10-Q 1 g10q-29969.txt 10-Q United States SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Period Ended September 30, 2002 ------------------ or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From to . UNIVEST CORPORATION OF PENNSYLVANIA ----------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1886144 (State or other jurisdiction of (IRS Employer Identification No.) incorporation of organization) 10 West Broad Street, Souderton, Pennsylvania 18964 --------------------------------------------------- (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code (215) 721-2400 -------------- Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $5 par value 6,855,753 -------------------------- --------- (Title of Class) (Number of shares outstanding at 9/30/02) UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES INDEX Page Number ----------- Part I. Financial Information: Item 1: Financial Statements (Unaudited) Condensed Consolidated Balance Sheets September 30, 2002 and December 31, 2001 1 Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2002 and 2001 2 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001 3 Notes to Condensed Consolidated Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information: 19 Other Information UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (SEE NOTE) September 30, 2002 December 31, 2001 ------------------ ----------------- (In thousands) ASSETS CASH AND DUE FROM BANKS $ 43,613 $ 39,107 INTEREST BEARING DEPOSITS WITH OTHER BANKS 870 15,731 INVESTMENT SECURITIES HELD-TO-MATURITY 86,873 109,805 (MARKET VALUE $90,034 AT 9/30/02 AND $112,689 AT 12/31/01) INVESTMENT SECURITIES AVAILABLE-FOR-SALE 288,361 238,053 FEDERAL FUNDS SOLD AND OTHER SHORT TERM INVESTMENTS 27,035 64 LOANS 817,511 798,329 LESS: RESERVE FOR POSSIBLE LOAN LOSSES (10,718) (10,294) --------------- --------------- NET LOANS 806,793 788,035 OTHER ASSETS 68,424 69,918 --------------- --------------- TOTAL ASSETS $ 1,321,969 $ 1,260,713 =============== =============== LIABILITIES DEMAND DEPOSITS, NON INTEREST BEARING $ 174,402 $ 166,254 DEMAND DEPOSITS, INTEREST BEARING 350,371 322,245 SAVINGS DEPOSITS 155,300 139,449 TIME DEPOSITS 374,634 370,189 --------------- --------------- TOTAL DEPOSITS 1,054,707 998,137 SHORT-TERM BORROWINGS 83,775 91,600 OTHER LIABILITIES 22,558 25,321 LONG-TERM DEBT 31,075 24,075 --------------- --------------- TOTAL LIABILITIES 1,192,115 1,139,133 SHAREHOLDERS' EQUITY COMMON STOCK 41,037 41,037 ADDITIONAL PAID-IN CAPITAL 20,912 20,912 RETAINED EARNINGS 100,088 89,688 ACCUMULATED OTHER COMPREHENSIVE INCOME 7,003 3,070 TREASURY STOCK (39,186) (33,127) --------------- --------------- TOTAL SHAREHOLDERS' EQUITY 129,854 121,580 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,321,969 $ 1,260,713 =============== ===============
NOTE: THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2001 HAS BEEN DERIVED FROM THE AUDITED FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION AND FOOTNOTES REQUIRED BY ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES. 1 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPT 30 ENDED SEPT 30 2002 2001 2002 2001 (in thousands, except per share data) INTEREST INCOME INTEREST AND FEES ON LOANS TAXABLE INTEREST AND FEES ON LOANS $ 12,673 $ 13,914 $ 37,873 $ 41,873 EXEMPT FROM FEDERAL INCOME TAXES 794 831 2,422 2,476 -------- -------- -------- -------- TOTAL INTEREST AND FEES ON LOANS 13,467 14,745 40,295 44,349 INTEREST AND DIVIDENDS ON INVESTMENT SECURITIES 4,798 4,981 14,565 14,824 OTHER INTEREST INCOME 121 212 237 997 -------- -------- -------- -------- TOTAL INTEREST INCOME 18,386 19,938 55,097 60,170 -------- -------- -------- -------- INTEREST EXPENSE INTEREST ON DEPOSITS 5,711 7,533 17,952 24,067 OTHER INTEREST EXPENSE 690 937 2,015 2,938 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 6,401 8,470 19,967 27,005 -------- -------- -------- -------- NET INTEREST INCOME 11,985 11,468 35,130 33,165 PROVISION FOR LOAN LOSSES 391 216 1,173 447 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,594 11,252 33,957 32,718 NONINTEREST INCOME TRUST 965 1,175 3,067 3,525 SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,372 1,296 4,126 3,747 COMMISSION INCOME 1,092 635 3,423 1,868 OTHER INCOME 1,518 1,082 4,549 3,952 -------- -------- -------- -------- TOTAL NONINTEREST INCOME 4,947 4,188 15,165 13,092 NONINTEREST EXPENSE SALARIES AND BENEFITS 5,462 4,923 16,455 14,996 NET OCCUPANCY 759 677 2,216 2,064 EQUIPMENT 390 357 1,150 1,097 OTHER EXPENSES 2,742 2,671 8,416 8,402 -------- -------- -------- -------- TOTAL NONINTEREST EXPENSE 9,353 8,628 28,237 26,559 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 7,188 6,812 20,885 19,251 INCOME TAXES 1,866 1,913 5,545 5,177 -------- -------- -------- -------- NET INCOME $ 5,322 $ 4,899 $ 15,340 $ 14,074 ======== ======== ======== ======== PER COMMON SHARE DATA: NET INCOME PER SHARE: BASIC $ 0.77 $ 0.69 $ 2.21 $ 1.97 DILUTED $ 0.76 $ 0.68 $ 2.19 $ 1.96 CASH DIVIDENDS DECLARED PER SHARE $ 0.23 $ 0.21 $ 0.69 $ 0.61
