-----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, G3EFWwQu1OAcSUrDiC2Wk2X8fRbGjP0n8fG02c2O/aBMyZ/6cPHx/IzaBVjhUEO9 cwFyhJ/ehPVPk0SPXiYHTQ== 0001144204-06-031548.txt : 20060808 0001144204-06-031548.hdr.sgml : 20060808 20060808161849 ACCESSION NUMBER: 0001144204-06-031548 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060808 DATE AS OF CHANGE: 20060808 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07617 FILM NUMBER: 061013388 BUSINESS ADDRESS: STREET 1: 14 NORTH MAIN STREET STREET 2: P. O. BOX 64197 CITY: SOUDERTON STATE: PA ZIP: 18964 BUSINESS PHONE: 2157212400 MAIL ADDRESS: STREET 1: 14 NORTH MAIN STREET STREET 2: P. O. BOX 64197 CITY: SOUDERTON STATE: PA ZIP: 18964 10-Q 1 v049111_10q.htm
United States
 
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2006.
 
or

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to ________.

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 incorporation of organization)
  
(IRS Employer Identification No.)
 
14 North Main 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.  RYes £No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ 
Accelerated filer R 
Non-accelerated filer £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). £Yes RNo 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $5 par value
  
12,941,415
(Title of Class)
  
(Number of shares outstanding at 6/30/06)
 
 
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX
   
Page Number
Part I.
Financial Information:
  
       
 
Item 1.
Financial Statements (Unaudited)
       
   
Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005
1
       
   
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005
2
       
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
3
       
   
Notes to Condensed Consolidated Financial Statements
4
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
       
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
30
       
 
Item 4.
Controls and Procedures
30
       
Part II.
Other Information:
 
       
 
Item 1.
Legal Proceedings
30
       
 
Item 1A.
Risk Factors
30
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
       
 
Item 3.
Defaults Upon Senior Securities
31
       
 
Item 4.
Submission of Matters to a Vote of Securities Holders
31
       
 
Item 5.
Other Information
31
       
 
Item 6.
Exhibits
32
 
 
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(UNAUDITED)
June 30, 2006
  
(SEE NOTE)
December 31, 2005
  
ASSETS
  
($ in thousands)
  
Cash and due from banks
  
$
42,503
  
$
46,226
  
Interest-bearing deposits with other banks
    
609
    
563
 
Federal funds sold
    
2,735
    
12,650
 
Investment securities held-to-maturity (market value $14,121 and $14,686 at June 30, 2006 and December 31, 2005, respectively)
    
14,239
    
14,808
 
Investment securities available-for-sale
    
352,108
    
328,451
 
Loans and leases
    
1,321,299
    
1,249,652
 
Less: Reserve for loan and lease losses
    
(14,280
)
  
(13,363
)
Net loans and leases
    
1,307,019
    
1,236,289
 
Premises and equipment, net
    
22,019
    
21,635
 
Goodwill, net of accumulated amortization of $2,845 at June 30, 2006 and December 31, 2005
    
41,150
    
40,998
 
Other intangibles, net of accumulated amortization of $4,739 and $4,424 at June 30, 2006 and December 31, 2005, respectively
    
2,094
    
2,389
 
Cash surrender value of insurance policies
    
35,832
    
35,211
 
Accrued interest and other assets
    
31,265
    
30,089
 
Total assets
  
$
1,851,573
  
$
1,769,309
  
               
LIABILITIES
              
Demand deposits, noninterest-bearing
  
$
231,282
  
$
246,736
  
Demand deposits, interest-bearing
    
457,393
    
445,395
 
Savings deposits
    
195,923
    
192,154
 
Time deposits
    
555,179
    
482,430
 
Total deposits
    
1,439,777
    
1,366,715
 
Securities sold under agreements to repurchase
    
93,321
    
108,312
 
Other short-term borrowings
    
35,700
    
─
  
Accrued expenses and other liabilities
    
22,194
    
32,753
 
Long-term debt
    
51,346
    
56,580
 
Subordinated notes
    
10,500
    
11,250
 
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding junior subordinated debentures of Univest ("Trust Preferred Securities")
    
20,619
    
20,619
  
Total liabilities
    
1,673,457
    
1,596,229
 
SHAREHOLDERS' EQUITY
              
Common stock, $5 par value: 24,000,000 shares authorized at June 30, 2006 and December 31, 2005; 14,873,904 shares and 14,873,904 shares issued and 12,941,415 and 12,947,001 shares outstanding at June 30, 2006 and December 31, 2005, respectively
    
74,370
    
74,370
  
Additional paid-in capital
    
22,059
    
22,051
 
Retained earnings
    
121,381
    
114,346
  
Accumulated other comprehensive loss, net of tax benefit
    
(2,923
)
  
(1,050
)
Treasury stock, at cost; 1,932,489 and 1,926,903 shares at June 30, 2006 and December 31, 2005, respectively
    
(36,771
)
  
(36,637
)
Total shareholders’ equity
    
178,116
    
173,080
 
Total liabilities and shareholders’ equity
  
$
1,851,573
  
$
1,769,309
  

Note: The condensed consolidated balance sheet at December 31, 2005 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 for complete financial statement. See accompanying notes to the unaudited condensed consolidated financial statements.
 
1

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Interest income
  
($ in thousands, except per share data)
  
Interest and fees on loans and leases:
                  
Taxable
  
$
20,896
  
$
16,469
  
$
40,056
  
$
31,995
  
Exempt from federal income taxes
    
941
    
808
    
1,857
    
1,596
  
Total interest and fees on loans and leases
    
21,837
    
17,277
    
41,913
    
33,591
  
Interest and dividends on investment securities:
                          
Taxable
    
2,800
    
2,437
    
5,246
    
4,747
  
Exempt from federal income taxes
    
981
    
886
    
1,948
    
1,770
  
Other interest income
    
111
    
67
    
174
    
107
  
Total interest income
    
25,729
    
20,667
    
49,281
    
40,215
  
Interest expense
                          
Interest on deposits
    
8,410
    
4,614
    
15,107
    
8,728
  
Interest on long-term debt and capital securities
    
1,187
    
1,079
    
2,343
    
2,091
  
Interest on short-term debt
    
577
    
314
    
1,284
    
549
  
Total interest expense
    
10,174
    
6,007
    
18,734
    
11,368
  
Net interest income
    
15,555
    
14,660
    
30,547
    
28,847
  
Provision for loan and lease losses
    
515
    
450
    
1,026
    
900
  
Net interest income after provision for loan and lease losses
    
15,040
    
14,210
    
29,521
    
27,947
  
Noninterest income
                          
Trust fee income
    
1,448
    
1,325
    
2,999
    
2,663
  
Service charges on deposit accounts
    
1,671
    
1,718
    
3,343
    
3,344
  
Investment advisory commission and fee income
    
607
    
446
    
1,156
    
921
  
Insurance commission and fee income
    
924
    
877
    
2,301
    
1,933
  
Life insurance income
    
235
    
334
    
621
    
604
  
Other service fee income
    
790
    
652
    
1,544
    
1,545
  
Net gain on sales of securities
    
47
    
87
    
47
    
87
  
Net loss on disposition of fixed assets
    
(64
)
  
