 Book Value.......................................... 17.32 15.76 9.90 Balance Sheets Investments......................................... 347,858 348,426 (.16) Net loans........................................... 788,035 729,020 8.10 Deposits ........................................... 998,137 971,924 2.70 Shareholders' equity................................ 121,580 115,240 5.50 Assets ............................................. 1,260,713 1,204,714 4.65
*Per share data has been restated to give effect to a five-percent stock dividend paid May 1, 2000. UNIVEST CORPORATION OF PENNSYLVANIA Consolidated Balance Sheets (in thousands, except share data)
December 31, 2001 2000 ---------------------------- Assets Cash and due from banks ............................................. $ 39,107 $ 40,517 Interest-bearing deposits with other banks .......................... 15,731 5,131 Investment securities held-to-maturity (market value $112,689 and $159,325 at December 31, 2001 and 2000, respectively) ........ 109,805 158,499 Investment securities available-for-sale ............................ 238,053 189,927 Federal funds sold and other short-term investments ................. 64 16,190 Loans................................................................ 798,329 739,228 Less: Reserve for possible loan losses............................ (10,294) (10,208) ---------------------------- Net loans......................................................... 788,035 729,020 ---------------------------- Premises and equipment, net.......................................... 16,025 15,538 Accrued interest and other assets ................................... 53,893 49,892 ---------------------------- Total assets ..................................................... $1,260,713 $ 1,204,714 ============================ Liabilities Demand deposits, noninterest bearing ................................ $ 166,254 $ 168,796 Demand deposits, interest bearing ................................... 322,245 298,304 Savings deposits .................................................... 139,449 130,594 Time deposits ....................................................... 370,189 374,230 ---------------------------- Total deposits ................................................... 998,137 971,924 ---------------------------- Securities sold under agreements to repurchase ...................... 73,745 67,370 Other short-term borrowings ......................................... 17,855 1,129 Accrued expenses and other liabilities .............................. 25,321 22,976 Long-term debt, current ............................................. - 7,000 Long-term debt ...................................................... 24,075 19,075 ---------------------------- Total liabilities ................................................ 1,139,133 1,089,474 ---------------------------- Shareholders' equity Common stock, $5 par value; 24,000,000 shares authorized at December 31, 2001 and 2000 and 8,207,496 shares issued at December 31, 2001 and 2000 and 7,020,944 and 7,313,556 shares outstanding at December 31, 2001 and 2000, respectively* ... 41,037 41,037 Additional paid-in capital ........................................... 20,912 20,912 Retained earnings .................................................... 89,688 77,498 Accumulated other comprehensive income ............................... 3,070 848 Treasury stock, at cost; 1,186,552 shares and 893,940 shares at December 31, 2001 and 2000, respectively ....................... (33,127) (25,055) ---------------------------- Total shareholders' equity ........................................ 121,580 115,240 ---------------------------- Total liabilities and shareholders' equity ........................ $1,260,713 $ 1,204,714 ============================
See accompanying notes to consolidated financial statements. *Common stock data has been restated to give effect to a five percent stock dividend paid May 1, 2000. 2 UNIVEST CORPORATION OF PENNSYLVANIA Consolidated Statements of Income (in thousands, except share data)
Year ended December 31, 2001 2000 1999 ----------------------------------------------- Interest income Interest and fees on loans: Taxable .............................................. $55,084 $55,808 $52,336 Exempt from federal income taxes ..................... 3,319 3,185 2,645 ----------------------------------------------- Total interest and fees on loans ........................ 58,403 58,993 54,981 Interest and dividends on investment securities: U.S. Government obligations .......................... 5,233 7,333 9,577 Obligations of state and political subdivisions ...... 1,938 1,339 947 Other securities ..................................... 12,543 10,255 7,638 Interest on time deposits with other banks .............. 345 285 227 Interest on federal funds sold and term federal funds ... 746 1,672 474 ----------------------------------------------- Total interest income ................................ 79,208 79,877 73,844 ----------------------------------------------- Interest expense Interest on demand deposits ............................. 7,873 9,900 7,054 Interest on savings deposits ............................ 2,555 2,660 2,776 Interest on time deposits ............................... 20,348 20,377 18,390 Interest on long-term debt .............................. 1,429 1,171 711 Interest--all other ..................................... 2,236 2,351 2,450 ----------------------------------------------- Total interest expense ............................... 34,441 36,459 31,381 ----------------------------------------------- Net interest income ........................................ 44,767 43,418 42,463 Provision for loan losses .................................. 763 205 1,052 ----------------------------------------------- Net interest income after provision for loan losses ........ 44,004 43,213 41,411 ----------------------------------------------- Noninterest income Trust ................................................... 4,260 4,404 3,970 Service charges on demand deposits ...................... 3,919 3,690 3,450 Service charges on other deposits ....................... 1,296 1,245 1,258 Commission income ....................................... 2,596 2,776 2,068 Net gains on sales of securities ........................ 150 1 3 Net gains on sales of mortgages ......................... 83 14 51 Other ................................................... 5,662 4,611 4,749 ----------------------------------------------- Total other income ................................... 17,966 16,741 15,549 ----------------------------------------------- Noninterest expense Salaries and benefits ................................... 19,961 20,887 19,204 Net occupancy ........................................... 2,734 2,652 2,464 Equipment ............................................... 2,214 2,556 2,570 Other ................................................... 10,880 9,720 10,304 ----------------------------------------------- Total other expenses ................................. 35,789 35,815 34,542 ----------------------------------------------- Income before income taxes ................................. 26,181 24,139 22,418 Applicable income taxes .................................... 6,971 6,791 6,614 ----------------------------------------------- Net income ................................................. $19,210 $17,348 $15,804 =============================================== Net income per share: * Basic ................................................... $ 2.69 $ 2.35 $ 2.08 =============================================== Diluted ................................................. $ 2.68 $ 2.34 $ 2.07 ===============================================
See accompanying notes to consolidated financial statements. * Per share data has been restated to give effect to a five percent stock dividend paid May 1, 2000. 3 UNIVEST CORPORATION OF PENNSYLVANIA
Consolidated Statements of Changes in Shareholders' Equity (in thousands, except share data) Accumulated Other Additional Comprehensive Common Paid-in Retained Treasury Income Stock Capital Earnings Stock Total -------------------------------------------------------------------------------- Balance at December 31, 1998..................... $ 582 $ 39,272 $ 14,908 $ 62,992 $ (14,577) $ 103,177 --------- Comprehensive Income Net Income for 1999........................... 15,804 15,804 Other comprehensive income, net of income tax benefit of $(1,784) Unrealized gains and (losses) on investment securities available-for-sale.. (3,254) (3,254) --------- Total comprehensive income ...................... 12,550 --------- Cash dividends declared* ($0.629 per share)... (4,762) (4,762) Stock issued under dividend reinvestment and employee stock purchase plans .......... (12) 1,282 1,270 Exercise of stock options .................... (613) 1,312 699 Acquisition of treasury stock (360,253 shares) (10,183) (10,183) -------------------------------------------------------------------------------- Balance at December 31, 1999..................... (2,672) 39,272 14,908 73,409 (22,166) 102,751 --------- Comprehensive Income Net Income for 2000........................... 17,348 17,348 Other comprehensive income, net of income taxes of $1,927 Unrealized gains and (losses) on investment securities available-for-sale.. 3,520 3,520 --------- Total comprehensive income ...................... 20,868 --------- Cash dividends declared* ($0.732 per share)... (5,420) (5,420) 5% stock dividend paid May 1, 2000............ 1,765 6,004 (7,769) Stock issued under dividend reinvestment and employee stock purchase plans........... (27) 1,266 1,239 Exercise of stock options .................... (43) 109 66 Acquisition of treasury stock (192,921 shares)............................ (4,264) (4,264) -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 .................... 848 41,037 20,912 77,498 (25,055) 115,240 --------- COMPREHENSIVE INCOME NET INCOME FOR 2001........................... 19,210 19,210 OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES OF $1,197 UNREALIZED GAINS AND (LOSSES) ON INVESTMENT SECURITIES AVAILABLE-FOR-SALE.. 1,919 1,919 UNREALIZED GAINS AND (LOSSES) ON SWAPS.... 303 303 --------- TOTAL COMPREHENSIVE INCOME ...................... 21,432 --------- CASH DIVIDENDS DECLARED* ($0.820 PER SHARE)........................ (5,843) (5,843) STOCK ISSUED UNDER DIVIDEND REINVESTMENT AND EMPLOYEE STOCK PURCHASE PLANS ........ (16) 1,221 1,205 EXERCISE OF STOCK OPTIONS..................... (1,161) 2,213 1,052 ACQUISITION OF TREASURY STOCK (404,302 SHARES).......................... (11,506) (11,506) -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 .................... $ 3,070 $ 41,037 $ 20,912 $ 89,688 $ (33,127) $ 121,580 ================================================================================
See accompanying notes to consolidated financial statements. * Per share data has been restated to give effect to a five percent stock dividend paid May 1, 2000. 4 UNIVEST CORPORATION OF PENNSYLVANIA Consolidated Statements of Cash Flows (in thousands)
Year ended December 31, 2001 2000 1999 --------------------------------------------------- Cash flows from operating activities Net income .................................................... $ 19,210 $ 17,348 $ 15,804 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses in excess of (less than) net charge-offs ........................................... 86 (496) 685 Depreciation of premises and equipment ...................... 2,495 2,284 2,313 (Discount accretion) premium amortization on investment securities ..................................... (764) (338) 17 Deferred tax (benefit) income tax ........................... (757) (458) 31 Realized gains on investment securities ..................... (150) (1) (3) Realized gains on sales of mortgages ........................ (83) (14) (51) Increase (decrease) in net deferred loan fees ............... 479 (315) (39) (Increase) decrease in interest receivable and other assets . (836) 60 (3,338) Increase (decrease) in accrued expenses and other liabilities 1,814 3,409 (622) --------------------------------------------------- Net cash provided by operating activities ................. 21,494 21,479 14,797 Cash flows from investing activities Proceeds from maturing securities held-to-maturity .......... 163,329 61,707 90,041 Proceeds from maturing securities available-for-sale ........ 111,274 20,114 28,935 Proceeds from sales of securities available-for-sale ........ 15,893 9,041 18,391 Purchases of investment securities held-to-maturity ......... (114,198) (82,671) (11,165) Purchases of investment securities available-for-sale ....... (171,862) (38,956) (115,466) (Increase) decrease in interest-bearing deposits ............ (10,600) (1,292) 101 Premium paid to purchase bank-owned life insurance .......... -- (8,000) -- Net decrease (increase) in federal funds sold and other short-term investments .................................... 16,126 (14,390) 10,900 Proceeds from sales of mortgages ............................ 9,016 2,362 11,306 Net increase in loans ....................................... (68,513) (18,787) (73,241) Capital expenditures ........................................ (2,982) (2,414) (1,893) Other investing activities .................................. (2,700) (200) (4,000) --------------------------------------------------- Net cash used in investing activities ..................... (55,217) (73,486) (46,091) Cash flows from financing activities Net increase in deposits..................................... 26,213 61,249 36,171 Net increase (decrease) in short-term borrowings............. 23,101 (3,599) 8,053 Repayment of long-term debt.................................. (7,000) (2,000) - Proceeds from long-term debt ................................ 5,000 10,000 9,000 Purchases of treasury stock.................................. (11,506) (4,264) (10,183) Stock issued under dividend reinvestment and employee stock purchase plans ............................. 1,205 1,239 1,270 Proceeds from exercise of stock options...................... 1,052 66 699 Cash dividends .............................................. (5,752) (5,233) (4,661) --------------------------------------------------- Net cash provided by financing activities ................. 32,313 57,458 40,349 --------------------------------------------------- Net (decrease) increase in cash and due from banks .......... (1,410) 5,451 9,055 --------------------------------------------------- Cash and due from banks at beginning of year ................ 40,517 35,066 26,011 --------------------------------------------------- Cash and due from banks at end of year ...................... $ 39,107 $ 40,517 $ 35,066 =================================================== Supplemental disclosures of cash flow information Cash paid during the year for: Interest .................................................. $ 34,893 $ 34,497 $ 32,916 Income taxes .............................................. $ 7,678 $ 7,077 $ 6,758