2 Univest Corporation of Pennsylvania and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Sept 30, 2002 Sept 30, 2001 ------------- ------------- (in thousands) Cash flows from operating activities: Net income $ 15,340 $ 14,074 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses in excess of net charge-offs 424 160 Depreciation of premises and equipment 1,547 1,891 Discount accretion on investment securities (181) (595) Deferred tax benefit (384) (368) Realized gains on investment securities (668) (112) Realized gains on sales of mortgages (54) (72) (Decrease) increase in net deferred loan fees (14) 293 Decrease (increase) in interest receivable and other assets 1,273 (1,105) (Decrease) increase in accrued expenses and other liabilities (4,589) 848 ------------- ------------- Net cash provided by operating activities 12,694 15,014 Cash flows from investing activities: Proceeds from maturing securities held-to-maturity 45,022 121,142 Proceeds from maturing securities available-for-sale 42,656 88,208 Proceeds from sales of securities available-for-sale 23,685 13,855 Purchases of investment securities held-to-maturity (21,976) (105,198) Purchases of investment securities available-for-sale (110,038) (112,963) Decrease (increase) in interest-bearing deposits 14,861 (4,041) Net (increase) decrease in federal funds sold and other short-term investments (26,971) 8,113 Proceeds from sales of mortgages 5,460 6,708 Net increase in loans (24,574) (42,115) Capital expenditures (1,157) (1,826) ------------- ------------- Net cash used in investing activities (53,032) (28,117) Cash flows from financing activities: Net increase in deposits 56,570 5,904 Net (decrease) increase in short-term borrowings (7,825) 18,910 Repayment of long-term debt - (7,000) Proceeds from long-term debt 7,000 5,000 Purchases of treasury stock (7,759) (6,853) Stock issued under dividend reinvestment and employee stock purchase plans 978 922 Proceeds from exercise of stock options 564 297 Cash dividends (4,684) (4,258) ------------- ------------- Net cash provided by financing activities 44,844 12,922 Net increase in cash and due from banks 4,506 (181) Cash and due from banks at beginning of period 39,107 40,517 ------------- ------------- Cash and due from banks at end of period $ 43,613 $ 40,336 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $20,575 $27,421
3 UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Financial Information The accompanying condensed consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (Univest) and its wholly owned subsidiaries, including Union National Bank and Trust Company (Union) and Pennview Savings Bank (Pennview), collectively referred to herein as the "Banks". The condensed consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary to present a fair statement of the results and condition for the interim periods presented. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the registrant's Annual Report on Form 10-K for the year ended December 31, 2001, which has been filed with the Securities and Exchange Commission. Certain prior year amounts have been reclassified to conform to current year presentation. Note 2. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands):
For the Three Months For the Nine Months Ended September 30 Ended September 30 2002 2001 2002 2001 ---- ---- ----- ---- Numerator: Net Income $5,322 $4,899 $15,340 $14,074 Numerator for basic and diluted earnings per share - income available to common shareholders 5,322 4,899 15,340 14,074
4
Denominator: Denominator for basic earnings per share- weighted-average shares outstanding 6,889 7,122 6,939 7,159 Effect of dilutive securities: Employee stock options 72 50 68 34 ---------------- ------------------- Denominator for diluted earnings per share adjusted weighted-average shares outstanding 6,961 7,172 7,007 7,193 ================ =================== Basic earnings per share $ .77 $ .69 $ 2.21 $ 1.97 ================ =================== Diluted earnings per share $ .76 $ .68 $ 2.19 $ 1.96 ================ ===================
Note 3. Accumulated Other Comprehensive Income The following shows the accumulated comprehensive income, net of income taxes, for the periods presented:
Three Months Nine Months Ended September 30 Ended September 30 2002 2001 2002 2001 ---- ---- ---- ---- (in thousands) Net income $5,322 $4,899 $15,340 $14,074 Accumulated gain on cash flow hedge 62 222 110 367 Change in unrealized gain (loss) on available for sale investment securities 2,348 2,317 3,823 3,460 ----- ----- ----- ----- Total comprehensive income $7,732 $7,438 $19,273 $17,901 ====== ====== ======= =======