(215
)
  
(67
)
  
(215
)
Other
    
17
    
158
    
176
    
217
  
Total noninterest income
    
5,675
    
5,382
    
12,120
    
11,099
  
Noninterest expense
                          
Salaries and benefits
    
7,198
    
6,552
    
14,503
    
13,273
  
Net occupancy
    
1,059
    
1,061
    
2,127
    
2,205
  
Equipment
    
805
    
771
    
1,577
    
1,471
  
Other
    
3,444
    
3,063
    
6,788
    
6,153
  
Total noninterest expense
    
12,506
    
11,447
    
24,995
    
23,102
  
Income before income taxes
    
8,209
    
8,145
    
16,646
    
15,944
  
Applicable income taxes
    
2,194
    
2,145
    
4,417
    
4,173
  
Net income
  
$
6,015
  
$
6,000
  
$
12,229
  
$
11,771
  
Net income per share:
                          
Basic
  
$
0.47
  
$
0.47
  
$
0.95
  
$
0.91
  
Diluted
    
0.46
    
0.46
    
0.94
    
0.90
  
Dividends declared
    
0.19
    
0.17
    
0.38
    
0.34
  

Note: See accompanying notes to the unaudited condensed consolidated financial statements.
 
2

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Six Months Ended June 30,
  
   
2006
  
2005
  
Cash flows from operating activities:
  
($ in thousands)
  
Net income
  
$
12,229
  
$
11,771
  
Adjustments to reconcile net income to net cash provided by operating activities:
      
Provision for loan and lease losses
   
1,026
    
900
 
Depreciation of premises and equipment
    
1,081
    
974
 
Realized gains on investment securities
    
(47
)
  
(87
)
Realized losses on dispositions of fixed assets
    
67
    
215
  
Increase in cash surrender value of insurance policies
    
(621
)
  
(604
)
Other adjustments to reconcile net income to cash provided by operating activities
    
467
    
(698
)
Increase in interest receivable and other assets
    
(161
)
  
(1,434
)
Decrease in accrued expenses and other liabilities
    
(11,265
)
  
(1,576
)
Net cash provided by operating activities
    
2,776
    
9,461
  
Cash flows from investing activities:
              
Net cash paid due to acquisitions, net of cash acquired
    
(152
)
  
(200
)
Net capital expenditures
    
(1,532
)
  
(2,332
)
Proceeds from maturing securities held-to-maturity
    
571
    
68,265
  
Proceeds from maturing securities available-for-sale
    
38,753
    
17,943
  
Proceeds from sales and calls of securities available-for-sale
    
18,515
    
2,814
  
Purchases of investment securities held-to-maturity
    
─
    
(44,914
)
Purchases of investment securities available-for-sale
    
(83,682
)
  
(46,599
)
Proceeds from sales of mortgages
    
756
    
4,616
  
Purchases of lease financings
    
271
    
─
  
Net increase in loans and leases
    
(72,687
)
  
(29,699
)
Net increase in interest-bearing deposits
    
(46
)
  
84
  
Net decrease (increase) in federal funds sold
    
9,915
    
(28
)
Net cash used in investing activities
    
(89,318
)
  
(30,050
)
Cash flows from financing activities:
              
Net increase in deposits
    
73,184
    
45,737
  
Net increase (decrease) in short-term borrowings
    
20,709
    
(17,467
)
Repayment of long-term debt
    
(5,000
)
  
─
  
Repayment of subordinated debt
    
(750
)
  
(750
)
Purchases of treasury stock
    
(2,192
)
  
(2,265
)
Stock issued under dividend reinvestment and employee stock purchase plans
    
1,043
    
987
  
Proceeds from exercise of stock options
    
749
    
1,362
  
Cash dividends paid
    
(4,924
)
  
(4,296
)
Net cash provided by financing activities
    
82,819
    
23,308
  
Net (decrease) increase in cash and due from banks
    
(3,723
)
  
2,719
  
Cash and due from banks at beginning of year
    
46,226
    
35,876
  
Cash and due from banks at end of period
  
$
42,503
  
$
38,595
  
               
Supplemental disclosures of cash flow information
              
Cash paid during the year for:
              
Interest
  
$
19,137
  
$
11,283
  
Income taxes, net of refunds received
    
5,134
   
4,453
  

Note: See accompanying notes to the unaudited condensed consolidated financial statements.

3

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements
 
Note 1.
Financial Information

The accompanying unaudited condensed consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (the “Corporation”) and its wholly owned subsidiaries; the Corporation’s primary subsidiary is Univest National Bank and Trust Co. (the “Bank”). The unaudited condensed consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited 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 six-month period ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. It is suggested that these unaudited 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, 2005, which has been filed with the SEC.

Effective January 1, 2006 the Corporation adopted the fair value method of accounting for stock-based compensation arrangements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123R”), using the modified prospective method of transition. Under the provisions of SFAS 123R, the estimated fair value of share based awards is recognized as compensation expense over the vesting period. Using the modified prospective method, compensation expense is recognized beginning with the effective date of adoption of SFAS 123R for all shares granted after the effective date of adoption and granted prior to the effective date of adoption and that remain unvested on the date of adoption.

During the second quarter of 2006, the Bank entered into the small ticket commercial leasing business through its newly formed subsidiary Vanguard Leasing, Inc. (“Vanguard”). Vanguard is incorporated under Pennsylvania law and is located in Bensalem, Pennsylvania.

Note 2.
Loans

The following is a summary of the major loan and lease categories:

($ in thousands)
  
At June 30,
2006
  
At December 31,
2005
  
Commercial, financial and agricultural
  
$
420,844
  
$
384,207
  
Real estate-commercial
    
365,847
    
349,384
  
Real estate-construction
   
125,911
    
110,032
  
Real estate-mortgage
    
301,077
    
303,994
  
Loans to individuals
    
107,734
    
102,095
  
Total gross loans and leases
    
1,321,413
    
1,249,712
  
Less: Unearned income
    
(114
)
  
(60
)
Total loans and leases
  
$
1,321,299
  
$
1,249,652
  

Net unamortized deferred loan and lease origination fees at June 30, 2006 and December 31, 2005 were $1.3 million and $1.5 million, respectively.
 