See accompanying notes to consolidated financial statements. 5 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (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. Univest Financial Services Corporation, a subsidiary of Pennview, provides financial planning, investment management, insurance products and brokerage services. Union and Pennview serve the Montgomery and Bucks Counties of Pennsylvania through 32 banking offices and provide banking and trust services to the residents and employees of 12 retirement communities and a work site office at Moyer Packing Company. This office serves only to cash payroll checks for Moyer Packing Company employees. 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. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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. Interest-bearing Deposits with Other Banks Interest-bearing deposits with other banks consist of deposit accounts with other financial institutions generally having maturities of three months or less. Investment Securities Securities are classified as investment securities held to maturity 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 held to maturity or trading are designated securities available-for-sale and carried at fair value with unrealized gains and losses reflected in accumulated other comprehensive income, net of estimated income taxes. The net unrealized gain on available-for-sale securities included in accumulated other comprehensive income was $2,767 and $848 at December 31, 2001 and December 31, 2000, respectively. Gains and losses on sales of securities are 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. 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 Corporation uses interest-rate swap agreements to manage the interest-rate risk of its floating-rate loan portfolio. Univest accounts for its interest rate swap contracts in compliance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows of certain prime-rate-based loans held by the bank. When the effectiveness of the hedge can be established and adequately documented at the inception of the derivative contract, the change in market value of the swap is recorded on the balance sheet of the company but only the accrued payments due under the contract for the current period are passed through the statement of operations. To ensure effectiveness, Univest performs an analysis to ensure that changes in fair value or cash flow of the derivative 6 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) correlates to the equivalent changes in the loans being hedged. Related fees are deferred and amortized on a straight-line basis over the life of the swap, which corresponds to the estimated life of the asset being hedged. 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. Should the company be unable to document the effectiveness of all or part of the cash flow hedge, the change in market value of the ineffective part of the instrument will need to be marked-to-market through the statement of operations, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods. As of January 1, 2001, the Corporation adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended. The Statement requires the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The fair value, net of income taxes, of the interest-rate swaps has been included in accumulated other comprehensive income. Reserve for Possible Loan Losses The reserve for possible 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 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 or when in the opinion of management the full amount of the loan, in the case of non-collateral dependent borrowings, will not be realized. Certain impaired loans are reported at the present value of expected future cash flows using the loan's initial effective interest rate, or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The reserve for possible loan losses consists of two elements: (1) an allocated reserve, which is comprised of reserves established on specific loans, and class reserves based on historical loan loss experience, current trends, and management assessments. (2) unallocated reserves based on both general economic conditions and other risk factors in the Corporation's individual markets and portfolios, and to account for a level of imprecision in management's estimation process. The specific reserve element is based on a regular analysis of impaired commercial and real estate loans. The specific reserve established for these loans is based on a careful analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity. The class reserve element is determined by an internal loan grading process in conjunction with associated allowance factors. The Corporation revises the class allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification. The Corporation maintains an unallocated reserve to recognize the existence of credit exposures that are probable within the loan portfolio although currently are undetected. There are many factors considered such as the inherent delay in obtaining information regarding a customer's financial condition or changes in their business condition, the judgmental nature of loan evaluations, the delay in the interpretation of economic trends and the judgmental nature of collateral assessments. (Also refer to Management's Discussion and Analysis.) 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 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 7 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) accounting provided for under Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense is recognized because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123. 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 The Univest Dividend Reinvestment Plan (the "Reinvestment Plan") provided 1,000,000 shares of common stock and the 1996 Employee Stock Purchase Plan (the "Purchase Plan") provided 500,000 shares of common stock available for issuance. 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 2001 and 2000, 37,958 and 48,850 shares, respectively, were issued under the Reinvestment Plan, with 838,029 shares available for future purchase as of December 31, 2001. During 2001 and 2000, 6,102 and 8,700 shares, respectively, were issued under the Purchase Plan, with 492,175 shares available for future purchase as of December 31, 2001. 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 Corporation acquired intangible assets in connection with the acquisitions of Pennview, Fin-Plan, Univest Insurance Inc. (formerly George Becker Associates) and Gum Insurance that include goodwill and core deposit intangibles. Goodwill is being amortized on a straight-line basis over a fifteen-year period. Core deposit intangibles have been fully amortized over their estimated useful lives of ten years. At December 31, 2001 the unamortized balance is approximately $7.1 million ($5.3 million at December 31, 2000), net of accumulated amortization of approximately $5.0 million ($4.2 million at December 31, 2000). In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the loss of economic value, the carrying amount of the goodwill is reduced by the estimated loss of value. On July 20, 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards SFAS No. 141 and SFAS No. 142, which changed the initial measurement and subsequent recording of goodwill and intangible assets. The effect of adopting SFAS No. 141 is discussed under "Recent Accounting Pronouncements." Mortgage servicing rights are recognized as separate assets when rights are acquired through the sale of mortgage loans. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing period of the underlying mortgage loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized amount. The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2001 and 2000 was $0.5 million. The fair values of these rights approximates the carrying value at December 31, 2001 and 2000. The fair value of servicing rights was determined using discount rates ranging from 6.8% to 7.6%. Amortization of mortgage servicing rights of approximately $0.1 million was recorded during 2001 ($.06 million was recorded in 2000). The valuation allowance was immaterial to the financial statements. Retirement Plan, Supplemental Plans and Other Postretirement Benefit Plans 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. The Corporation also provides supplemental executive retirement benefits, a portion of which is in excess of limits imposed on qualified plans by federal tax law. These plans are nonqualified benefit plans. 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. 8 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) The Corporation provides certain postretirement healthcare 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. Stock Dividend On March 22, 2000, the Corporation's board of directors declared a 5% stock dividend paid on May 1, 2000 to all shareholders of record as of April 14, 2000. All share and per share amounts have been retroactively adjusted to give effect to the stock dividend. Earnings Per Share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method. Comprehensive Income Unrealized gains or losses on the Corporation's available-for-sale securities and cash flow hedges are included in comprehensive income. The following shows the accumulated comprehensive income, net of income taxes, for the periods presented:
Period Ended Dec. 31 2001 2000 --------------------------- Net income................................................... $ 19,210 $ 17,348 Accumulated unrealized gain on cash flow hedges ............. 303 - Change in unrealized gain (loss) on available-for- sale investment securities .................................. 1,919 3,520 --------------------------- Total comprehensive income .................................. $ 21,432 $ 20,868 ===========================
Recent Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Major provisions of these Statements include the following: o SFAS No. 141 provisions relating to the initial measurement and recording of goodwill and intangible assets, financial statement presentation, and disclosures are effective for combinations completed after June 30, 2001. o SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with fiscal years beginning after March 15, 2001, but only if they have not issued their first quarter financial statements prior to adoption. Regardless of the full adoption date, the nonamortization provisions of SFAS No. 142 are effective for business combinations and other transactions completed after June 30, 2001. The Corporation estimates that a decrease of approximately $500 thousand in other expenses will be the effect of adopting SFAS No. 142. 9 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) 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 was $2.7 million for December 31, 2001 and 2000. Note 3. Investment Securities Securities with a market value of $206.0 million and $207.0 million at December 31, 2001 and 2000, respectively, were pledged to secure public deposits and for other purposes as required by law. The following table shows the amortized cost and the approximate market value of the held-to-maturity securities and available-for-sale securities at December 31, 2001 and 2000, by maturity within each type:
DECEMBER 31, 2001 December 31, 2000 -------------------------------------------- ---------------------------------------------- GROSS GROSS Gross Gross AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market Held-to-Maturity Securities COST GAINS LOSSES VALUE Cost Gains Losses Value -------------------------------------------- ---------------------------------------------- U.S. Treasury, government corporations and agencies obligations: Within 1 year ................... $ 7,000 $ 102 $ - $ 7,102 $ 47,142 $ 15 $ (70) $ 47,087 1 to 5 years .................... 23,100 446 (9) 23,537 30,998 25 (178) 30,845 -------------------------------------------- ---------------------------------------------- 30,100 548 (9) 30,639 78,140 40 (248) 77,932 -------------------------------------------- ---------------------------------------------- State and political subdivisions: Within 1 year ................... 2,960 26 - 2,986 5,020 1 (8) 5,013 1 to 5 years .................... 9,180 195 - 9,375 12,721 - (113) 12,608 Over 10 years.................... 1,154 4 - 1,158 1,154 - - 1,154 -------------------------------------------- ---------------------------------------------- 13,294 225 - 13,519 18,895 1 (121) 18,775 -------------------------------------------- ---------------------------------------------- Mortgage-backed securities: Within 1 year ................... - - - - 794 - (4) 790 1 to 5 years .................... 934 17 - 951 837 - (5) 832 5 to 10 years ................... 5,726 104 - 5,830 3,130 20 (8) 3,142 Over 10 years.................... 39,384 1,027 (83) 40,328 36,609 684 (57) 37,236 -------------------------------------------- ---------------------------------------------- 46,044 1,148 (83) 47,109 41,370 704 (74) 42,000 -------------------------------------------- ---------------------------------------------- Other: Within 1 year ................... - - - - 491 - - 491 1 to 5 years .................... 10,145 532 - 10,677 9,195 271 - 9,466 5 to 10 years ................... 6,351 298 - 6,649 6,542 140 - 6,682 Over 10 years.................... 3,871 225 - 4,096 3,866 113 - 3,979 -------------------------------------------- ---------------------------------------------- 20,367 1,055 - 21,422 20,094 524 - 20,618 -------------------------------------------- ---------------------------------------------- Total ............................ $109,805 $2,976 $(92) $112,689 $158,499 $1,269 $(443) $159,325 ============================================ ==============================================
10 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data)
DECEMBER 31, 2001 December 31, 2000 -------------------------------------------- ---------------------------------------------- GROSS GROSS Gross Gross AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market Securities Available for Sale COST GAINS LOSSES VALUE Cost Gains Losses Value -------------------------------------------- ---------------------------------------------- U.S. Treasury, government corporations and agencies obligations: Within 1 year ..................... $ 5,497 $ 54 $ - $ 5,551 $ 20,939 $ 1 $ (55) $ 20,885 1 to 5 years ...................... 52,260 868 - 53,128 31,677 147 (56) 31,768 5 to 10 years ..................... 2,000 44 - 2,044 550 1 - 551 -------------------------------------------- ---------------------------------------------- 59,757 966 - 60,723 53,166 149 (111) 53,204 -------------------------------------------- ---------------------------------------------- State and political subdivisions: 1 to 5 years ...................... 974 6 - 980 414 - (6) 408 5 to 10 years ..................... 1,224 20 - 1,244 560 2 - 562 Over 10 years...................... 33,918 569 (367) 34,120 18,753 729 (1) 19,481 -------------------------------------------- ---------------------------------------------- 36,116 595 (367) 36,344 19,727 731 (7) 20,451 -------------------------------------------- ---------------------------------------------- Mortgage-backed securities: 1 to 5 years ...................... 2,436 50 - 2,486 2,225 12 (2) 2,235 5 to 10 years ..................... 29,400 795 - 30,195 27,836 154 (62) 27,928 Over 10 years...................... 72,627 977 (170) 73,434 51,057 196 (185) 51,068 -------------------------------------------- ---------------------------------------------- 104,463 1,822 (170) 106,115 81,118 362 (249) 81,231 -------------------------------------------- ---------------------------------------------- Other: Within 1 year ..................... 669 - - 669 3,493 - - 3,493 1 to 5 years ...................... 23,994 1,311 - 25,305 23,936 469 (31) 24,374 5 to 10 years ..................... 2,000 46 - 2,046 - - - - Over 10 years...................... 6,797 54 - 6,851 7,183 - (9) 7,174 -------------------------------------------- ---------------------------------------------- 33,460 1,411 - 34,871 34,612 469 (40) 35,041 -------------------------------------------- ---------------------------------------------- Total .............................. $233,796 $ 4,794 $(537) $238,053 $188,623 $1,711 $(407) $189,927 ============================================================================================