Note 4. Recent Accounting Pronouncements On January 1, 2002, the Corporation adopted Statement No. 141, "Business Combinations" (SFAS No. 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). In accordance with the adoption provisions of SFAS No. 142, the Corporation has completed the transitional impairment tests and no impairment was noted. The Corporation will be required to perform goodwill impairment tests at least on an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. 5 The Corporation has a covenant not to compete, intangible assets due to branch acquisitions and mortgage servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life. The amortization for these intangible assets for the nine months ended September 30, 2002 was $235. The Corporation also has costs in excess of net assets acquired, which are deemed to be an indefinite intangible asset and will not be amortized. The estimated aggregate amortization expense for each of the five succeeding fiscal years ending December 31, is: Year Amount 2002 $302 2003 $232 2004 $231 2005 $229 2006 $225 The following table reflects the components of intangible assets as of September 30, 2002 and December 31, 2001:
September 30, 2002 December 31, 2001 (in thousands) Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ---------------------------- ---------------------------- Non-amortized intangible assets: Goodwill $ 9,144 $ 2,845 $ 8,635 $ 2,845 Amortized intangible assets: Covenants not to compete 200 33 200 3 Branch acquisitions 2,951 2,080 2,951 1,888 Mortgage servicing rights, net 369 54 567 41
The following table reflects the results of operations as if SFAS No. 142 had been adopted as of January 1, 2001: 6
For the three months ended For the nine months ended September 30 September 30 2002 2001 2002 2001 (In thousands, except per share data) Net income, as reported 5,322 4,899 15,340 14,074 Add back: Goodwill amortization, net of income tax benefit of $6 and $16 respectively - 117 - 350 ------- ------- ------- ------- Adjusted net income 5,322 5,016 15,340 14,424 Per common share data: Net income per share: Basic as reported $ 0.77 $ 0.69 $ 2.21 $ 1.97 Goodwill amortization $ - $ 0.02 $ - $ 0.05 Adjusted basic earnings per share $ 0.77 $ 0.71 $ 2.21 $ 2.02 Diluted as reported $ 0.76 $ 0.68 $ 2.19 $ 1.96 Goodwill amortization $ - $ 0.02 $ - $ 0.05 Adjusted diluted earnings per share $ 0.76 $ 0.70 $ 2.19 $ 2.01
7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OF FINANCIAL CONDITION AND -------------------------- RESULTS OF OPERATIONS --------------------- Net Income ---------- Net income increased 8.2% or $0.4 million from $4.9 million for the three months ended September 30, 2001 to $5.3 million for the three months ended September 30, 2002. Net income for the nine months ended September 30, 2002 increased 8.5% or $1.2 million from $14.1 million for the nine months ended September 30, 2001 to $15.3 million for the nine months ended September 30, 2002. The net income growth for the three and nine months ended September 30, 2002 was due to an increase in noninterest income and a decrease in interest expense offset by increases in the loan loss provision, operating expenses and income taxes. Net Interest Income ------------------- Interest and fees on loans for the three months ended September 30, 2002 decreased $1.2 million from $14.7 million at September 30, 2001 to $13.5 million at September 30, 2002. There was average loan volume growth in commercial loans that was offset by a decrease in rate. Mortgage loans and consumer loans also increased in average volume offset by a decrease in rate. The prime rate, which is an important factor of the Banks' loan interest income, averaged 4.8% for the third quarter 2002 compared to 6.4% for the third quarter 2001. For the nine months ended September 30, 2002, interest and fees on loans decreased $4.0 million from $44.3 million at September 30, 2001 to $40.3 million at September 30, 2002. There was growth in the average commercial loan volume offset by a decrease in rate. Fixed rate consumer loans increased in average volume and mortgage loans increased partly due to the purchase of jumbo mortgages. Prime rate averaged 4.8% for the nine months ended September 2002 compared to 7.3% for the nine months ended September 2001. Interest on investment securities decreased $0.2 million from $5.0 million for the three-month period ended September 30, 2001 to $4.8 million for the three-month period ended September 30, 2002. Interest on investments decreased $0.2 million from $14.8 million for the nine months ended September 30, 2001 to $14.6 million for the nine months ended September 30, 2002. Other interest income decreased $0.1 million for the three-month period ended September 30, 2002 and decreased $0.8 million for the nine-month period ended September 30, 2002. This is due to the fluctuation in average volume of federal funds sold and the decline in the federal funds rate. Interest expense decreased $2.1 million from $8.5 million for the three months ended September 30, 2001 to $6.4 million for the three-month period ended September 30, 2002. Interest expense decreased $7.0 million from $27.0 million for the nine months 8 ended September 30, 2001 to $20.0 million for the nine-month period ended September 30, 2002. The decrease in both periods is primarily attributed to volume growth in most of the deposit type of accounts offset by declines in the average rates. The asset/liability management process continues with its goal of