4

Note 3.
Reserve for Loan and Lease Losses

A summary of the activity in the reserve for loan and lease losses is as follows:
 
Information with respect to loans and leases that are considered to be impaired under SFAS 114 at June 30, 2006 and December 31, 2005 is as follows:
 
($ in thousands)
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Reserve for loan and lease losses at beginning of period
  
$
13,856
  
$
13,043
  
$
13,363
  
$
13,099
  
Provision for loan and lease losses
    
515
    
450
    
1,026
    
900
  
Recoveries
    
129
    
611
    
402
    
777
  
Loans charged off
    
(220
)
  
(852
)
  
(511
)
  
(1,524
)
Reserve for loan and lease losses at period end
  
$
14,280
  
$
13,252
  
$
14,280
  
$
13,252
  

 
 
At June 30, 2006
  
At December 31, 2005
  
 ($ in thousands)
  
Balance
  
Specific Reserve
  
Balance
  
Specific Reserve
  
 
                  
Recorded investment in impaired loans and leases at period-end subject to a specific reserve for loan and lease losses and corresponding specific reserve
  
$
9,843
  
$
1,886
  
$
3,263
  
$
1,076
  
Recorded investment in impaired loans and leases at period-end requiring no specific reserve for loan and lease losses
    
─
          
─
        
Recorded investment in impaired loans and leases at period-end
  
$
9,843
        
$
3,263
        
Recorded investment in nonaccrual and restructured loans and leases
  
$
9,843
        
$
3,263
        
 
 


The following is an analysis of interest on nonaccrual and restructured loans and leases:

   
Three Months Ended
  
Six Months Ended
  
($ in thousands)
  
June 30,
  
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Nonaccrual and restructured loans and leases at period end
  
$
9,843
  
$
8,192
  
$
9,843
  
$
8,192
  
Average recorded investment in impaired loans and leases
    
5,707
    
9,161
    
4,967
    
9,881
  
Interest income that would have been recognized under original terms
    
115
    
157
    
233
    
383
  

No interest income was recognized on these loans for the three- and six-month periods ended June 30, 2006 and 2005.
 
5

Note 4.
Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

(in thousands, except per share data)
  
Three Months Ended
 June 30,
  
Six Months Ended
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Numerator:
              
 
  
Numerator for basic and diluted earnings per share -
Net income
  
$
6,015
  
$
6,000
  
$
12,229
  
$
11,771
  
Denominator:
                          
Denominator for basic earnings per share -
weighted-average shares outstanding
    
12,939
    
12,882
    
12,942
    
12,879
  
Effect of dilutive securities:
Employee stock options
    
79
    
143
    
69
    
160
  
Denominator for diluted earnings per share - adjusted
weighted-average shares outstanding
    
13,018
    
13,025
    
13,011
    
13,039
  
Basic earnings per share
  
$
0.47
  
$
0.47
  
$
0.95
  
$
0.91
  
Diluted earnings per share
    
0.46
    
0.46
    
0.94
    
0.90
  
 
As permitted under SFAS No. 123 (before revision), “Accounting for Stock-Based-Compensation” (“SFAS 123”), the Corporation applied the intrinsic value method of accounting for stock options and other awards granted to employees. Under that method, the Corporation did not recognize any compensation cost during 2005. Under the modified prospective method of transition under SFAS 123R, the Corporation is not required to restate its prior period financial statements to reflect expensing of share-based compensation under SFAS 123R. Therefore, the results for the three- and six-month periods ended June 30, 2006 are not directly comparable to the same periods in the prior year.

The following pro forma information is presented for comparative purposes and illustrates the effect on net income, basic earnings per share and fully-diluted earnings per share, assuming the estimated fair value based method of the options granted prior to January 1, 2006 were amortized to expense over the option-vesting period:

($ in thousands, except per share data)
  
Three Months Ended
 June 30,
  
Six Months Ended
June 30,
 
   
2006
 
2005
 
2006
 
2005
  
Net Income as reported
  
$
6,015
  
$
6,000
  
$
12,229
  
$
11,771
  
Add: Stock-based compensation expense included in reported net income, net of tax
    
126
    
─
    
244
    
─
  
Deduct: Stock-based compensation expense determined under the fair value based method for all awards, net of tax
    
126
    
64
    
244
    
152
  
Pro forma net income
  
$
6,015
  
$
5,936
  
$
12,229
  
$
11,619
  
Basic earnings per share:
                          
As reported
  
$
0.47
  
$
0.47
  
$
0.95
  
$
0.91
  
Pro forma
  
 
0.47
  
 
0.46
  
 
0.95
  
 
0.90
  
Diluted earnings per share:
                          
As reported
  
 
0.46
  
 
0.46
  
 
0.94
  
 
0.90
  
Pro forma
  
 
0.46
  
 
0.46
  
 
0.94
  
 
0.89
  

6
 
Note 5.
Share-Based Compensation

The 1996 Employee Stock Purchase Plan (the “Purchase Plan”) provided 984,375 shares of common stock available for issuance, of which 884,689 shares were available for issuance at June 30, 2006. 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. Under SFAS 123R compensation expense must be recognized if the discount is greater than 5%.

The Corporation adopted the shareholders’ approved 2003 Long-Term Incentive Plan to replace the 1993 Long-Term Incentive Plan at its expiration. The 385,546 unissued common shares remaining under the 1993 plan expired and are no longer available for future options. There were 313,548 options to purchase common shares outstanding at June 30, 2006 under the 1993 plan. The Corporation may grant options to employees to purchase up to 1,500,000 shares of common stock under the 2003 plan. 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. For the majority of options issued, after two years, 33 percent of the optioned shares are exercisable each year for a period not exceeding ten years. There were 1,231,851 common shares available for future grants and 268,149 options to purchase common shares outstanding at June 30, 2006 under the 2003 plan.

Activity under the 1993 and 2003 Long-term Incentive Plans was as follows:

($ in thousand except per share data)
  
 
 
Shares Under Option
  
Weighted Average Exercise Price Per Share
  
Weighted Average Remaining
Contractual
Life (Years)
  
 
Aggregate Intrinsic
Value at June 30, 2006
 
Outstanding at December 31, 2005
    
589,223
  
$
21.57
          
Granted
    
37,500
    
25.01
            
Expired
    
─
    
─
            
Forfeited
    
(5,700
)
  
25.46
          
Exercised
    
(39,326
)
  
18.84
          
Outstanding at June 30, 2006
    
581,697
    
21.94
    
4.6
  
$
3,386
  
Exercisable at June 30, 2006
    
325,617
   
19.49
    
2.1
    
2,682
 

During the first six months of 2006 and 2005, proceeds from the exercise of stock options were $741 thousand and $1.3 million, respectively, the tax benefit recognized and recorded to additional paid in capital was $8 thousand and $68 thousand, respectively, and the intrinsic value of the options exercised was $288 thousand and $1.0 million, respectively.