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, 2001, available-for-sale debt securities with a fair value at the date of sale of $15,893 were sold ($9,041 in 2000). Gross realized gains on such sales totaled $151 during 2001 ($9 in 2000 and $52 in 1999), and the gross realized losses totaled $1 during 2001 ($8 in 2000 and $49 in 1999). Net unrealized gains on available-for-sale securities included in accumulated other comprehensive income as a separate component of shareholders' equity totaled $2,767 in 2001 and $848 in 2000. Unrealized losses in investment securities at December 31, 2001 and 2000 do not represent permanent impairments. At December 31, 2001 and 2000, 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, 2001 2000 -------------------------- Real estate-construction ............................ $ 34,774 $ 39,707 Real estate-commercial .............................. 195,872 168,761 Real estate-residential ............................. 226,962 214,973 Commercial and industrial ........................... 254,032 221,101 Loans to individuals ................................ 71,212 79,320 All other............................................ 15,495 15,425 -------------------------- Total loans ......................................... 798,347 739,287 Less: Unearned income ............................... (18) (59) -------------------------- $798,329 $739,228 ========================== 11 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) At December 31, 2001, loans to directors and executive officers of Univest and companies in which directors have an interest aggregated $19,735. 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, 2001 Additions Collected December 31, 2001 --------------------------------------------------------------------- $14,021 $25,305 $19,591 $19,735 Note 5. Reserve for Possible Loan Losses A summary of the transactions in the reserve for possible loan losses is as follows: 2001 2000 1999 -------------------------------- Balance at beginning of year.................... $10,208 $ 10,704 $10,019 Provision charged to operating expenses ........ 763 205 1,052 Recoveries...................................... 540 672 1,390 Loans charged off............................... (1,217) (1,373) (1,757) -------------------------------- Balance at end of year.......................... $10,294 $ 10,208 $10,704 ================================ Information with respect to loans that are considered to be impaired under SFAS No. 114 for the year ended December 31 is as follows:
December 31, 2001 2000 ---------------------- Average recorded investment in impaired loans .................................. $ 2,154 $ 2,096 Recorded investment in impaired loans at year-end subject to a reserve for loan losses................................................... 832 1,485 Corresponding reserve........................................................... 540 1,035 Recorded investment in impaired loans at year-end requiring no reserve for loan losses ................................................. 574 168 Recorded investment in impaired loans at year-end .............................. 1,406 1,653 Recorded investment in nonaccrual and restructured* ............................ 1,617 1,865
* Included in the nonaccrual total are Pennview's first residential mortgage loans which were over 90 days delinquent of $211 at December 31, 2001 and $212 at December 31, 2000. The following is an analysis of interest on nonaccrual loans at December 31 as follows: 2001 2000 1999 ------------------------- Nonaccrual and restructured loans .................... $ 1,617 $ 1,865 $ 2,323 Interest income that would have been recognized under original terms............................ 176 229 246 There was no other real estate owned at December 31, 2001 and December 31, 2000. 12 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) Note 6. Premises and Equipment December 31, 2001 2000 -------------------- Land and land improvements ............................... $ 4,230 $ 3,411 Premises and improvements................................. 17,759 17,853 Furniture and equipment................................... 17,528 16,996 -------------------- 39,517 38,260 Less: accumulated depreciation............................ (23,492) (22,722) -------------------- $ 16,025 $ 15,538 ==================== As of December 31, 2001, 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: 2002................................$ 747 2003................................ 592 2004................................ 465 2005................................ 291 2006................................ 201 Rental expense charged to operations was $707, $685, and $611 for 2001, 2000, and 1999, respectively. Note 7. Income Taxes The provision for federal and state income taxes included in the accompanying consolidated statements of income consists of the following: 2001 2000 1999 ----------------------- Current.............................................. $ 7,728 $ 7,249 $ 6,583 Deferred ............................................ (757) (458) 31 ----------------------- $ 6,971 $ 6,791 $ 6,614 ======================= The provision for income taxes differs from the expected statutory provision as follows: 2001 2000 ------------------ Expected provision at statutory rate ......................... 35.0% 35.0% Difference resulting from: Tax exempt interest income.................................. (6.7%) (6.2%) Increase in value of contracts.............................. (2.4%) (1.7%) Other....................................................... 0.7% 1.0% ------------------ 26.6% 28.1% 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 assets and liabilities as of December 31, 2001 and 2000 are as follows: 2001 2000 ------------------ Deferred tax assets: Loan loss .................................................. $ 3,831 $ 3,772 Deferred compensation ...................................... 426 403 Postretirement benefits..................................... 407 407 Depreciation ............................................... 242 82 Other....................................................... 118 - ------------------ Total deferred tax assets .................................... $ 5,024 $ 4,664 13 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) 2001 2000 --------------------- Deferred tax liabilities: Accretion ............................................ $ 311 $ 234 Retirement plans ..................................... 153 56 Intangible assets .................................... 291 290 Deferred income ...................................... 394 408 Marked-to-market adjustment........................... 1,921 493 Other................................................. - 525 --------------------- Total deferred tax liabilities ......................... 3,070 2,006 Net deferred tax assets ................................ $ 1,954 $ 2,658 ===================== No valuation allowance was recognized for the deferred tax assets at December 31, 2001 and 2000. Note 8. Retirement Plan and Supplemental Retirement Plans Information with respect to the Retirement Plan and the Supplemental Retirement Plans is as follows: 2001 2000 --------------------- Change in benefit obligation Benefit obligation at beginning of year ................ $ 19,615 $ 17,944 Service cost-benefits earned during the period ......... 635 1,221 Interest cost on projected benefit obligation .......... 1,266 1,322 Actuarial (gain) loss................................... (802) 30 Benefits paid .......................................... (1,063) (902) --------------------- Benefit obligation at end of year....................... $ 19,651 $ 19,615 ===================== Change in plan assets Fair value of plan assets at beginning of year.......... $ 17,583 $ 19,090 Actual return on plan assets ........................... (435) (888) Benefits paid........................................... (1,063) (902) Employer contribution................................... 310 283 --------------------- Fair value of plan assets at end of year ............... 16,395 17,583 --------------------- Funded status (3,256) (2,032) Unrecognized net actuarial gain ........................ 619 (489) Unrecognized prior service costs ....................... (270) (343) Unrecognized net transition asset ...................... - - --------------------- Pension liability ...................................... $ (2,907) $ (2,864) ===================== Weighted-average assumptions as of December 31 Assumed discount rate for obligation.................... 7.00%-7.50% 7.25%-8.00% Assumed long-term rate of investment return ............ 8.50% 8.50% Assumed salary increase rate ........................... 4.00%-5.10% 4.00%-5.10% Expense recognized in 2001, 2000, and 1999 amounted to $353, $680, and $1,045, respectively, and is summarized as follows:
2001 2000 1999 ------------------------------- Service cost-benefits earned during the period.......... $ 635 $ 1,221 $ 1,684 Interest cost on projected benefit obligation .......... 1,266 1,322 1,039 Expected return on plan assets ......................... (1,476) (1,593) (1,455) Amortization of net transition asset.................... - (126) (126) Amortization of prior service cost ..................... (72) (144) (61) ------------------------------- $ 353 $ 680 $ 1,045 ===============================
14 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) 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. The Corporation has invested in bank-owned life insurance contracts to meet its future obligations under the supplemental retirement plans. For the nonqualified supplemental retirement plan, the projected benefit obligation excess of plan assets was $3,920 and $3,884 for December 31, 2001 and 2000 respectively. Expense recorded by the Corporation for the 401(k) deferred salary savings plan for the years ended December 31, 2001, 2000 and 1999 was $306, $306 and $290, respectively. Note 9. Other Postretirement Benefit Plan Information with respect to Other Postretirement Benefits is as follows: Change in benefit obligation 2001 2000 ----------------------- Benefit obligation at beginning of year ................ $ 929 $ 903 Service cost-benefits earned during the period ......... 34 32 Interest cost on projected benefit obligation .......... 66 64 Actuarial (gain) loss................................... 7 (31) Benefits paid .......................................... (69) (39) ----------------------- Benefit obligation at end of year....................... $ 967 $ 929 ======================= Fair value of plan assets .............................. - - ----------------------- Funded status (967) (929) Unrecognized net actuarial loss ........................ 42 33 Unrecognized prior service cost......................... (251) (269) ----------------------- Accrued pension expense ................................ $ (1,176) $ (1,165) ======================= Net periodic postretirement benefit cost for the years ended December 31, 2001, 2000, and 1999 includes the following components:
2001 2000 1999 ------------------------ Service cost-benefits earned during the period........................ $ 34 $ 32 $ 30 Interest cost on accumulated postretirement benefit obligation ....... 66 64 61 Prior service cost.................................................... (20) (20) (20) Amortization of actuarial loss ....................................... - - 6 ------------------------ $ 80 $ 76 $ 77 ========================
Weighted-average assumptions as of December 31 2001 2000 ------------------ Assumed discount rate for obligation......................... 7.25% 7.25% Medical care cost trend on covered charges*.................. 6.50% 6.50% *For measurement purposes, the medical care cost trend rate on covered charges is 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, a one-percentage-point change in the assumed health care cost trend rates would have the following effects:
One Percentage Point ------------------------------ Increase Decrease ------------------------------ Effect on total of service and interest cost components ................ $ 3 $ (3) Effect on postretirement benefit obligation ............................ 36 (35)
The Corporation provides supplemental executive retirement benefits covering selected employees and retirees. These plans are nonqualified defined benefit plans. Assumptions used in determining the net periodic pension costs are similar to those used to determine the costs of the Corporation's retirement plan. Expenses charged to salaries and benefits were not material to the Corporation's consolidated financial statements. 15 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) 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 800,000 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. After two years, 33 percent of the optioned shares are exercisable each year for a period not exceeding six years. 273,530 common shares were available for future options and 338,373 common shares were exercisable at December 31, 2001. Transactions involving the plan are summarized as follows: Shares Option Price Under Option Per Share -------------------------------- Outstanding at December 31, 1998............. 126,404 $12.95-$28.57 Granted...................................... 15,750 31.67 Granted...................................... 146,213 24.29 Exercised.................................... (30,715) 12.95 Exercised.................................... (20,435) 14.76 -------------------------------- Outstanding at December 31, 1999............. 237,217 $14.76-$31.67 Granted...................................... 10,500 24.40 Granted...................................... 53,000 22.25 Exercised.................................... (4,491) 14.76 -------------------------------- Outstanding at December 31, 2000............. 296,226 $14.76-$31.67 Granted...................................... 23,000 25.35 Granted...................................... 91,500 35.35 Forfeited ................................... (4,725) 24.29 Exercised.................................... (2,625) 31.67 Exercised.................................... (65,003) 14.76 -------------------------------- Outstanding at December 31, 2001............. 338,373 $22.25-$35.35 ================================ Note 11. Time Deposits The aggregate amount of certificates of deposit in denominations of $100 or more was $37,867 at December 31, 2001, and $31,662 at December 31, 2000, with interest expense of $1,887 for 2001 and $1,736 for 2000. Other time deposits in denominations of $100 or more were $13,314 at December 31, 2001, and $20,055 at December 31, 2000, with interest expense of $879 for 2001 and $1,230 for 2000. Note 12. Long-Term Debt At December 31, 2001 and 2000, long-term debt consisted of the following:
Description December 31, December 31, 2001 2000 Interest Rate Maturity ------------------------------------------------------------------- Federal Home Loan Bank Advance ................ $ - $ 3,500 6.60% (variable) May 2001 Federal Home Loan Bank Advance ................ - 3,500 6.58% (variable) March 2001 Federal Home Loan Bank Advance ................ 75 75 4.00% September 2006 Federal Home Loan Bank Advance ................ 4,000 4,000 4.99% January 2009 Federal Home Loan Bank Advance ................ 5,000 5,000 6.30% November 2009 Federal Home Loan Bank Advance ................ 5,000 5,000 6.10% September 2010 Federal Home Loan Bank Advance ................ 5,000 5,000 5.89% December 2010 Federal Home Loan Bank Advance ................ 5,000 - 4.68% March 2011 ------------------------------- $24,075 $26,075 ===============================
16 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) Advances from the Federal Home Loan Bank are collateralized by Federal Home Loan Bank stock and substantially all first mortgage loans of the Banks. These advances may be convertible to a floating interest rate and could be subject to a prepayment fee. Univest, through its banks, has short-term and long-term credit facilities with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $188.1 million. At December 31, 2001, Univest's outstanding borrowings under the FHLB credit facilities totaled $24.1 million. The maximum borrowing capacity changes as a function of the banks' qualifying collateral assets and the amount of funds received may be reduced by additional required purchases of FHLB stock. Univest maintains verbal federal fund credit lines with several correspondent banks totaling $70 million. At December 31, 2001, Univest's outstanding borrowings under these lines totaled $16.7 million. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will. Univest, through Union, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At December 31, 2001, the Corporation had no outstanding borrowings under this line. Note 13. Earnings per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands):
2001 2000 1999 -------------------------------- Numerator: Net income ......................................................... $ 19,210 $ 17,348 $ 15,804 Numerator for basic and diluted earnings per share - income available to common shareholders .................... $ 19,210 $ 17,348 $ 15,804 Denominator:* Denominator for basic earnings per share- weighted-average shares outstanding................................. 7,136 7,394 7,587 Effect of dilutive securities: Employee stock options .......................................... 36 20 48 -------------------------------- Denominator for diluted earnings per share adjusted weighted-average shares outstanding........................ 7,172 7,414 7,635 ================================ Basic earnings per share*............................................. $ 2.69 $ 2.35 $ 2.08 ================================ Diluted earnings per share*........................................... $ 2.68 $ 2.34 $ 2.07 ================================
For additional disclosures regarding the employee stock options, see Note 10. *The weighted-average number of shares outstanding as well as per share data has been restated to give effect to a five percent stock dividend paid May 1, 2000. Note 14. Financial Instruments with Off-Balance-Sheet Risk and Commitments Loan commitments are made to accommodate the financial needs of the Banks' customers. Standby letters of credit commit the Banks 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 Banks' normal credit policies. Collateral is obtained based on management's credit assessment of the customer. 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. As of December 31, 2001, the Banks have identified the due from banks' balance of $23,658 as a significant concentration of credit risk because it contains a balance due from a single depository institution that 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. 17 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) The following schedule summarizes the Corporation's off-balance-sheet financial instruments:
Contract of Notional Amount ----------------- Financial instruments representing credit risk: Commitments to extend credit..................................... $ 247,271 Standby letters of credit or commercial letters of credit........ 19,759 Interest-rate swaps, notional principal amount .................. 30,000
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. 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, 2001, $30 million in notional interest-rate swaps were outstanding. The contracts entered into by the Corporation expire as follows: $10 million in notional principal amount in first quarter 2002, $10 million in second quarter 2003 and $10 million in third quarter of 2003. The impact of the interest-rate swaps on net interest income for the year ended December 31, 2001 was a positive $440 and for the year ended December 31, 2000, a negative $187. The ineffective portion of the swaps' change in fair value is to be immediately recognized in earnings. For the Corporation, the amount of the ineffective portion is immaterial. 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, 2001, the market value of interest-rate swaps in a favorable position was $465. There were no interest-rate swaps in an unfavorable position. At December 31, 2000, the market value of interest-rate swaps in a favorable position was $107 and the market value of interest-rate swaps in an unfavorable position was $66. 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 not to 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 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. The Corporation, using the best available data and an estimation methodology suitable for each category of financial instruments, has determined estimated fair values. 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. 18 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) The following table represents the estimates of fair value of financial instruments:
DECEMBER 31, 2001 December 31, 2000 --------------------------------------------------------------- CARRYING OR Carrying or NOTIONAL/CONTRACT FAIR Notinal/Contract Fair AMOUNT VALUE Amount Value --------------------------------------------------------------- Assets: Cash and short-term assets ........................ $ 54,902 $ 54,902 $ 61,838 $ 61,838 Investment securities.............................. 347,858 350,742 348,426 349,252 Net loans.......................................... 788,035 817,072 729,020 747,880 Liabilities: Deposits........................................... $998,137 $1,006,435 $971,924 $973,372 Short-term borrowings ............................. 91,600 91,600 68,499 68,499 Long-term debt .................................... 24,075 25,241 26,075 26,551 Off-Balance-Sheet: Commitments to extend credit....................... $247,271 $ (610) $251,622 $ (724) Letters of credit ................................. 19,759 (296) 18,902 (284) Interest-rate swap, notional principal amount...... 30,000 465 30,000 41
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: The fair values for loans are estimated using discounted cash flow analyses, using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and imbedded prepayment options. DEPOSIT LIABILITIES: The fair values for deposits with fixed maturities are estimated by discounting the final maturity, and the fair values for non-maturity deposits are established using a decay factor estimate of cash flows based upon industry-accepted assumptions. The discount rate applied to deposits consists of an appropriate risk free rate and included components for credit risk, operating expense, and imbedded prepayment options. 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 a discounted cash flow analysis using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and imbedded prepayment options. OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Corporation's off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. 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. 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). Management believes, as of December 31, 2001, that the Banks meet all capital adequacy requirements to which they are subject. 19 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data) As of December 31, 2001, 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 Banks' category. The Banks' actual capital amounts and ratios are also presented in the table.
To Be Well-Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------- As of December 31, 2001: Total Capital (to Risk-Weighted Assets): CONSOLIDATED ....................................... $121,702 13.55% $ 71,877 8.00% $ 89,846 10.00% Union National Bank ................................ 106,712 13.18% 64,754 8.00% 80,942 10.00% Pennview Savings Bank .............................. 12,078 14.84% 6,512 8.00% 8,140 10.00% Tier I Capital (to Risk-Weighted Assets): CONSOLIDATED ....................................... 111,408 12.40% 35,938 4.00% 53,907 6.00% Union National Bank ................................ 96,822 11.96% 32,377 4.00% 48,565 6.00% Pennview Savings Bank .............................. 11,170 13.72% 3,256 4.00% 4,884 6.00% Tier I Capital (to Average Assets): CONSOLIDATED ....................................... 111,408 9.24% 36,168 3.00% 48,224 4.00% Union National Bank ................................ 96,822 9.24% 31,444 3.00% 41,925 4.00% Pennview Savings Bank .............................. 11,170 7.39% 4,536 3.00% 6,048 4.00% As of December 31, 2000: Total Capital (to Risk-Weighted Assets): CONSOLIDATED ........................................ $119,782 13.89% $ 69,005 8.00% $ 86,256 10.00% Union National Bank ................................. 102,785 13.45% 61,121 8.00% 76,401 10.00% Pennview Savings Bank ............................... 13,598 15.16% 7,175 8.00% 8,969 10.00% Tier I Capital (to Risk-Weighted Assets): CONSOLIDATED ........................................ 109,055 12.64% 34,502 4.00% 51,753 6.00% Union National Bank ................................. 93,232 12.20% 30,560 4.00% 45,841 6.00% Pennview Savings Bank ............................... 12,664 14.12% 3,588 4.00% 5,382 6.00% Tier I Capital (to Average Assets): CONSOLIDATED ........................................ 109,055 9.56% 34,219 3.00% 45,626 4.00% Union National Bank ................................. 93,232 9.39% 29,786 3.00% 39,715 4.00% Pennview Savings Bank ............................... 12,664 8.96% 4,241 3.00% 5,655 4.00%
Dividend and Other Restrictions The approval of the Office of 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 2002 without approval of the Office of Comptroller of the Currency of approximately $12,193 plus an additional amount equal to the Bank's net profits for 2002 up to the date of any such dividend declaration. The Federal Reserve Act requires that extension of credit by Union 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 Union'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. 20 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (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, 2001 2000 --------------------- Assets: Deposits with bank subsidiary ............................................. $ 222 $ 67 Investments in U.S. Government obligations available-for-sale.............. 1,000 1,570 Investments in subsidiaries, at equity in net assets: Banks .................................................................. 118,166 112,075 Non-banks .............................................................. 5,760 5,469 Other assets .............................................................. 3,469 2,817 --------------------- Total assets ......................................................... $128,617 $121,998 ===================== Liabilities: Dividends payable ......................................................... $ 1,486 $ 1,395 Other liabilities ......................................................... 5,551 5,363 --------------------- Total liabilities ......................................................... 7,037 6,758 --------------------- Shareholders' equity ........................................................ 121,580 115,240 --------------------- Total liabilities and shareholders' equity............................ $128,617 $121,998 ===================== Statements of Income Year ended December 31, 2001 2000 1999 ----------------------------------- Dividends from banks .......................................... $ 15,193 $ 8,139 $ 12,991 Other income .................................................. 10,249 9,500 8,578 ----------------------------------- Total operating income ...................................... 25,442 17,639 21,569 Operating expenses ............................................ 10,531 9,975 9,839 ----------------------------------- Income before income tax benefit and equity in undistributed income of subsidiaries ........................ 14,911 7,664 11,730 Applicable income tax (benefit) ............................... (140) (81) (365) ----------------------------------- Income before equity in undistributed income of subsidiaries... 15,051 7,745 12,095 Equity in undistributed (loss) income of subsidiaries: Banks ....................................................... 3,868 9,503 3,439 Non-banks ................................................... 291 100 270 ----------------------------------- Net income .................................................... $ 19,210 $ 17,348 $ 15,804 ===================================
21 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (dollars in thousands, except share data)
Statements of Cash Flows Year ended December 31, 2001 2000 1999 ------------------------------------ Cash flows from operating activites Net income ............................................................ $ 19,210 $ 17,348 $ 15,804 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income/loss of subsidiaries........... (4,159) (9,603) (3,709) Increase in other assets .......................................... (968) (545) (1,592) Depreciation of premises and equipment ............................ 315 520 571 Increase in other liabilities ..................................... 188 500 1,969 ------------------------------------ Net cash provided by operating activities ..................... 14,586 8,220 13,043 Cash flows from investing activities Proceeds from sales of securities available-for-sale ................... 1,570 1,542 1,000 Purchases of investment securities available-for-sale .................. (1,000) (1,570) (1,542) ------------------------------------ Net cash provided by (used in) investing activities 570 (28) (542) Cash flows from financing activities Purchases of treasury stock ............................................ (11,506) (4,264) (10,183) Stock issued under dividend reinvestment and employee stock purchase plans ................................................. 1,205 1,239 1,270 Proceeds from exercise of stock options ................................ 1,052 66 699 Repayment from subsidiary .............................................. -- -- 350 Cash dividends ......................................................... (5,752) (5,233) (4,661) ------------------------------------ Net cash used in financing activities ......................... (15,001) (8,192) (12,525) ------------------------------------ Net increase (decrease) in deposits with bank subsidiary ............... 155 -- (24) Deposits with bank subsidiary at beginning of year ..................... 67 67 91 ------------------------------------ Deposits with bank subsidiary at end of year ........................... $ 222 $ 67 $ 67 ====================================