providing stable reliable earnings through varying interest rate environments. Net interest income is the amount by which interest income on earning assets exceeds interest paid on interest-bearing liabilities. Changes in interest rates, account balances or volume, and the mix of interest earning assets and interest bearing liabilities affect the amount of net interest income. The nine months ended September 30, 2002 shows net interest income of $35.1 million, which is an increase of $1.9 million compared to the $33.2 million recorded for the nine months ended September 30, 2001. Average interest earning assets increased by $59.5 million for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. Average interest bearing liabilities increased $49.7 million for the nine months ended September 30, 2002 as compared to the same period in 2001. Interest earning asset yields decreased 0.9% compared to last year along with a decrease of 1.1% paid on interest-bearing liabilities increased the net interest spread to 3.5%. The net interest margin remained constant at 4.0%. The following table demonstrates the aforementioned effects: NINE MONTHS ENDED ----------------- 9/30/02 9/30/01 ------- ------- AVG. BALANCE RATE AVG. BALANCE RATE ----------------- ----------------- Interest Earnings Assets $1,174,159 6.3% $1,114,637 7.2% Interest Bearing Liabilities 964,418 2.8% 914,758 3.9% Net Interest Income 35,130 33,165 Net Interest Spread 3.5% 3.3% Net Interest Margin 4.0% 4.0% The Corporation uses 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 September 30, 2002, September 30, 2001 and December 31, 2001, the notional amount of "Pay Floating, Receive Fixed" swaps outstanding was $30.0 million. The net payable or receivable from interest rate swap agreements is accrued as an adjustment to interest income. The $30.0 million in notional amount interest rate swaps outstanding at 9 September 30, 2002 expire as follows: $10.0 million in second quarter 2003, $10.0 million in third quarter 2003 and $10.0 million in first quarter 2004. The impact of interest rate swaps on net interest income for the quarter ended September 30, 2002 was a positive $172 thousand as compared to a positive $114 thousand for the quarter ended September 30, 2001. For the nine months ended September 30, 2002 the impact was a positive $551 thousand as compared to a positive $213 thousand for the nine months ended September 30, 2001. The income on the swaps increased by the same amount as the decrease in income on the floating loans being hedged. Both resulted from a decline in the prime rate. The Corporation's current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. As of September 30, 2002, the market value of interest-rate swaps in a favorable position was $634 thousand and there were no interest-rate swaps with a market value in an unfavorable position. As of September 30, 2001, the market value of interest-rate swaps in a favorable position was $564 thousand and there were no interest-rate swaps with a market value in an unfavorable position. Credit risk exists when the counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Asset Quality ------------- 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 as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The reserve for possible loan losses consists of an allocated reserve, which is comprised of reserves established on specific loans, and class reserves based on historical loan loss experience and current trends and an unallocated reserve 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 reserves established for these loans are based on a careful analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity. 10 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. Management believes the reserve for possible loan losses is maintained at a level that is adequate to absorb potential losses inherent in the loan portfolio. Management's methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth and composition of the loan portfolio. The reserve for possible loan losses is determined through a periodic evaluation 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 provisions for possible loan losses for the three months ended September 30, 2002, were $0.4 million and for the nine months ended September 30, 2002 were $1.2 million. For the three and nine months ended September 30, 2001, the provisions were $0.2 million and $0.4 million, respectively. The provisions for possible loan losses were increased to build up the reserve to levels required by the previously mentioned reserve analysis. At September 30, 2002, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $3.1 million, all of which were on a non-accrual basis. The related reserve for credit losses for those loans was $0.5 million. At September 30, 2001, the recorded investment in loans considered to be impaired was $2.0 million, all of which were on a non-accrual basis. The related reserve for credit losses for these loans was $0.7 million. When a loan, including a loan impaired under SFAS No. 114, is classified as non-accrual, the accrual of interest on such loan is discontinued. A loan is classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a 11 loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years are charged against "other expense." Interest received on nonaccrual loans is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. 