The Corporation uses the Black-Scholes Model to estimate the fair value of each option on the date of grant. The Black-Scholes Model estimates the fair value of employee stock options using a pricing model which takes into consideration the exercise price of the option, the expected life of the options, the current market price and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Corporation’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. The Corporation uses a straight-line accrual method to recognize stock-based compensation expense over the time-period it expects the options to vest.
7
 
Using the modified prospective method, compensation expense is recognized beginning with the effective date of adoption of SFAS 123R for all shares granted after the effective date of adoption and for those shares granted prior to the effective date of adoption and that remain unvested on the date of adoption. There were no options granted in 2004. Options granted during Fiscal Years 2002, 2003 and 2005 which remained unvested on the date of adoption will be expensed in 2006 and in future periods under the following assumptions:

 
For the Three
Months Ended
June 30,
  
For the Six
Months Ended
June 30,
  
 
 
For Fiscal Years
  
   
2006
  
2005
  
2006
  
2005
  
2005
  
2004
  
2003
  
2002
  
Expected option life in years
    
8.9
    
─
    
8.9
    
8.6
    
8.7
    
─
    
8.0
    
5.0
  
Risk free interest rate
    
5.15
%
  
─
    
5.15
%
  
4.00
%
  
4.35
%
  
─
    
3.04
%
  
2.75
%
Expected dividend yield
    
3.80
%
  
─
    
3.80
%
  
2.38
%
  
3.11
%
  
─
    
2.11
%
  
2.26
%
Expected volatility
    
.309
    
─
    
.309
    
.351
    
.335
    
─
    
.142
    
.219
  
Fair value of options
  
$
7.96
    
─
  
$
7.96
  
$
10.13
  
$
7.69
    
─
  
$
4.57
  
$
3.93
  

During the second quarter of 2006, the Corporation recognized stock-based compensation expense of $122 thousand on stock options and $13 thousand on the Employee Stock Purchase Plan and recognized a tax benefit on nonqualified stock option expense of $9 thousand. During the six month ended June 30, 2006, the Corporation recognized stock-based compensation expense of $245 thousand on stock options and $20 thousand on the Employee Stock Purchase Plan and recognized a tax benefit on nonqualified stock option expense of $21 thousand. The recognized stock-based compensation expense of $245 thousand at June 30, 2006 has been accrued on stock options that the Corporation anticipates to vest over a weighted average period of 2.1 years. At June 30, 2006, there was $1.3 million of unrecognized expense related to stock options which is expected to be recognized over a weighted-average period of 3.1 years.

During the six months ended June 30, 2006, the Corporation accelerated the vesting of 2,800 grants for one employee as permitted under the 2003 Long-Term Incentive Plan upon retirement. As a result of this modification, additional compensation expense of $13 thousand was recognized.

The following table provides information about the change in nonvested options over the first six months of 2006:
 
   
Nonvested Shares
  
Weighted Average Grant Date Fair Value
  
Nonvested options at December 31, 2005
    
227,080
  
$
6.01
  
Granted
    
37,500
    
7.96
  
Vested
    
(2,800
)
  
4.57
  
Forfeited
    
(5,700
)
  
6.71
  
Nonvested options at June 30, 2006
    
256,080
    
6.30
  

8

Note 6.
Accumulated Comprehensive Income

The following shows the accumulated comprehensive income, net of income taxes, for the periods presented:
 
($ in thousands)
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
   
2006
  
2005
  
2006
  
2005
  
Net Income
  
$
6,015
  
$
6,000
  
$
12,229
  
$
11,771
  
Unrealized gain on cash flow hedges
    
15
    
─
    
4
    
─
  
Unrealized loss on available-for-sale investment securities
    
(977
)
  
1,658
    
(1,846
)
  
(686
)
Less: reclassification adjustment for gains realized in net income 
    
31
    
57
    
31
    
57
  
Total comprehensive income
  
$
5,022
  
$
7,601
  
$
10,356
  
$
11,028
  
 
Note 7.
Pensionsand Other Postretirement Benefits

Components of net periodic benefit cost:
 
($ in thousands)
  
Three Months Ended June 30,
  
   
2006
  
2005
  
2006
  
2005
  
   
Retirement Plans
  
Other Postretirement
  
Service cost
  
$
347
  
$
302
  
$
15
  
$
14
  
Interest cost
    
406
    
390
    
20
    
19
  
Expected return on plan assets
    
(388
)
  
(372
)
  
3
    
2
  
Amortization of prior service cost
    
72
    
39
    
(5
)
  
(5
)
Net periodic benefit cost
  
$
437
  
$
359
  
$
33
  
$
30
  
 
($ in thousands)
  
Six Months Ended June 30,
  
   
2006
  
2005
  
2006
  
2005
  
   
Retirement Plans
  
Other Postretirement
  
Service cost
  
$
687
  
$
618
  
$
29
  
$
27
  
Interest cost
    
820
    
791
    
39
    
37
  
Expected return on plan assets
    
(765
)
  
(760
)
  
6
    
4
  
Amortization of prior service cost
    
119
    
70
    
(10
)
  
(10
)
Net periodic benefit cost
  
$
861
  
$
719
  
$
64
  
$
58
  

The Corporation previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to make payments of $1.5 million for its qualified and non-qualified retirement plans and $94 thousand for its other postretirement benefit plans in 2006. As of June 30, 2006, $803 thousand and $43 thousand have been paid from its retirement plans and other postretirement plans, respectively. During the six months ended June 30, 2006, the Corporation contributed $266 thousand and $43 thousand to its non-qualified retirement plans and other postretirement plans, respectively. The Corporation presently anticipates making essentially equal payments for the remaining quarters in 2006 to fund the non-qualified retirement plan and other postretirement plans.

Note 8. 
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

At June 30, 2006, the total notional amount of the “Pay Floating, Receive Fixed” swap outstanding was $20.0 million. The net payable or receivable from the interest-rate swap agreement is accrued as an adjustment to interest income. The $20.0 million in notional amount of interest-rate swap outstanding expires on November 2, 2006. The Corporation’s credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. At June 30, 2006, the market value of the interest-rate swaps in an unfavorable position was $88 thousand and there were no interest-rate swaps with a market value in a favorable position.
 
9
 
Note 9.
Recent Accounting Pronouncements 
 
In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). SFAS 155 amends SFAS Nos. 133 and 140. SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS 155: a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, e) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS 155. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Corporation has not completed its assessment of SFAS 155 and the impact, if any, on the financial statements.
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.” SFAS 156: 1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a) a transfer of the servicer’s financial assets that meets the requirements for sale accounting; b) a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”); or, c) an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: a) amortization method—amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date; or, b) fair value measurement method—measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and, 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS 156 as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of SFAS 156 is the date an entity adopts the requirements of this Statement. The Corporation has not completed its assessment of SFAS 156 and the impact, if any, on the financial statements.
 
In June 2006, FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. According to FIN 48, a tax position is recognized if it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize and should be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation has not completed its assessment of FIN 48 and the impact, if any, on the financial statements.
 
10
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements

The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words "believe," "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:

·  
Operating, legal and regulatory risks
·  
Economic, political and competitive forces impacting various lines of business
·  
The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful
·  
Volatility in interest rates
·  
Other risks and uncertainties

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 report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions 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.

General

Univest Corporation of Pennsylvania, (the “Corporation”), is a Financial Holding Company. It owns all of the capital stock of Univest National Bank and Trust Co. (the “Bank”), Univest Realty Corporation, Univest Delaware, Inc., and Univest Reinsurance Corporation.

The Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers. Delview, Inc., a wholly owned subsidiary of the Bank, provides various financial services including financial planning, investment management, insurance products and brokerage services to individuals and businesses through its subsidiaries Univest Investments, Inc. and Univest Insurance, Inc. During the second quarter of 2006, the Bank entered into the small ticket commercial leasing business through its newly formed subsidiary Vanguard Leasing, Inc. (“Vanguard”). Vanguard is incorporated under Pennsylvania law and is located in Bensalem, Pennsylvania.

Executive Overview

The Corporation recorded net income for the six months ended June 30, 2006 of $12.2 million, a 3.9% increase over the June 30, 2005 period. Both basic and diluted net income per share increased 4.4%.

Average earning assets increased $118.4 million and average interest-bearing liabilities increased $100.4 million when comparing the six-month periods ended June 30, 2006 and 2005. Increased rates on commercial business loans and commercial and construction real estate loans, partially offset by increased rates on money market savings and certificates of deposits, contributed to a $1.7 million increase in net interest income. The tax-equivalent net interest margin declined slightly to 3.9% for the six-month period ended June 30, 2006 compared to 4.0% for the same period in 2005.
 
11

Non-interest income grew 9.2%, when comparing the six-month periods ended June 30, 2006 to 2005, primarily due to increases in insurance commissions and fee income, investment advisory commissions and fee income, and trust fee income. Non-interest expense grew 8.2% primarily due to an increase in salary and employee benefit expense as well as an increase in the capital shares tax.

The Corporation earns its revenues primarily from the margins and fees it generates from the loan and depository services it provides as well as from trust, insurance and investment commissions and fees. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value while the margin impact will vary from bank to bank based upon the structure of its balance sheet. The Corporation maintains a relatively low interest rate risk profile and does not anticipate that an increase in interest rates would be adverse to its net interest margin.

The Corporation seeks to establish itself as the financial provider of choice in the markets it serves. It plans to achieve this goal by offering a broad range of high quality financial products and services and by increasing market awareness of its brand and the benefits that can be derived from its products. The Corporation operates in an attractive market for financial services but also is in intense competition with domestic and international banking organizations and other insurance and investment providers for the financial services business. The Corporation has taken initiatives to achieve its business objective by acquiring banks and other financial service providers in strategic markets, by marketing, public relations and advertising, by establishing standards of service excellence for its customers, and by using technology to ensure that the needs of its customers are understood and satisfied.

Results of Operations - Three Months Ended June 30, 2006 Versus 2005

The Corporation’s consolidated net income and earnings per share for the three months ended June 30, 2006 and 2005 were as follows:

($ in thousands, except per share data)
  
Three Months Ended
June 30,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Net income
  
$
6,015
  
$
6,000
  
$
15
    
0.3
%
Net income per share:
                          
Basic
  
$
0.47
  
$
0.47
  
$
─
    
─
%
Diluted
    
0.46
   
0.46
   
─
    
─
 

Return on average shareholders' equity was 13.53% and return on average assets was 1.32% for the three months ended June 30, 2006 compared to 14.52% and 1.43%, respectively, for the same period in 2005.

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 revenue. The following table presents a summary of the Corporation's average balances; the tax-equivalent yields earned on average assets, and the cost of average liabilities for the three months ended June 30, 2006 and 2005. 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 reliable net interest margin for the Corporation.

Net interest income increased $895 thousand for the three months ended June 30, 2006 compared to 2005 primarily due to increased rates on commercial loans and commercial real estate and construction loans, partially offset by increased rates on money market savings deposits and certificates of deposit. The tax-equivalent net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was 3.9% and 4.0% for the three-month periods ended June 30, 2006 and 2005, respectively. The tax-equivalent net interest spread, which represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, was 3.5% for the three months ended June 30, 2006 compared to 3.7% for the same period in 2005. The effect of net interest free funding sources increased to 0.4% for the three months ended June 30, 2006 compared to 0.3% for the same period in 2005; this represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.
 
12

Table 1 — Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
  
       
   
For the Three Months Ended June 30,
  
   
2006 
 
2005 
 
 
 
Average
 
Income/
 
Avg.
 
Average
 
Income/
 
Avg.
 
 
 
Balance 
 
Expense 
 
Rate 
 
Balance 
 
Expense 
 
Rate 
  
Assets:
  
 
                      
Interest-earning deposits with other banks
  
$
668
  
$
6
    
3.6
%
$
663
  
$
4
    
2.4
%
U.S. Government obligations
    
150,794
    
1,314
    
3.5
    
159,226
    
1,307
    
3.3
  
Obligations of states & political subdivisions
    
84,463
    
1,507
    
7.1
    
78,006
    
1,362
    
7.0
  
Other securities
    
116,033
    
1,460
    
5.0
    
103,257
    
1,104
    
4.3
  
Federal Reserve bank stock
    
1,687
    
26
    
6.2
    
1,687
    
26
    
6.2
  
Federal funds sold
    
8,349
    
105
    
5.0
    
9,074
    
63
    
2.8
  
Total interest-earning deposits, investments and federal funds sold
    
361,994
    
4,418
    
4.9
    
351,913
    
3,866
    
4.4
  
Commercial, financial and agricultural loans and leases
    
383,052
    
7,099
    
7.4
    
337,312
    
5,182
    
6.1
  
Real estate─commercial and construction loans
    
422,727
    
7,919
    
7.5
    
388,356
    
6,434
    
6.6
  
Real estate─residential loans
    
304,469
    
4,122
    
5.4
    
295,684
    
3,753
    
5.1
  
Loans to individuals
    
107,302
    
1,756
    
6.5
    
76,313
    
1,100
    
5.8
  
Municipal loans
    
87,352
    
1,295
    
5.9
    
83,636
    
1,148
    
5.5
  
Gross loans and leases
    
1,304,902
    
22,191
    
6.8
    
1,181,301
    
17,617
    
6.0
  
Total interest-earning assets
    
1,666,896
    
26,609
    
6.4
    
1,533,214
    
21,483
    
5.6
  
Cash and due from banks
    
40,586
                
39,061
              
Reserve for loan losses
    
(14,034
)
              
(12,880
)
            
Premises and equipment, net
    
22,118
                
20,642
              
Other assets
    
106,610
                
103,255
              
Total assets
  
$
1,822,176
              
$
1,683,292
              
Liabilities:
                                      
Interest-bearing checking deposits
  
$
138,897
    
37
    
0.1
  
$
155,643
    
43
    
0.1
  
Money market savings
    
316,345
    
2,802
    
3.5
    
269,461
    
1,275
    
1.9
  
Regular savings
    
197,252
    
310
    
0.6
    
214,603
    
151
    
0.3
  
Certificates of deposit
    
529,125
    
4,995
    
3.8
    
430,258
    
3,055
    
2.8
  
Time open & club accounts
    
24,008
    
266
    
4.4
    
14,870
    
90
    
2.4
  
Total time and interest-bearing deposits
    
1,205,627
    
8,410
    
2.8
    
1,084,835
    
4,614
    
1.7
  
Federal funds purchased
    
4,295
    
56
    
5.2
    
5,230
    
40
    
3.1
  
Securities sold under agreements to repurchase
    
93,809
    
495
    
2.1
    
92,419
    
274
    
1.2
  
Short-term borrowings
    
2,344
    
26
    
4.4
    
─
    
─
    
─
  
Long-term debt
    
55,860
    
606
    
4.3
    
56,878
    
613
    
4.3
  
Subordinated notes and capital securities
    
31,127
    
581
    
7.5
    
32,617
    
466
    
5.7
  
Total borrowings
    
187,435
    
1,764
    
3.8
    
187,144
    
1,393
    
3.0
  
Total interest-bearing liabilities
    
1,393,062
    
10,174
    
2.9
    
1,271,979
    
6,007
    
1.9
  
Demand deposits, non-interest bearing
    
228,121
                
224,443
              
Accrued expenses & other liabilities
    
23,171
                
21,588
              
Total liabilities
    
1,644,354
                
1,518,010
              
Shareholders’ Equity:
                                      