During 2001, 2000, and 1999, the parent company made income tax payments of $7,678, $7,077, and $6,758, respectively. No interest payments were made. 22 UNIVEST CORPORATION OF PENNSYLVANIA Notes to Consolidated Financial Statements (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, 2001 and 2000 were as follows: 2001 Quarterly Financial Data
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ------------------------------------------------------ Interest income ..................................... $ 19,038 $ 19,938 $ 19,984 $ 20,248 Interest expense .................................... 7,436 8,470 9,073 9,462 ------------------------------------------------------ Net interest income ............................... 11,602 11,468 10,911 10,786 Provision for loan losses ........................... 316 216 216 15 ------------------------------------------------------ Net interest income after provision for loan losses . 11,286 11,252 10,695 10,771 Noninterest income .................................. 4,874 4,188 4,679 4,225 Noninterest expense ................................. 9,230 8,628 8,567 9,364 ------------------------------------------------------ Income before income taxes .......................... 6,930 6,812 6,807 5,632 Applicable income taxes ............................. 1,794 1,913 1,793 1,471 ------------------------------------------------------ Net income ........................................ $ 5,136 $ 4,899 $ 5,014 $ 4,161 ====================================================== Per share data: Net income: Basic ......................................... $ .73 $ .69 $ .70 $ .58 ====================================================== Diluted ....................................... $ .72 $ .68 $ .70 $ .58 ====================================================== Dividends per share* ................................ $ .21 $ .21 $ .21 $ .19 ====================================================== 2000 Quarterly Financial Data DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ------------------------------------------------------ Interest income ..................................... $ 20,488 $ 20,330 $ 19,881 $ 19,178 Interest expense .................................... 9,752 9,453 8,931 8,323 ------------------------------------------------------ Net interest income ............................... 10,736 10,877 10,950 10,855 Provision for loan losses ........................... 148 215 15 (173) ------------------------------------------------------ Net interest income after provision for loan losses 10,588 10,662 10,935 11,028 Noninterest income .................................. 4,108 4,157 4,112 4,364 Noninterest expense ................................. 8,899 8,846 8,567 9,503 ------------------------------------------------------ Income before income taxes .......................... 5,797 5,973 6,480 5,889 Applicable income taxes ............................. 1,524 1,641 1,862 1,764 ------------------------------------------------------ Net income ........................................ $ 4,273 $ 4,332 $ 4,618 $ 4,125 ====================================================== Per share data: Net income: Basic ......................................... $ .58 $ .59 $ .62 $ .55 ====================================================== Diluted ....................................... $ .58 $ .59 $ .62 $ .55 ====================================================== Dividends per share* ................................ $ .19 $ .19 $ .19 $ .162 ======================================================
*Per share data has been restated to give effect to a 5% stock dividend paid May 1, 2000. 23 UNIVEST CORPORATION OF PENNSYLVANIA 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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 18, 2002 24 UNIVEST CORPORATION OF PENNSYLVANIA FIVE-YEAR PERFORMANCE HIGHLIGHTS [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] BASIC EARNINGS PER SHARE (In Dollars) - -------------------------------------------------------------------------------- 97 ................................................................ 1.62 98 ................................................................ 1.84 99 ................................................................ 2.08 00 ................................................................ 2.35 01 ................................................................ 2.69 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] AVERAGE DEPOSITS (Millions of Dollars) - -------------------------------------------------------------------------------- 97 ................................................................ 755.0 98 ................................................................ 830.2 99 ................................................................ 885.7 00 ................................................................ 934.8 01 ................................................................ 969.1 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] AVERAGE LOANS (Millions of Dollars) - -------------------------------------------------------------------------------- 97 ................................................................ 625.8 98 ................................................................ 645.7 99 ................................................................ 685.6 00 ................................................................ 717.7 01 ................................................................ 761.6 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] NET INCOME (Millions of Dollars) - -------------------------------------------------------------------------------- 97 ................................................................ 13.18 98 ................................................................ 14.50 99 ................................................................ 15.80 00 ................................................................ 17.35 01 ................................................................ 19.21 - -------------------------------------------------------------------------------- Selected Financial Data
(In thousands, except per share data) Year ended December 31, 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------- Total assets........................... $ 1,260,713 $ 1,204,714 $ 1,121,511 $ 1,070,989 $ 973,676 Long-term obligations.................. 24,075 26,075 18,075 9,075 9,075 Interest income........................ 79,208 79,877 73,844 72,460 69,540 Net interest income.................... 44,767 43,418 42,463 40,645 40,628 Provision for loan losses.............. 763 205 1,052 958 1,310 Net income............................. 19,210 17,348 15,804 14,501 13,177 Net income per share:* Basic............................ $ 2.69 $ 2.35 $ 2.08 $ 1.84 $ 1.62 Diluted.......................... $ 2.68 $ 2.34 $ 2.07 $ 1.82 $ 1.61 Dividends declared per share........... $ 0.820 $ 0.732 $ 0.629 $ 0.548 $ 0.457
*Per share data has been restated to give effect to a 5% stock dividend paid May 1, 2000. 25 UNIVEST CORPORATION OF PENNSYLVANIA 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 2001, 2000, and 1999 were as follows:
2001 2000 1999 -------------------------------------------------- Net income...................................................... $ 19,210 $ 17,348 $ 15,804 Net income per share: Basic........................................................ 2.69 2.35 2.08 Diluted...................................................... 2.68 2.34 2.07
2001 versus 2000 The 2001 results compared to 2000 include the following significant pretax components: -- Net interest income increased due to growth in average earning assets offset by a decrease in the net interest margin. The net interest margin decreased to 4.0% from 4.1%. -- Total noninterest income increased by $1.3 million or 7.8% due primarily to growth in debit card compensation and the cash surrender value of bank owned life insurance policies. -- Other noninterest expense increased $1.2 million or 12.4% largely due to additional advertising, contribution and community relations expenses. 2000 versus 1999 The 2000 results compared to 1999 include the following significant pretax components: -- Net interest income increased due to growth in average earning assets and an increase in average yield that was offset by growth in interest-bearing liabilities with an increase in yield. The net interest margin decreased to 4.1% from 4.2%. -- Total noninterest income increased by $1.2 million or 7.7% due to growth in fee income and commission income. Commission income, which is offset by commission expense, is the primary source of income for Fin-Plan Group and George Becker Associates, Inc. acquired during fiscal 2000. -- Salaries and benefits increased $1.7 million or 8.9% largely due to bonuses and the commissions and salaries of Fin-Plan Group and George Becker Associates, Inc. acquired during fiscal 2000. Net Interest Income Net interest income is the difference between interest earned on loans, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation's revenues. The following table demonstrates a trend of increasing amounts for 1999 through 2001. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Asset/Liability Management and Investment Committees work to maintain an adequate and predictable net interest margin for the Corporation. 26 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2001, 2000, and 1999:
2001 2000 1999 ---------------------------------------------------------------------------------------------------- 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 $ 359,014 $ 20,805 5.8% $ 341,481 $ 20,884 6.1% $ 325,693 $ 18,863 5.8% Loans 761,640 58,403 7.7% 717,749 58,993 8.2% 685,644 54,981 8.0% ---------------------------------------------------------------------------------------------------- Total interest-earning assets 1,120,654 79,208 7.1% 1,059,230 79,877 7.5% 1,011,337 73,844 7.3% Noninterest-earning assets 90,247 87,147 77,985 ------------- ------------ ------------- Total assets $ 1,210,901 $ 1,146,377 $ 1,089,322 ============= ============ ============= Interest-bearing liabilities: Deposits $ 816,402 $ 30,776 3.8% $ 783,868 $ 32,937 4.2% $ 735,260 $ 28,220 3.8% Borrowings 102,274 3,665 3.6% 85,410 3,522 4.1% 85,822 3,161 3.7% ---------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 918,676 34,441 3.7% 869,278 36,459 4.2% 821,082 31,381 3.8% Noninterest-bearing liabilities 173,014 169,616 165,472 ------------- ------------ ------------- Total liabilities 1,091,690 1,038,894 986,554 Shareholders' equity 119,211 107,483 102,768 ------------- ------------ ------------- Total liabilities and shareholders' equity $ 1,210,901 $ 1,146,377 $ 1,089,322 ============= ============ ============= ---------- --------- ---------- Net interest income $ 44,767 $ 43,418 $ 42,463 ========== ========= ========== Interest-rate spread 3.4% 3.3% 3.5% ========== ========== ========= Net interest margin on weighted average interest- earning assets 4.0% 4.1% 4.2% ========== ========== ========= Ratio of average interest-earning assets to average interest-bearing liabilities 122.0% 121.9% 123.2% ========== ========== =========
Interest Income Interest and fees on loans decreased 1.0% or $0.6 million from the $59.0 million recorded for the year ended December 31, 2000 to $58.4 million for the year ended December 31, 2001. There was a significant increase in loan volume in commercial loans that was offset by a decrease in loan yields. Prime rate, which is an important factor of the banks' loan interest income, decreased from 9.50% beginning in January 2001 to 4.75% in December 2001. The average prime rate for the year ended December 31, 2001 was 6.77% compared to 9.27% for the year ended December 31, 2000. The average interest yield on the portfolio decreased from 8.2% in 2000 to 7.7% in 2001. 27 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and fees on loans increased 7.3% or $4.0 million from the $55.0 million recorded for the year ended December 31, 1999 to $59.0 million for the year ended December 31, 2000. The growth was due to increased volume and an increase in rate. Prime rate was increased during 2000 from 8.50% in January 2000 to 9.50% at December 2000. The average prime rate for the year 2000 was 9.27% compared to 8.00% for the year 1999. The average interest yield on the portfolio increased from 8.0% in 1999 to 8.2% in 2000. Tax-free interest on loans shows an increasing trend when comparing the $3.3 million for December 31, 2001 with the $3.2 million recorded for December 31, 2000 and the $2.6 million for December 31, 1999. Interest on U.S. Government obligations decreased from $7.3 million for the year ended December 31, 2000 to $5.2 million for the year ended December 31, 2001. The decline was due to a decrease in volume and rate. As U.S. government securities matured or were called, many were replaced with agency mortgage-backed securities. Interest on U.S. Government obligations decreased from $9.6 million for the year ended December 31, 1999 to $7.3 million at December 31, 2000. The decline was due to a decrease in volume. As treasury securities matured many were replaced with corporate and asset-backed securities. Interest and dividends on state and political subdivisions shows an increasing trend from $0.9 million in 1999 to $1.3 million in 2000 and $1.9 million in 2001. The increase is a result of a continued commitment to tax-exempt securities. During 2001 and 2000, the Corporation acquired tax-exempt securities with a term of greater than ten years and at tax-equated yields substantially higher than portfolio yields. The other securities category consists mainly of U.S. Government Agency mortgage-backed securities. Income on other securities has grown from $7.6 million in 1999 to $10.3 million in 2000 and $12.5 million in 2001. The increases were all due to increased average volume where average balances increased from $122.2 million for 1999 to $154.8 million for 2000 and to $192.6 million for 2001. Corporate and asset-backed securities purchased during the second half of 2000 also contributed to the increase in income. 