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. Cash basis, non-accrual and restructured loans at September 30, 2002 total $3.1 million and consist mainly of commercial loans and real estate related commercial loans and $0.02 million of first residential mortgage loans that are over 90 days delinquent. The total of cash basis, non-accrual and restructured loans at September 30, 2001 were $2.0 million. At September 30, 2002, non-accrual loans resulted in lost interest income of $152 thousand as compared to $140 thousand at September 30, 2001. At September 30, 2002, the Corporation had no commitments to lend additional funds with respect to nonperforming loans. In management's evaluation of the loan portfolio risks, any significant future increases in nonperforming loans are dependent to a large extent on the economic environment, or specific industry problems. At September 30, 2002 and December 31, 2001, the reserve for possible loan losses was 1.3% of total loans. For more information on the reserve, please refer to the Registrant's Annual Report on Form 10-K for the period ended December 31, 2001. At September 30, 2002, the Corporation had $37 thousand in Other Real Estate Owned ("OREO"). This amount is recorded in "Other Assets" at the lower of cost or fair market value, less estimated costs to sell, in the accompanying condensed consolidated balance sheets. Noninterest Income ------------------ Noninterest income consists mainly of trust department fee income, service charge income, commission income and other miscellaneous types of income. It also includes various types of service charges, such as ATM fees and increases in the cash surrender value of bank-owned life insurance (BOLI). Total noninterest income increased $0.7 million or 16.7% from $4.2 million for the three months ended September 30, 2001 to $4.9 million for the three months ended September 30, 2002. For the nine months ended September 30, 2002, total noninterest income increased $2.1 million or 16.0% from $13.1 million for the nine months ended September 30, 2001 to $15.2 million. The growth in both periods is primarily attributed to increases in commission income and increases in other income as described below. Trust income for the three months ended September 30, 2002 of $1.0 million was $0.2 million less than the $1.2 million reported for the three months ended September 30, 2001. Trust income for the nine months ended September 30, 2002 of $3.1 million was $0.4 million less than the $3.5 million reported for the nine months ended September 30, 12 2001. Growth in the number of trust accounts was partly offset by a decline in the market value of assets under management. This had an adverse effect on trust management fees. Service charges on deposit accounts grew $0.1 million from $1.3 million for the three months ended September 30, 2001 to $1.4 million for the three months ended September 30, 2002. Service charges on deposit accounts grew $0.4 million from $3.7 million for the nine months ended September 30, 2001 to $4.1 million for the nine months ended September 30, 2002. Due to declining earnings credit rates in commercial accounts, service charges increased. Nonsufficient funds fees also increased. These increases were partially offset by a decrease in ATM fees. Commission income is the primary source of income for Univest Investments, Inc. and Univest Insurance, Inc. Commission income for the three months ended September 30, 2002 of $1.1 million was $0.5 million or 83.3% more than the $0.6 million reported for the three months ended September 30, 2001. Commission income for the nine months ended September 30, 2002 of $3.4 million was $1.5 million or 78.9% more than the $1.9 million reported for the nine months ended September 30, 2001. The growth is primarily due to the acquisition of the Gum Insurance Agency in December 2001. Other income increased $0.4 million from $1.1 million for the three months ended September 30, 2001 to $1.5 million for the three months ended September 30, 2002. For the nine-month period, other income grew $0.5 million from $4.0 million at September 30, 2001 to $4.5 million at September 30, 2002. The growth in both periods is attributed to gains on the sales of securities and a gain on the sale of a property located next to a Union branch. These gains were offset by a decline in the value of mortgage servicing rights and the cash surrender value of certain annuities. Also contributing to the growth is an increase in debit card usage that generated additional fees from the card origination system. Noninterest Expense ------------------- The operating costs of the Corporation include but are not limited to, salaries and benefits, equipment expense, and