Common stock
    
74,370
                
74,370
              
Additional paid-in capital
    
22,059
                
21,650
              
Retained earnings and other equity
    
81,393
                
69,262
              
Total shareholders’ equity
    
177,822
                
165,282
              
Total liabilities and shareholders’ equity
  
$
1,822,176
              
$
1,683,292
              
                                       
Net interest income
        
$
16,435
              
$
15,476
        
                                       
Net interest spread
  
3.5
                
3.7
  
Effect of net interest-free funding sources
  
0.4
               
0.3
 
Net interest margin
  
3.9
%
              
4.0
%
Ratio of average interest-earning assets to average interest-bearing liabilities
    
119.7
%
              
120.5
%
            
 
 
Notes:
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35 percent.
For rate calculation purposes, average loan categories include unearned discount.
Nonaccrual loans have been included in the average loan balances.
Certain amounts have been reclassified to conform to the current-year presentation.
 
13
 
Analysis of Changes in Net Interest Income 

The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated to change in volume.

 
 
 
The Three Months Ended June 30,
2006 Versus 2005
 
 
 
Volume
Change 
 
Rate
Change 
 
 
Total 
  
Interest income:
              
Interest-earning deposits with other banks
  
$
—
  
$
2
  
$
2
  
U.S. Government obligations
    
(73
)
  
80
    
7
  
Obligations of states & political subdivisions
    
125
    
20
    
145
  
Other securities
    
175
    
181
    
356
  
Federal Reserve bank stock
    
—
    
—
    
—
  
Federal funds sold
   
(8
)
  
50
   
42
 
Interest on deposits, investments and federal funds sold
    
219
    
333
    
552
  
Commercial , financial and agricultural loans and leases
    
821
    
1,096
    
1,917
  
Real estate─commercial and construction loans
    
611
    
874
    
1,485
  
Real estate─residential loans
    
147
    
222
    
369
  
Loans to individuals
    
522
    
134
    
656
  
Municipal loans
    
63
   
84
    
147
 
Interest and fees on loans and leases
    
2,164
   
2,410
   
4,574
 
Total interest income
    
2,383
    
2,743
   
5,126
 
Interest expense:
                    
Interest checking deposits
    
(6
)
  
—
    
(6
)
Money market savings
    
449
    
1,078
    
1,527
  
Regular savings
    
(2
)
  
161
    
159
  
Certificates of deposit
    
864
    
1,076
    
1,940
  
Time open & club accounts
    
102
   
74
   
176
 
Interest on deposits
    
1,407
   
2,389
   
3,796
 
Federal funds purchased
    
(12
)
  
28
    
16
  
Securities sold under agreement to repurchase
    
11
    
210
    
221
  
Other short-term borrowings
    
26
    
—
    
26
  
Long-term debt
    
(7
)
  
—
    
(7
)
Subordinated notes and capital securities
    
(32
)
  
147
    
115
  
Interest on borrowings
    
(14
)
  
385
   
371
 
Total interest expense
    
1,393
   
2,774
   
4,167
 
Net interest income
  
$
990
 
$
(31
)
$
959
 

Notes:
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35 percent.
Nonaccrual loans and unearned discounts have been included in the average loan balances.

Interest Income

Interest on deposits, investments and federal funds sold increased primarily due to a rate and volume increases on mortgage-backed securities and U.S. Government agency obligations and average volume increases in obligations of state and political subdivisions.

The growth in interest and fees on loans and leases is due primarily to increased rates on commercial business loans and commercial and construction real estate loans. The average interest yield on the commercial loan portfolio increased 126 basis points, primarily due to a 209 basis point increase in the average prime rate, for the three months ended June 30, 2006 compared to the same period in 2005; which, along with average volume increases of $45.7 million, contributed to a $1.9 million increase in interest income. The average yield on commercial and construction real estate loans increased by 86 basis points; this along with average volume increases of $34.4 million contributed to a $1.5 million increase in interest income. The average volume of loans to individuals increased $31.0 million, primarily contributing to an increase in interest income of $656 thousand.

14

Interest Expense

The Corporation’s average rate on deposits increased 109 basis points for the three months ended June 30, 2006 compared to the same period in 2005. The average rate paid on money market savings increased 165 basis points due to new products and promotions offered to grow deposits in the Bank’s competitive marketplace; which contributed to a $1.5 million increase in interest expense. Interest on certificates of deposit increased $1.9 million, due to a 94 basis-point increase in average rate and average volume increases of $98.9 million. Since August 2004, the Bank obtained deposits from the Pennsylvania Local Government Investment Trust (“PLGIT”) to augment its fixed funding sources. The PLGIT deposits are public funds collateralized with a letter of credit that PLGIT maintains with the Federal Home Loan Bank of Pittsburgh (“FHLB”); therefore, the Univest National Bank is not required to provide collateral on these deposits. The average balance of PLGIT deposits increased $57.5 million comparing the three months ended June 30, 2006 over the same period in 2005.

Interest expense on short-term borrowings includes interest paid on federal funds purchased and short-term FHLB borrowings. In addition, the Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account (“sweep accounts”). Interest expense on short-term borrowings increased 83.8% during the three months ended June 30, 2006 compared to 2005 primarily due to a 92 basis point increase in the average rate paid on sweep accounts.

Interest on long-term debt increased primarily due to a 176 basis point increase in the rate paid on subordinated notes and trust preferred securities. This increase in rate was due to Three Month London Interbank Offer Rate (“LIBOR”) increases which affect the variable rate paid on the trust preferred securities.

Provision for Loan and Lease Losses

The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease 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 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 bank’s primary regulators, as an integral part of their examination process, may require adjustments to the allowance. Continued growth in loan and lease volumes and current economic conditions indicated the need for an increase to the reserve in 2006. The provision for the three months ended June 30, 2006 and 2005 was $515 thousand and $450 thousand, respectively.

Non-interest Income

Non-interest income consists of trust department fee income, service charges on deposits income, commission income, net gains on sales of securities, and other miscellaneous types of income. It also includes various types of service fees, such as ATM fees, and life insurance income which primarily represents changes in the cash surrender value of bank-owned life insurance policies. Total noninterest income increased during the three months ended June 30, 2006 compared to 2005 primarily due to higher investment advisory commissions and fees as well as increases in other service fees.