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 decreased from $1.7 million in 2000 to $0.7 million in 2001 due to both decreased volume and a sharp decline in the federal funds rate. Interest on federal funds sold increased from $0.5 million in 1999 to $1.7 million in 2000 due to both increased volume and rate. Interest Expense Interest expense on demand deposits decreased 20.2% or $2.0 million from $9.9 million in 2000 to $7.9 million in 2001. An increase in volume was offset by a decrease in the rate of certain types of money market accounts. Interest expense on demand deposits increased 39.4% or $2.8 million from $7.1 million in 1999 to $9.9 million in 2000. The growth is attributed to an increase in volume and rate in certain types of money market accounts. Interest expense on savings deposits decreased from $2.7 million in 2000 to $2.6 million in 2001. A reduction in rate caused the decrease. Interest expense on savings deposits decreased from $2.8 million in 1999 to $2.7 million in 2000. A reduction in volume caused the decrease. Interest expense on time deposits decreased from $20.4 million in 2000 to $20.3 million in 2001 primarily due to a decline in rates. Interest expense on time deposits increased from $18.4 million in 1999 to $20.4 million in 2000. Certificates of deposit volumes and rates grew due to special rate promotions during 2000. Interest expense-all other consists of interest paid on short-term borrowings such as federal funds purchased, repurchase agreements and a treasury tax and loan note. In addition, Union National Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreements account. Interest expense decreased from $2.4 million in 2000 to $2.2 million in 2001 due to a decrease in rate that was partially offset by an increase in volume. Interest expense-all other decreased from $2.5 million in 1999 to $2.4 million in 2000 due to a reduction in volume that was partly offset by an increase in rate. Long-Term Debt Interest on long-term debt increased from $1.2 million at December 31, 2000 to $1.4 million at December 31, 2001. This increase represents a full year of interest on the additional $8.0 million borrowed from the Federal Home Loan Bank of Pittsburgh by Pennview in 2000. Interest on long-term debt increased from $0.7 million at December 31, 1999 to $1.2 million at December 31, 2000. This increase represents interest on the additional borrowings from the Federal Home Loan Bank of Pittsburgh by Pennview in 2000. Federal Home Loan Bank advances are available to meet seasonal and other withdrawals from deposit accounts, to purchase mortgage-backed securities and to expand lending. Reserve For Possible Loan Losses Management believes the reserve for possible loan losses is maintained at a level that is adequate to absorb potential losses in the loan portfolio. Management's methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth, and composition of the loan portfolio. 28 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The reserve for possible loan losses is determined through a periodic evaluation that takes into consideration the growth of the loan portfolio, the status of past-due loans, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in the charge-off activity. Loans are also reviewed for impairment based on discounted cash flows using the loans' initial effective interest rate or the fair value of the collateral for certain collateral dependent loans as provided for under SFAS No. 114. Any of the above criteria may cause the provision to fluctuate. The provision for December 31, 2001, 2000, and 1999 was $0.8 million, $0.2 million, and $1.1 million, respectively. Growing loan volumes and a migration of credit risk assessment towards weaker loan grades indicated the need for an increase in the reserve for 2001. As weakness in the economy became apparent in the latter part of 2001, the proportion of credits with identified credit issues also increased. The provision for December 31, 2000 was minimal due to improvements in the evaluation criteria and recoveries in the fourth quarter of 2000. The ratio of the reserve for possible loan losses to total loans at December 31, 2001 and 2000 was 1.3% and 1.4% respectively. (Also refer to Note 1 of Notes to Consolidated Financial Statements.) At December 31, 2001, the recorded investment in loans that are considered to be impaired under SFAS No.114 was $1.4 million, all of which were on a nonaccrual basis. The related reserve for possible loan losses for those loans was $0.5 million. At December 31, 2000, the recorded investment in loans that are considered to be impaired under SFAS No.114 was $1.7 million, all of which were on a nonaccrual basis. The related reserve for possible loan losses for those loans was $1.0 million. When a loan, including a loan impaired under SFAS No. 114, is classified as nonaccrual, the accrual of interest on such a loan is discontinued. A loan is classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on 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 is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Loans are usually restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Total cash basis, restructured and nonaccrual loans total $1.6 million at December 31, 2001 and $1.9 million at December 31, 2000 and $2.3 million at December 31, 1999 and consist mainly of commercial loans and real estate-related commercial loans. For the years ended December 31, 2001, 2000 and 1999, nonaccrual loans resulted in lost interest income of $0.2 million for all three years. In management's evaluation of the loan portfolio risks, any significant future increases in nonperforming loans are dependent to a large extent on the economic environment, or specific industry problems. The Corporation's ratio of nonperforming assets to total loans was .20% as of December 31, 2001 and .26% as of December 31, 2000. At December 31, 2001 and 2000, the Corporation had no Other Real Estate Owned ("OREO"). OREO is usually recorded in "Other Assets" at fair market value, less estimated costs to sell, in the accompanying consolidated balance sheets. Noninterest Income Trust income continues to be a major source of noninterest income. Income for the year ended December 31, 2001 of $4.3 million was $0.1 million or 2.3% less than the $4.4 million reported for year ended December 31, 2000. The increase in the number of trust accounts was offset by the decline in market conditions thereby lowering the dollar value of assets under management. Income for the year ended December 31, 2000 of $4.4 million was $0.4 million or 10.0% more than the $4.0 million reported for the year ended December 31, 1999. The increase is attributed to growth in the number of trust accounts and a higher dollar value of assets under management. Service charges on demand deposits increased $0.2 million from $3.7 million for the year ended December 31, 2000 to $3.9 million for the year ended December 31, 2001. The growth was due mainly to increases in various transaction fees and deposit service fees. Service charges on demand deposits increased $0.2 million from $3.5 million at December 31, 1999 to $3.7 million at December 31, 2000. The realignment of checking account products resulted in an increase of deposit service fees. Service charges on other deposits increased $0.1 million from $1.2 million for the year ended December 31, 2000 to $1.3 million for the year ended December 31, 2001. The growth was due mainly to increases in various transaction fees and deposit service fees. Service charges on other deposits remained constant at $1.2 million for the years ended December 31, 1999 and 2000. Commission income, which is offset by commission expense, is the primary source of income for Fin-Plan Group, George Becker Associates, Inc. and the newly acquired Gum Insurance. Commission income decreased from $2.8 million at 29 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2000 to $2.6 million at December 31, 2001, a reduction of $0.2 million or 7.1%. This decline is primarily due to an increase in broker/dealer commission that was adversely impacted by the decline in the equity markets. Commission income grew from $2.1 million at December 31, 1999 to $2.8 million at December 31, 2000. This is an increase of $0.7 million or 33.3%. The majority of the growth was due to the new company, George Becker Associates, Inc. Other income that is noninterest related consists mainly of general fee income and other miscellaneous types of income. Other noninterest income of $5.7 million for 2001 is $1.1 million or 23.9% higher than the $4.6 million earned in 2000. Increases in debit card compensation, cash surrender values of bank-owned life insurance policies and nonqualified plan annuities all contributed to the growth. Other noninterest income of $4.6 million for 2000 is $0.1 million or 2.1% lower than the $4.7 million earned in 1999. An increase in debit card compensation and Bank-Owned Life Insurance Policy income offset by a decrease in mortgage servicing fees is the reason for the slight decline. Asset Sales Sales of mortgage loans during the year ended December 31, 2001 resulted in a gain of $83 thousand as compared to $14 thousand for the year ended December 31, 2000. Sales increased due to the large number of refinancings that was a result of the decreasing long-term rates during 2001. Sales of mortgage loans during the year ended December 31, 2000 resulted in a gain of $14 thousand as compared to $51 thousand for the year ended December 31, 1999. Increasing long-term rates during 2000 caused a reduction in new loan volume and resulted in fewer sales. During 2001, securities totaling approximately $15.9 million were sold from the available-for-sale portfolio resulting in a net gain of $150 thousand. Short-term securities were sold and reinvested in medium-term securities to take advantage of the steepness of the yield curve. During 2000, securities totaling approximately $9.0 million were sold from the available-for-sale portfolio or matured, resulting in a net gain of $1 thousand. Near maturity government securities were sold and reinvested in bank owned life insurance. In 1999, securities totaling approximately $18.4 million were sold from the available-for-sale portfolio or matured at a net gain of $3 thousand. Short-term treasury securities were sold and the funds reinvested in agency securities to take advantage of the steepness of the yield curve and spread between treasuries and agencies. The total of debt and equity securities held in the available-for-sale portfolio as of December 31, 2001 is $238.1 million versus $189.9 million at December 31, 2000. The accumulated other comprehensive income of $3.1 million, net of taxes, has been credited to shareholders' equity as of December 31, 2001. Accumulated other comprehensive income of $0.8 million, net of taxes, was credited to shareholders' equity as of December 31, 2000. Noninterest Expense The operating costs of the Corporation are known as noninterest expense, and include, but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses, attempting to provide technological innovation whenever practical, as operations change or expand. Salaries and benefits decreased $0.9 million or 4.3% from $20.9 million in 2000 to $20.0 million in 2001. Decreases in bonus and commission expense, nonqualified pension expense and vacation liability accrual are the reason for the reduction. Salaries and benefits increased $1.7 million or 8.9% from $19.2 million in 1999 to $20.9 million in 2000. Salary increases of $1.1 million, which include bonuses and commission expense generated by Fin-Plan Group and George Becker Associates, Inc., acquired in fiscal 2000, contributed to this increase. The vacation and paid time off program was realigned in 2000 and created an increase in the vacation liability that generated $0.4 million of additional expense. Net occupancy expense remained constant at $2.7 million for the year ended December 31, 2000 and December 31, 2001. Net occupancy expense increased $0.2 million or 8.0% from $2.5 million for the year ended December 31, 1999 to $2.7 million for the year ended December 31, 2000. The new Franconia office and a full year's expense for the new supermarket opened in 1999 contributed to the higher expense. Equipment expense decreased $0.4 million from $2.6 million in 2000 to $2.2 million in 2001. Equipment expense remained constant at $2.6 million for December 31, 1999 and December 31, 2000. Other expenses of $10.9 million increased $1.2 million or 12.4% for the year ended December 31, 2001 as compared to $9.7 million for the year ended December 31, 2000. Advertising, contributions, community relations and stock option modification expense all contributed to this increase. Other expenses of $9.7 million decreased $0.6 million or 5.8% for the year ended December 31, 2000 as compared to $10.3 million for the year ended December 31, 1999. A decrease in intangible expense and certain retail sales incentives were posted to salaries and benefits in 2000 instead of marketing expense in 1999 contributed to the decrease. Tax Provision The provision for income taxes was $7.0 million for the year ended December 31, 2001, $6.8 million for the year ended December 31, 2000 and $6.6 million for the year ended December 31, 1999. The provision for income taxes for 2001, 2000, and 1999, was at effective rates of 26.7%, 28.1%, and 29.5%, respectively. The effective tax rate reflects the benefits of tax 30 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS credits generated from investments in low-income housing tax projects and tax-free income from investment of securities, loans, and bank-owned life insurance. Critical Accounting Policies Management, in order to prepare Univest's financial statements in conformity with generally accepted accounting principles, is required to make estimates and assumptions that effect the amounts reported in the Corporation's financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially effect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. Reserves for possible loan losses are provided using techniques that specifically identify projected losses on impaired loans, estimate probable losses on pools of homogeneous loans, and estimate the amount of unallocated reserve necessary to account for probable losses that are present in the loan portfolio but not yet currently identifiable. The adequacies of these reserves are sensitive to changes in current economic conditions that may effect the ability of borrowers to make contractual payments as well as the value of the collateral committed to secure such payments. Rapid or sustained downturns in the economy may require increases in reserves that may negatively impact the corporation's results of operation and statements of financial condition in the periods requiring additional reserves. The Corporation accounts for its interest-rate swap contracts, in compliance with SFAS No. 133, by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows of certain prime-rate-based loans held by the bank. When the effectiveness of the hedge can be established and adequately documented, the change in market value of the swap is recorded on the balance sheet of the company but only the accrued payments due under the contract for the current period are passed through the statement of operations. Should the company be unable to document the effectiveness of all or part of the cash flow hedge, the change in market value of the ineffective part of the instrument will need to be marked-to-market through the statement of