occupancy costs. This category is usually referred to as noninterest expense and receives ongoing management attention in an attempt to contain and minimize the growth of the various expense categories, while encouraging technological innovation in conjunction with the expansion of the Corporation. Total noninterest expense increased from $8.6 million for the three months ended September 30, 2001 to $9.4 million for the three months ended September 30, 2002. Total noninterest expense increased from $26.6 million for the nine months ended September 30, 2001 to $28.2 million for the nine months ended September 30, 2002. Salaries and benefits, which include commission expense generated by Univest Investments, Inc. and Univest Insurance, Inc. increased. Other expenses such as marketing, advertising, ATM fees, consulting, insurance and contributions also increased while goodwill expense decreased due to the Corporation's adoption of Financial Accounting Standards Board 13 Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) on January 1, 2002. Tax Provision ------------- The provision for income taxes was $1.9 million for the quarters ended September 30, 2002 and September 30, 2001. The effective tax rates were 26.0% and 28.1% respectively. For the nine months ended September 30, 2002 the provision was $5.5 million as compared to $5.2 million for the nine months ended September 30, 2001. The effective tax rates were 26.6% and 26.9% respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects and tax-free income from investment in municipal securities, loans and bank-owned life insurance. The decrease in the effective tax rate is primarily the result of the tax-exempt income on the Corporation's loans, investments and bank-owned life insurance growing more slowly than the Corporation's pre-tax income. Critical Accounting Policies ---------------------------- Management, in order to prepare Univest's financial statements in conformity with accounting principles generally accepted in the United States, 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 uses 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 adequacy of these reserves are sensitive to changes in current economic conditions that may affect 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, "Accounting for Derivative Instruments and Hedging Activities," as amended, 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 14 only the accrued payments due under the contract for the current period are passed through the statement of operations. Should the Corporation 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. Intangible assets have been recorded on the books of the Corporation in connection with its acquisitions of Pennview Savings Bank, Univest Investments, 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 charge in the statement of operations. Such changes in fair 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. They could also result from changes in the time value of money or risk premiums that the expected cash flows of the business are discounted by. SFAS No. 142, which took effect January 1, 2002, defines the methods that are acceptable for determining whether intangible asset values are sustainable. Univest designates its investment securities as held-to-maturity, available-for-sale or trading in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 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-for-sale 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, "Accounting for Transfers and Servicing of Financial Assets and Extinguishing of Liabilities." This means the value of the rights is recognized as a separate asset when the related mortgages are sold. The value of the mortgage servicing rights 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. When mortgage rates being offered to the public decrease, the life of mortgage 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 15 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 statements of operation or 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. Controls and Procedures ----------------------- As of September 30, 2002, an evaluation was performed under the supervision and with the participation of the Corporation's management, including the CEO and CFO, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, the Corporation's management, including the CEO and CFO, concluded that the Corporation's disclosure controls and procedures were effective as of September 30, 2002. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002. Financial Condition ------------------- Total assets increased $61.3 million or 4.9% from $1,260.7 million at December 31, 2001 to $1,322.0 million at September 30, 2002 primarily due to increases in loans, investments, federal funds sold and in cash and due from banks. Total liabilities increased $53.0 million or 4.7% from $1,139.1 million at December 31, 2001 to $1,192.1 million at September 30, 2002. Total deposits increased from $998.1 million at December 31, 2001 to $1,054.7 million at September 30, 2002. There was growth in all types of accounts. Short-term borrowings decreased $7.8 million from $91.6 million at December 31, 2001 to $83.8 million at September 30, 2002 due to a decline in federal funds purchased of $16.7 million offset by an increase in corporate sweep accounts of $8.9 million. Other liabilities decreased $2.8 million primarily because there were $0.7 million in purchases of securities and $0.2 million of treasury 16 stock purchases that will settle in October 2002 compared to securities of $4.1 million purchased in December 2001 that settled in January 2002. Shareholders' equity grew to $129.9 million at September 30, 2002 from $121.6 million at December 31, 2001. Treasury stock increased to $39.2 million at September 30, 2002 from $33.1 million at December 31, 2001. On December 31, 2001, 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 351,047 shares of its outstanding common stock in open market or negotiated transactions. The net number of shares purchased since December 31, 2001 is 165,191. Book value per share increased from $17.32 at December 31, 2001 to $18.94 at September 30, 2002, an increase of $1.62 per share or 9.4%. The accumulated other comprehensive income, related to debt securities, of $6.6 million, net of taxes, has been included in shareholders' equity as of September 30, 2002. At December 31, 2001, the accumulated other comprehensive income, related to debt securities, included in shareholders' equity was $2.8 million, net of taxes. The accumulated other comprehensive income, related to interest-rate swaps, of $0.4 million, net of taxes, has been included in shareholders' equity as of September 30, 2002. The accumulated other comprehensive income, related to interest-rate swaps, of $0.3 million, net of taxes, was included in shareholders' equity as of December 31, 2001. Market Risk ----------- No material changes in the Corporation's market risk or market strategy occurred during the current period. A detailed discussion of market risk is provided in the Registrant's Annual Report on Form 10-K for the period ended December 31, 2001. Recent Accounting Pronouncements -------------------------------- On January 1, 2002, the Corporation adopted Statement No. 141, "Business Combinations" (SFAS No. 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). In accordance with the adoption provisions of SFAS No. 142, the Corporation has completed the transitional impairment tests and no impairment was noted. The Corporation will be required to perform goodwill impairment tests at least on an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. 17 The following table reflects the results of operations as if SFAS No. 142 had been adopted as of January 1, 2001:
For the three months ended For the nine months ended September 30 September 30 2002 2001 2002 2001 (In thousands, except per share data) Net income, as reported $ 5,322 $ 4,899 $15,340 $14,074 Add back: Goodwill amortization, net of income tax benefit of $6 and $16 respectively - 117 - 350 ------- ------- ------- ------- Adjusted net income $ 5,322 $ 5,016 $15,340 $14,424 Per common share data: Net income per share: Basic as reported $ 0.77 $ 0.69 $ 2.21 $ 1.97 Goodwill amortization $ - $ 0.02 $ - $ 0.05 Adjusted basic earnings per share $ 0.77 $ 0.71 $ 2.21 $ 2.02 Diluted as reported $ 0.76 $ 0.68 $ 2.19 $ 1.96 Goodwill amortization $ - $ 0.02 $ - $ 0.05 Adjusted diluted earnings per share $ 0.76 $ 0.70 $ 2.19 $ 2.01
18 Part II. OTHER INFORMATION Item 1. Legal Proceedings--None Item 2. Changes in Securities--None Item 3. Defaults upon Senior Securities--None Item 4. Submission of Matters to a Vote of Security Holders--Not applicable Item 5. Other Information--None Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit 99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Reports on Form 8-K during the quarter ended September 30, 2002 Date of Report Item Description -------------- ---- ----------- August 13, 2002 5 Notification of a correspondence sent to SEC containing the certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Univest Corporation of Pennsylvania (Registrant) Date: 10/23/02 /s/ William S. Aichele -------- ----------------------------- William S. Aichele, President and Chief Executive Officer Date: 10/23/02 /s/ Wallace H. Bieler -------- ----------------------------- Wallace H. Bieler, Executive Vice President and Chief Financial Officer 20 CERTIFICATIONS I, William S. Aichele, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Univest Corporation of Pennsylvania; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 10/23/02 -------- /s/ William S. Aichele --------------------------------- William S. Aichele, President and Chief Executive Officer CERTIFICATIONS I, Wallace H. Bieler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Univest Corporation of Pennsylvania; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 10/23/02 -------- /s/ Wallace H. Bieler ------------------------------------- Wallace H. Bieler, Execute Vice President and Chief Financial Officer