   
For the Three Months
Ended June 30,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Trust fee income
  
$
1,448
  
$
1,325
  
$
123
    
9.3
%
Service charges on deposit accounts
    
1,671
    
1,718
    
(47
)
  
(2.7
)
Investment advisory commission and fee income
    
607
    
446
    
161
    
36.1
  
Insurance commission and fee income
    
924
    
877
    
47
    
5.4
  
Life insurance income
    
235
   
334
    
(99
)
  
(29.6
)
Other service fee income
    
790
    
652
    
138
    
21.2
  
Net gain on sales of securities
    
47
    
87
    
(40
)
  
(46.0
)
Net loss on dispositions of fixed assets
    
(64
)
  
(215
)
  
151
    
(70.2
)
Other
    
17
    
158
    
(141
)
  
(89.2
)
Total noninterest income
  
$
5,675
  
$
5,382
  
$
293
    
5.4
  

15
 
Trust fee income increased in 2006 over 2005 primarily due to an increase in the number and market value of managed accounts. Service charges on deposit accounts decreased for the second quarter in 2006 compared to 2005 primarily due to a reduction in nonsufficient-funds fees.

Investment advisory commissions and fee income, the primary source of income for Univest Investments, Inc., increased in 2006 over 2005 due to market activity and volume. Life insurance income is primarily the change in the cash surrender values of bank owned life insurance policies, which is primarily affected by the market value of the underlying assets. The increase recognized on these policies was less in the second quarter of 2006 compared to 2005.
 
Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (“Mastermoney fees”), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Other service fee income increased for the second quarter of 2006 over 2005 primarily due to increases Mastermoney fees and mortgage placement income.
 
Other non-interest income includes loss on investments in partnerships, gains on sales of mortgages, gains on sales of other real estate owned, reinsurance income and other miscellaneous income. The Corporation recognized a reduction in the income earned on sales of mortgages and reinsurance income. Additionally, larger losses were recognized on investments in partnerships when comparing June 30, 2006 to the same period in 2005.

Gains on Sale of Assets

Sales of $738 thousand in mortgage loans during the three months ended June 30, 2006 resulted in gains of $7 thousand compared to sales of $3.2 million for gains of $36 thousand for the three months ended June 30, 2005.

During the three months ended June 30, 2006, approximately $31 thousand of securities were sold recognizing gains of $1 thousand; the Corporation also received $46 thousand resulting from the mandatory sale of shares created through conversion of one of its vendor relationships from a membership association to a private share corporation. During the three months ended June 30, 2005, $1.2 million of securities were sold recognizing gains of $87 thousand.

During the three months ended June 30, 2006, the Corporation relocated a banking office within one of its supermarket locations and recognized a loss of $65 thousand; this was slightly reduced by gains on sales of other fixed assets. During the three months ended June 30, 2005 the Corporation closed two of its supermarket banking offices and retired additional long-term assets replaced by the new Kulpsville branch resulting in net losses of the disposition of fixed assets of $215 thousand.
 
Non-interest Expense

The operating costs of the Corporation are known as non-interest 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.

The following table presents noninterest expense for the periods indicated:

   
For the Three Months
Ended June 30,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Salaries and benefits
  
$
7,198
  
$
6,552
  
$
646
    
9.9
%
Net occupancy
   
1,059
   
1,061
    
(2
)
  
(0.2
)
Equipment
    
805
    
771
    
34
    
4.4
  
Other
    
3,444
   
3,063
    
381
    
12.4
  
Total noninterest expense
  
$
12,506
  
$
11,447
  
$
1,059
    
9.3
 
 
 
16
Salary and benefits increased due to the normal annual increases, the recognition of stock-based compensation expense of $128 thousand, and increased hospital and medical expenses of $96 when compared to the same period in 2005. Equipment expense increased due to depreciation on assets purchased for new branches opened in 2005. Other expenses increased primarily due to bank shares tax overpayments and credits utilized in 2005 which were no longer available in 2006 and increases in miscellaneous expense. These increases were partially offset by decreases in legal fees associated with loan work-outs as well as a reduction in advertising and marketing expenses.

Tax Provision

The provision for income taxes was $2.2 million for the three months ended June 30, 2006 compared to $2.1 million in 2005, at effective rates of 26.73% and 26.33%, respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects and tax-exempt income from investments in municipal securities, loans and bank-owned life insurance. The increase in the effective tax rate between the three-month periods is primarily due to an increase in pre-tax income and non-deductible stock option compensation expense, partially offset by an increase in tax-exempt income.


Results of Operations - Six Months Ended June 30, 2006 Versus 2005

The Corporation’s consolidated net income and earnings per share for the six months ended June 30, 2006 and 2005 were as follows:

($ in thousands, except per share data)
  
For the Six Months Ended
June 30,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Net income
  
$
12,229
  
$
11,771
  
$
458
    
3.89
%
Net income per share:
                          
Basic
  
$
0.95
  
$
0.91
  
$
0.04
    
4.40
%
Diluted
    
0.94
   
0.90
   
0.04
    
4.44
  

Return on average shareholders' equity was 13.88% and return on average assets was 1.37% for the six months ended June 30, 2006 compared to 14.37% and 1.41%, respectively, for the same period in 2005.

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 revenue. The following table presents a summary of the Corporation's average balances; the tax-equivalent yields earned on average assets, and the cost of average liabilities for the six months ended June 30, 2006 and 2005. 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 reliable net interest margin for the Corporation.

Net interest income increased $1.7 million for the six months ended June 30, 2006 compared to 2005 primarily due to increased rates on commercial loans and commercial real estate and construction loans, partially offset by increased rates on money market savings deposits and certificates of deposit. The tax-equivalent net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was 3.9% for the six-month period ended June 30, 2006 and 4.0% for the same period in 2005. The tax-equivalent net interest spread, which represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, was 3.4% for the six months ended June 30, 2006 compared to 3.7% for the same period in 2005. The effect of net interest free funding sources increased to 0.5% for the six months ended June 30, 2006 compared to 0.3% for the same period in 2005; this represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.
 
17

Table 1 — Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
  
       
   
For the Six Months Ended June 30,
 
 
 
2006 
 
2005 
 
 
 
Average
 
Income/
 
Avg.
 
Average
 
Income/
 
Avg.
 