operations, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods. At 12/31/01 Univest's interest-rate swap hedges were considered to be effective. Intangible assets have been recorded on the books of the Corporation in connection with its acquisitions of Pennview Savings Bank, Fin-Plan Group, Univest Insurance, and several bank branches. These assets, both identifiable and unidentifiable, are subject to tests for impairment. Changes in the useful life or economic value of acquired assets may require a reduction in the asset value carried on the financial statements of the Corporation and a related change in the statement of operations. Such changes in asset value could result from a change in market demand for the products or services offered by an acquired business or by reductions in the expected profit margins that can be obtained through the future delivery of the acquired product or service line. SFAS No. 142, which takes effect January 1, 2002, defines the methods that are acceptable for determining whether intangible asset values are sustainable. Univest designates its investment securities as either held-to-maturity, available-for-sale or trading in accordance with SFAS No. 115. Each of these designations affords different treatment in the statement of operations and statement of financial condition for market value changes effecting securities that are otherwise identical. Should evidence emerge that indicates that management's intent or ability to manage the securities as originally asserted is not supportable, securities in the held-to-maturity or available-forsale designations may be re-categorized so that either statement of financial position or statement of operations adjustments may be required. Univest accounts for mortgage servicing rights for mortgages it originated but subsequently sold in accordance with SFAS No. 140. As such, the value of the rights are booked as income when they are sold. The income booked at sale is the estimated present value of the cash flows that will be received from the current owner of the mortgage over its entire future term. The term of a servicing right can be reasonably estimated using prepayment assumptions of comparable assets priced in the secondary market. As mortgage rates being offered to the public decrease, the life of loan servicing rights tends to shorten, as borrowers have increased incentive to refinance. Shortened loan servicing lives require a change in the value of the servicing rights that have already been recorded to be marked down in the statement of operations of the servicing company. This may cause a material change in reported operations for the Corporation depending on the size of the servicing portfolio and the degree of change in the prepayment speed of the type and coupon of loans being serviced. The Corporation has a retirement plan and supplemental retirement plans that it provides as a benefit to employees and former employees. Determining the adequacy of the funding of these plans may require estimates of future salary rate increases, of long-term rates of investment return, and the use of an appropriate discount rate for the obligation. Changes in these estimates and assumptions due to changes in the economic environment or financial markets may result in material changes in the Corporation's report of operation or statement of financial condition. Readers of the Corporation's financial statements should be aware that the estimates and assumptions used in the Corporation's current financial statements may need to be updated in future financial presentations for changes in circumstances, business or economic conditions in order to fairly represent the condition of the Corporation at that time. 31 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition During 2001, total assets increased to $1,260.7 million, a growth of $56.5 million or 4.7% over the $1,204.7 million in 2000. Interest-bearing deposits increased $10.6 million to $15.7 million as compared to the $5.1 million at December 31, 2000. Federal funds sold decreased $16.1 million to $0.1 million as compared to the $16.2 million at December 31, 2000. Total loans increased significantly by $59.1 million from $739.2 million at December 31, 2000 to $798.3 million at December 31, 2001. Other assets increased $4.5 million due to the increase in the cash surrender value of the bank owned life insurance policies, the recognition of the market value of interest-rate swaps on the balance sheet and the acquisition of the Gum Insurance. The increase in deposits and the decrease in federal funds sold provided funds for the increases in loans. Total deposits grew from $971.9 million at December 31, 2000 to $998.1 million at December 31, 2001, an increase of $26.2 million or 2.70%. Deposit growth was due mainly to an increase in savings accounts, interest checking and certain types of money market accounts. Long-term debt decreased $2.0 million from $26.1 million at December 31, 2000 to $24.1 million at December 31, 2001. Shareholders' equity increased $6.4 million or 5.6% to $121.6 million at December 31, 2001 compared to $115.2 million at December 31, 2000. Unrealized gains on investment securities available-for-sale and unrealized gains on interest-rate swaps increased other comprehensive income by $2.3 million. Treasury stock increased to $33.1 million from $25.1 million at December 31, 2000. On November 22, 2000, the Board of Directors approved the continuation of the Buyback Program for another two years. This approval allows the Corporation to buy back up to 5% or approximately 367,228 shares of its outstanding common stock in open market or negotiated transactions. The net number of shares purchased since November 2000 is 318,625. Subsequent to December 31, 2001, the Board of Directors announced that the Corporation would extend the stock purchase program. As of January 1, 2001, the Corporation adopted Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended. The Statement requires the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The accumulated other comprehensive income, related to interest-rate swaps, of $0.3 million, net of taxes, has been included in shareholders' equity as of December 31, 2001. Asset/Liability Management, Liquidity The primary functions of Asset/Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers and corporate needs. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates. Univest uses both GAP and simulation techniques to quantify its exposure to interest rate risk. The Corporation uses GAP techniques to identify and monitor long term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year horizon. The simulation uses existing portfolio rate and repricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is permitted to use interest-rate swap agreements that convert a portion of its floating rate commercial loans to a fixed rate basis. In these swaps, the Corporation agrees to exchange, at specified intervals, the difference between fixed and floating interest rates calculated on an agreed upon notional principal amount. 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, 2001, $30.0 million in notional interest-rate swaps were outstanding. The contracts entered into by the Corporation expire as follows: $10.0 million in notional principal amount in the first quarter 2002, $10.0 million in the second quarter 2003 and $10.0 million in the third quarter 2003. The impact of the interest-rate swaps on net interest income for the year ended December 31, 2001 was a positive $0.4 million and for the year ended December 31, 2000 a negative $0.2 million. 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, 2001, the market value of interest-rate swaps in a favorable value position was $0.5 million. There were no interest-rate swaps with the market value in an unfavorable position. At December 31, 2000, the market value of interest-rate swaps in a favorable value position was $0.1 million and the market value of interest-rate swaps in an unfavorable value position was $0.1 million. Credit risk exists when the counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. 32 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity Univest, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation's ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans and deposit withdrawals. Univest manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. Core deposits and cash management repurchase agreement (Repos) have historically been the most significant funding sources for the Corporation. These deposits and Repos are generated from a base of consumer, business and public customers primarily located in Bucks and Montgomery Counties of Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, thrifts, mutual funds, security dealers and others. Univest supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the banks investment portfolio and are at current money market mutual fund rates. This funding source is subject to changes in the asset allocations of the trust accounts. Univest, through its Banks, has short-term and long-term credit facilities with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $188.1 million. At December 31, 2001, Univest's outstanding borrowings under the FHLB credit facilities totaled $24.1 million. The maximum borrowing capacity changes as a function of the banks' qualifying collateral assets and the amount of funds received may be reduced by additional required purchases of FHLB stock. The Corporation maintains federal fund lines with several correspondent banks totaling $70 million. At December 31, 2001, Univest's outstanding borrowings under these lines totaled $16.7 million. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn. Univest, through Union, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At December 31, 2001, the corporation had no outstanding borrowings under this line. Capital Adequacy Shareholders' equity at December 31, 2001 was $121.6 million or 9.6% of total assets compared to shareholders' equity of $115.2 million, also 9.6% of total assets as of December 31, 2000. At December 31, 2001, shareholders' equity includes accumulated other comprehensive income of $3.1 million related to the unrealized security gains, net of taxes, on investment securities available-for-sale and accumulated gains on interest-rate swaps, net of taxes, while shareholders' equity at December 31, 2000 includes accumulated other comprehensive income of $0.8 million. 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 and Tier II. Tier I is composed of total shareholders' equity, excluding the adjustment for the unrealized securities gains and losses, and also excluding any goodwill. Tier II includes the applicable portion of the reserve for possible loan losses. Minimum required total risk-based capital is 8.0%. Under the requirements, Univest has Tier I capital ratios of 12.4% and 12.6%, and total risk-based capital ratios of 13.6% and 13.9% at December 31, 2001 and 2000, respectively. These ratios place Univest in the "well-capitalized" category under regulatory standards. Recent Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Major provisions of these Statements include the following: o SFAS No. 141 provisions relating to the initial measurement and recording of goodwill and intangible assets, financial statement presentation, and disclosures are effective for combinations completed after June 30, 2001. o SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for companies with fiscal years beginning after March 15, 2001 but only if they have not issued their first quarter financial statements prior to adoption. Regardless of the full adoption date, the nonamortization provisions of SFAS No. 142 are effective for business combinations and other transactions completed after June 30, 2001. The Corporation estimates that a decrease of approximately $500 thousand in other expenses will be the effect of adopting these new standards. Credit Risk Extending credit exposes Univest to credit risk, which is the risk that the principal balance of a loan and any related interest will not be collected due to the inability of the borrower to repay the loan. Univest manages credit risk in the loan portfolio through adherence to consistent standards, guidelines and limitations established by the Board of Directors. Written loan policies establish underwriting standards, lending limits and other standards or limits as deemed necessary and prudent. 33 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The loan review department conducts ongoing, independent reviews of the lending process to ensure adherence to established policies and procedures, monitors compliance with applicable laws and regulations, provides objective measurement of the risk inherent in the loan portfolio, and ensures that proper documentation exists. Univest focuses on both assessing the borrower's capacity and willingness to repay and on obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower's assets and by personal guarantees. Commercial real estate loans are originated primarily within the Eastern Pennsylvania market area and are secured by developed real estate at conservative loan-to-value ratios and often by a guarantee of the borrowers. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that significant credit concentrations by borrower or industry do not exist. Credit risk in the direct consumer loan portfolio is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values. In the home equity loan portfolio, combined loan-to-value ratios are generally limited to 80%. Other credit considerations may warrant higher combined loan-to-value ratios for approved loans. Univest originates fixed-rate and adjustable-rate residential mortgage loans that are secured by the underlying 1- to 4-family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more that 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance. Univest closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts begin after a loan payment is missed, by attempting to contact all borrowers. If collection attempts fail, Univest will proceed to gain control of any and all collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all monies owed to Univest. Univest monitors delinquency trends and past due reports are submitted to the Board of Directors. 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 to any change in events, conditions or circumstances on which any such statement is based. 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 Corporation uses GAP techniques to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a 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 is also included in the results of the simulation. At December 31, 2001, the simulation, based upon forward-looking assumptions, projects that Univest's greatest interest margin exposure to interest-rate risk would occur if interest rates rise from present levels. Given the assumptions, a 200 basis point parallel shift in the yield curve applied on a ramp-up basis would cause Univest's interest margin, over a 1-year horizon, to be approximately 0.60% less than it would be if market rates would remain unchanged. At December 31, 2000, the simulation projected that Univest's greatest interest margin exposure to interest-rate risk would occur if interest rates had declined. 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 1% less than it would be if market rates would remain unchanged. Policy 34 UNIVEST CORPORATION OF PENNSYLVANIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS limits have been established which allow a tolerance for no more than approximately a 3.25% negative impact to the interest margin resulting from a 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" and "Asset/Liability Management, Liquidity" and the table below: Interest Sensitivity Analysis at December 31, 2001 (Dollars in thousands)
WITHIN 1-5 OVER 1 YEAR YEARS 5 YEARS ---------------------------------------------------- Rate Sensitive Interest Earning Assets Federal funds sold............................................ $ 64 $ -- $ -- Investment securities......................................... 63,840 257,120 42,629 Loans......................................................... 400,339 343,167 54,823 Hedging instruments........................................... (20,000) 20,000 -- ---------------------------------------------------- 444,243 620,287 97,452 Rate Sensitive Liabilities Interest bearing deposits..................................... 431,067 400,668 148 Borrowed funds................................................ 45,405 66,599 3,671 Net noninterest-bearing funds (a)............................. -- -- 214,424 ---------------------------------------------------- 476,472 467,267 218,243 Excess interest-earning assets (liabilities)........................ (32,229) 153,020 (120,791) Cumulative excess interest-earning assets (liabilities)............. $ (32,229) $ 120,791 $ -- ====================================================
Notes to interest sensitivity analysis: (a) Net noninterest-bearing funds is the sum of non-interest bearing liabilities and shareholders' equity minus non-interest earning assets. 35 UNIVEST CORPORATION OF PENNSYLVANIA SUPPLEMENTARY INFORMATION Range of Market Prices The following table shows the range of market values of the Corporation's stock. The Trust Department of 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 ----------------------------------------- 2001 January-March.................................................... $ 25.00 $ 22.25 April-June....................................................... 32.50 24.50 July-September................................................... 34.00 32.25 October-December................................................. 35.40 34.00 High Low ----------------------------------------- 2000 January-March.................................................... $ 26.19 $ 19.19 April-June....................................................... 25.25 19.53 July-September................................................... 21.50 19.50 October-December................................................. 21.88 21.00 Cash Dividends Paid Per Share* 2001 January 2........................................................ $ 0.190 April 1.......................................................... 0.190 July 1........................................................... 0.210 October 1........................................................ 0.210 ---------------- ........................................................... $ 0.800 for the year 2001 2000 January 2........................................................ $ 0.162 April 1.......................................................... 0.162 July 1........................................................... 0.190 October 1........................................................ 0.190 ---------------- ........................................................... $ 0.704 for the year 2000
*The cash dividends paid per share have been restated to give effect to a five percent stock dividend paid on May 1, 2000. 36 UNIVEST CORPORATION OF PENNSYLVANIA SUPPLEMENTARY INFORMATION Description of Business Univest Corporation of Pennsylvania is a financial holding company with banking and financial subsidiaries operating in eastern Pennsylvania and Delaware. Union National Bank and Trust Company of Souderton, Pennsylvania has 19 traditional offices and 8 supermarket branches offering all normal commercial bank and trust services, and one work site office offering a payroll check cashing service. 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. Delview, Inc., a wholly owned subsidiary of Pennview, is a passive investment holding company located in Delaware. Univest Financial Services Corporation, a subsidiary of Delview, provides various financial management services and insurance products to individuals and businesses within the holding company's market area through Univest Investments, Inc. (formerly Fin-Plan Group) and Univest Insurance, Inc. 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 Reinsurance Corporation (formerly 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 developmentfor all subsidiaries of the holding company. Univest Delaware, Inc. is a passive investment holding company located in Delaware. Securities Market Univest Corporation of Pennsylvania stock is traded over the counter and is generally held by individuals residing within the arket area of the Corporation as stated under Description of Business. The number of shareholders as of December 31, 2001 as 2,082. 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 2001 to each shareholder who requests one in writing after March 31, 2002. Requests should be directed to: Norman L. Keller, Secretary, Univest Corporation of Pennsylvania, 14 N. Main Street, Souderton, PA 18964. 37 UNIVEST CORPORATION OF PENNSYLVANIA
OFFICE LOCATIONS Union National Bank & Trust Company Univest Plaza Office Hilltown Supermarket Office Quakertown Office TRUST AND FUNDS MANAGEMENT DIVISION, Clemens Market Quakertown Shopping Plaza CORPORATE BANKING, PRIVATE BANKING, Route 113 & County Line Road Clemens Market CONSUMER AND LOAN DEPARTMENT Souderton, Pennsylvania 18964 Routes 313 & 309 14 North Main Street 215-703-9933 Quakertown, Pennsylvania 18951 Souderton, Pennsylvania 18964 Kulpsville Office 215-538-3407 215-721-2400 Sumneytown Pike Ralph's Corner Office Buckingham Office Kulpsville, Pennsylvania 19443 Clemens Market Hunt Acres Center 215-368-1666 West Main Street & Forty Foot Road 5006 York Road Lansdale Area Office Lansdale, Pennsylvania 19446 Holicong, Pennsylvania 18928 2333 West Main Street, Suite 12 215-393-5677 215-794-5916 Lansdale, Pennsylvania 19446 Schwenksville Office Center Point Office 215-362-8835 415 Main Street 2960 Skippack Pike Lansdale East Office Schwenksville, Pennsylvania 19473 Worcester, Pennsylvania 19490 Clemens Market 610-287-7811 610-584-8450 620 East Main Street Sellersville Office Center Square Office Lansdale, Pennsylvania 19446 835 Lawn Avenue Clemens Market 215-412-9750 Sellersville, Pennsylvania 18960 Routes 202 & 73 Line Lexington Office 215-257-8060 Center Square, Pennsylvania 19422 990 Bethlehem Pike Solebury Office 610-279-3901 Line Lexington, Pennsylvania 18932 Logan Square Shopping Center East Greenville Office 215-822-3314 6542D York Road 321 Main Street Milford Office New Hope, Pennsylvania 18938 East Greenville, Pennsylvania 18041 Route 663 & Weiss Road 215-862-3750 215-679-7928 Milford Square, Pennsylvania 18935 Souderton Office Franconia Office 215-536-4204 10 West Broad Street 503 Harleysville Pike Montgomery Office Souderton, Pennsylvania 18964 Franconia, Pennsylvania 18924 986 Bethlehem Pike 215-721-2400 215-721-0707 Montgomeryville, Pennsylvania 18936 Telford Office Green Lane Office 215-699-3525 50 Penn Avenue Gravel Pike New Britain Office Telford, Pennsylvania 18969 Green Lane, Pennsylvania 18054 Clemens Market 215-723-4515 215-234-4511 202 Town Center Telford Supermarket Office Harleysville Office New Britain, Pennsylvania 18901 Landis Market Clemens Market 215-345-8259 2685 County Line Road 611 Main Street Perkasie Office Telford, Pennsylvania 18969 Harleysville, Pennsylvania 19438 545 Constitution Avenue 215-721-7412 215-256-8048 Perkasie, Pennsylvania 18944 Trappe Office Hilltown Traditional Office 215-257-6607 595 West Main Street Routes 113 & 309 Plumsteadville Office Trappe, Pennsylvania 19426 Souderton, Pennsylvania 18964 5859 Easton Road 610-454-0883 215-721-2471 Plumsteadville, Pennsylvania 18949 215-766-3701 Pennview Savings Bank Montgomeryville Office Univest Investments, Inc. Executive Offices 706 North Wales Road 14 North Main Street 14 North Main Street Montgomeryville, Pennsylvania 18936 Souderton, Pennsylvania 18964 Souderton, Pennsylvania 18964 215-362-5130 215-721-2112 215-721-2400 Silverdale Office Univest Insurance, Inc. Franconia Office 103 Baringer Avenue 521 West Main Street 503 Harleysville Pike Silverdale, Pennsylvania 18962 Lansdale, Pennsylvania 19446 Franconia, Pennsylvania 18924 215-257-9600 215-362-7000 215-721-0707 Souderton Office Hatfield Office 10 West Broad Street 115 East Broad Street Souderton, Pennsylvania 18964 Hatfield, Pennsylvania 19440 215-721-2400 215-855-4646
38 UNIVEST CORPORATION OF PENNSYLVANIA
DIRECTORS James L. Bergey *+ Marvin A. Anders *+ President, Chairman, Univest Corporation of Pennsylvania; and Abram W. Bergey & Sons, Inc. Chairman, Union National Bank & Trust Company Clair W. Clemens *+ William S. Aichele *+o Retired, President & Chief Executive Officer, Univest Hatfield Quality Meats, Inc. Corporation of Pennsylvania; and President & Chief Executive Officer, Union National Bank R. Lee Delp * & Trust Company Principal, R. L. Delp & Company Norman L. Keller *o Executive Vice President, Univest Corporation of Richard W. Godshall # Pennsylvania; and President & Chief Executive Officer, Physician, M.D., Upper Bucks Pennview Savings Bank Orthopaedic Associates Laurence A. Moyer o Charles H. Hoeflich *+ Executive Vice President & Secretary, Chairman Emeritus, Pennview Savings Bank Univest Corporation of Pennsylvania Thomas K. Leidy *+ Chairman & President, Leidy's, Inc. H. Ray Mininger * President, H. Mininger & Son, Inc. William G. Morral o Retired, Moyer Packing Company Merrill S. Moyer *+o Retired Chairman, Univest Corporation of Pennsylvania; and Retired Chairman, Union National Bank & Trust Company Paul Gregory Shelly *+ President, Shelly Enterprises, Inc. John U. Young *o President, KEY Alderfer Bologna Co., Inc. * Director of Univest Corporation of Pennsylvania Margaret K. Zook # + Director of Union National Bank & Trust Company Administrator, o Director of Pennview Savings Bank Souderton Mennonite Homes # Alternate Director of Univest Corporation of Pennsylvania
III
OFFICERS UNIVEST CORPORATION OF PENNSYLVANIA UNION NATIONAL BANK & TRUST COMPANY PENNVIEW SAVINGS BANK SENIOR MANAGEMENT SENIOR MANAGEMENT SENIOR MANAGEMENT Marvin A. Anders, Chairman Marvin A. Anders, Chairman Norman L. Keller, President & William S. Aichele, President & Chief William S. Aichele, President & Chief Executive Officer Executive Officer Chief Executive Officer Laurence A. Moyer, Executive Norman L. Keller, Executive Vice Wallace H. Bieler, Executive Vice Vice President & Secretary President & Corporate Secretary President & Chief Financial Officer Francis E. Varilla, Senior Vice Wallace H. Bieler, Executive Vice K. Leon Moyer, Executive Vice President, President, Treasurer, & Chief President & Credit Policy Officer Chief Financial Officer & Treasurer Financial Officer George D. Terry, Jr., Executive K. Leon Moyer, Executive Vice Vice President UNIVEST INSURANCE, INC. President & Credit Policy Officer George D. Terry, Jr., Executive Vice SENIOR VICE PRESIDENTS Martin Renninger, Chairman & President, Electronic Services Chief Executive Officer Martin Renninger, Senior Vice President, Linda J. Bishop, Sales & Marketing George Becker, Jr., President Financial Services & Insurance Diane L. Koehler, Compliance & Cynthia L. Gum, Chief Community Reinvestment Operating Officer SENIOR VICE PRESIDENTS John T. Landes, Corporate Banking George J. Becker, III, Vice President Ronald S. Price, Corporate Banking William R. Erickson, Vice President Linda J. Bishop, Sales & Marketing Barry L. Stoltzfus, Trust Division Hervey W. Schofield, Vice President Richard L. Boaman, Electronic Services Gail M. Strohmeyer, Vice President Duane J. Brobst, Credit Quality VICE PRESIDENTS Richard Theis, Vice President Douglas R. Delp, Human Resources & Branch Delivery Vernon L. Clemmer, Trust Operations UNIVEST INVESTMENTS, INC. Kenneth D. Hochstetler, Wealth John W. Duerksen, Corporate Banking Management J. Matthew Holliday, Trust & Martin Renninger, Chairman Diane L. Koehler, Compliance & Investment Services Kenneth D. Hochstetler, President Community Reinvestment Patricia J. Kratz, Corporate Banking Darren G. Johnson, Vice President Richard R. Swartley, Electronic Services William F. Marks, Corporate Banking Rose A. Radcliff, Corporate Banking OTHER PRINCIPAL SUBSIDIARIES VICE PRESIDENTS Stephen D. Robinson, Corporate OF UNIVEST CORPORATION OF Banking PENNSYLVANIA Michael A. Baymor, Credit Quality Ricky R. Schneider, Corporate Banking Gary E. Brown, Wealth Management Harry A. Wenzel, Corporate Banking Univest Realty Corporation Patricia S. Coleman, Electronic Services Gary S. Wolfer, Trust & Univest Reinsurance Corporation Richard D. Juniper, Auditor Investment Services Univest Delaware Inc. Garry R. Kuhnle, Credit Support Fern M. Zepp, Trust Division Mary L. Marger, Electronic Services William B. Meyer, Loan Review Timothy E. Mininger, Wealth Management Laurence A. Moyer, Residential Mortgage Origination Philip J. Rush, Finance & Accounting Keith C. Thomas, Asset Recovery Francis E. Varilla, Finance & Accounting
IV INFORMATION FOR SHAREHOLDERS CORPORATE HEADQUARTERS Univest Plaza 14 North Main Street Souderton, Pennsylvania 18964 SHAREHOLDERS' MEETING The Annual Shareholders' Meeting will take place at 10:45 a.m., Tuesday April 9, 2002, in the Board Room at Univest Plaza, 14 North Main Street, Souderton, Pennsylvania. MARKET MAKERS FOR UNIVEST CORPORATION OF PENNSYLVANIA COMMON STOCK Legg Mason Wood Walker, Inc. 1-800-221-8496 Ryan, Beck & Co. 1-800-223-8969 F.J. Morrissey & Co., Inc. 1-800-842-8928 UNIVEST SHAREHOLDER INFORMATION HOTLINE For more information on the Univest Corporation of Pennsylvania Common Stock, please call 215-721-2434. V EX-21 4 gex21-27665.txt EX-21 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES EXHIBIT 21 [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 Delaware, Inc. is chartered in the State of Delaware. (6) Univest Financial Services Corporation is chartered in the Commonwealth of Pennsylvania. (7) Univest Reinsurance Corporation (formerly Univest Insurance Company) is chartered in the State of Arizona. (8) Univest Electronic Services Corporation is chartered in the Commonwealth of Pennsylvania. (9) Delview, Inc. is a wholly owned subsidiary of Pennview Savings Bank that is chartered in the State of Delaware. (10) Univest Investments, Inc. (formerly Fin Plan Group) is chartered in the Commonwealth of Pennsylvania. (11) Univest Insurance, Inc. (formerly George Becker Associates) is chartered in the Commonwealth of Pennsylvania. All the subsidiaries do business under the above names. EX-23 5 gex23-27665.txt EX-23 CONSENT OF INDEPENDENT AUDITOR 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 18, 2002, 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, 2001. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----