 
 
Balance 
 
Expense 
 
Rate 
 
Balance 
 
Expense 
 
Rate 
  
Assets:
  
 
          
 
          
Interest-earning deposits with other banks
  
$
639
  
$
12
    
3.8
%
$
714
  
$
8
    
2.2
%
U.S. Government obligations
    
151,670
    
2,611
    
3.4
    
151,939
    
2,446
    
3.2
  
Obligations of states & political subdivisions
    
84,537
    
2,993
    
7.1
    
78,180
    
2,721
    
7.0
  
Other securities
    
106,815
    
2,584
    
4.8
    
104,657
    
2,250
    
4.3
  
Federal Reserve bank stock
    
1,687
    
51
    
6.0
    
1,687
    
51
    
6.0
  
Federal funds sold
    
6,902
    
162
    
4.7
    
7,253
    
99
    
2.7
  
Total interest-earning deposits, investments and federal funds sold
    
352,250
    
8,413
    
4.8
    
344,430
    
7,575
    
4.4
  
Commercial, financial and agricultural loans and leases
    
374,341
    
13,512
    
7.2
    
334,911
    
9,857
    
5.9
  
Real estate─commercial and construction loans
    
412,044
    
15,021
    
7.3
    
387,031
    
12,653
    
6.5
  
Real estate─residential loans
    
303,798
    
8,129
    
5.4
    
295,911
    
7,420
    
5.0
  
Loans to individuals
    
106,548
    
3,394
    
6.4
    
72,178
    
2,065
    
5.7
  
Municipal loans
    
87,052
    
2,570
    
5.9
    
83,172
    
2,274
    
5.5
  
Gross loans and leases
    
1,283,783
    
42,626
    
6.6
    
1,171,203
    
34,269
    
5.8
  
Total interest-earning assets
    
1,636,033
    
51,039
    
6.2
    
1,517,633
    
41,844
    
5.5
  
Cash and due from banks
    
39,883
                
38,416
              
Reserve for loan losses
    
(13,805
)
              
(13,012
)
            
Premises and equipment, net
    
21,846
                
20,335
              
Other assets
    
105,636
                
102,793
              
Total assets
  
$
1,789,593
              
$
1,666,165
              
Liabilities:
                                      
Interest-bearing checking deposits
  
$
139,836
    
74
    
0.1
  
$
154,769
    
86
    
0.1
  
Money market savings
    
300,267
    
4,912
    
3.3
    
263,026
    
2,296
    
1.7
  
Regular savings
    
196,697
    
512
    
0.5
    
213,686
    
298
    
0.3
  
Certificates of deposit
    
507,518
    
9,176
    
3.6
    
424,319
    
5,894
    
2.8
  
Time open & club accounts
    
21,653
    
433
    
4.0
    
14,728
    
154
    
2.1
  
Total time and interest-bearing deposits
    
1,165,971
    
15,107
    
2.6
    
1,070,528
    
8,728
    
1.6
  
Federal funds purchased
    
2,437
    
62
    
5.1
    
6,522
    
93
    
2.9
  
Securities sold under agreements to repurchase
    
96,203
    
1,001
    
2.1
    
94,662
    
456
    
1.0
  
Short-term borrowings
    
9,719
    
221
    
4.5
    
─
    
─
    
─
  
Long-term debt
    
56,191
    
1,212
    
4.3
    
56,936
    
1,193
    
4.2
  
Subordinated notes and capital securities
    
31,314
    
1,131
    
7.2
    
32,808
    
898
    
5.5
  
Total borrowings
    
195,864
    
3,627
    
3.7
    
190,928
    
2,640
    
2.8
  
Total interest-bearing liabilities
    
1,361,835
    
18,734
    
2.8
    
1,261,456
    
11,368
    
1.8
  
Demand deposits, non-interest bearing
    
228,062
                
219,227
              
Accrued expenses & other liabilities
    
23,504
                
21,628
              
Total liabilities
    
1,613,401
                
1,502,311
              
Shareholders’ Equity:
                                      
Common stock
    
74,370
                
62,455
              
Additional paid-in capital
    
22,056
                
21,642
              
Retained earnings and other equity
    
79,766
                
79,757
              
Total shareholders’ equity
    
176,192
                
163,854
              
Total liabilities and shareholders’ equity
  
$
1,789,593
              
$
1,666,165
              
                                       
Net interest income
        
$
32,305
              
$
30,476
        
                                       
Net interest spread
  
3.4
                
3.7
  
Effect of net interest-free funding sources
  
0.5
               
0.3
  
Net interest margin
  
3.9
%
              
4.0
%
Ratio of average interest-earning assets to average interest-bearing liabilities
    
120.1
%
              
120.3
%
            

Notes:
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35 percent.
For rate calculation purposes, average loan categories include unearned discount.
Nonaccrual loans have been included in the average loan balances.
Certain amounts have been reclassified to conform to the current-year presentation.

 
18
Analysis of Changes in Net Interest Income 

The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated to change in volume.

 
 
  
The Six Months Ended June 30,
2006 Versus 2005   
  
   
Volume
Change 
 
Rate
Change 
 
 
Total 
  
Interest income:
              
Interest-earning deposits with other banks
  
$
(2
)
$
6
  
$
4
  
U.S. Government obligations
    
13
    
152
    
165
  
Obligations of states & political subdivisions
    
233
    
39
    
272
  
Other securities
    
72
    
262
    
334
  
Federal Reserve bank stock
    
—
    
—
    
—
  
Federal funds sold
   
(10
)
  
73
   
63
 
Interest on deposits, investments and federal funds sold
    
306
    
532
    
838
  
Commercial, financial and agricultural loans and leases
    
1,478
    
2,177
    
3,655
  
Real estate─commercial and construction loans
    
820
    
1,548
    
2,368
  
Real estate─residential loans
    
117
    
592
    
709
  
Loans to individuals
    
1,076
    
253
    
1,329
  
Municipal loans
    
130
   
166
    
296
 
Interest and fees on loans and leases
    
3,621
   
4,736
   
8,357
 
Total interest income
    
3,927
    
5,268
   
9,195
  
Interest expense:
                    
Interest checking deposits
    
(12
)
  
—
    
(12
)
Money market savings
    
512
    
2,104
    
2,616
  
Regular savings
    
─
    
214
    
214
  
Certificates of deposit
    
1,585
    
1,697
    
3,282
  
Time open & club accounts
    
139
   
140
   
279
 
Interest on deposits
    
2,224
   
4,155
   
6,379
  
Federal funds purchased
    
(102
)
  
71
    
(31
)
Securities sold under agreement to repurchase
    
34
    
511
    
545
  
Other short-term borrowings
    
221
    
—
    
221
  
Long-term debt
    
(9
)
  
28
    
19
  
Subordinated notes and capital securities
    
(46
)
  
279
    
233
  
Interest on borrowings
    
98
   
889
   
987
  
Total interest expense
    
2,322
   
5,044
   
7,366
  
Net interest income
  
$
1,605
 
$
224
 
$
1,829
  

Notes:  Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35 percent.
Nonaccrual loans and unearned discounts have been included in the average loan balances.

Interest Income

Interest on deposits, investments and federal funds sold increased primarily due to rate increases on mortgage-backed securities and U.S. Government obligations and volume increases in obligations of state and political subdivisions.
 
The growth in interest and fees on loans and leases is due primarily to increased rates on commercial business loans and commercial and construction real estate loans. The average interest yield on the commercial loan portfolio increased 133 basis points, primarily due to a 199 basis point increase in the average prime rate, for the six months ended June 30, 2006 compared to the same period in 2005; which, along with average volume increases of $39.4 million, contributed to a $3.7 million increase in interest income. The average yield on commercial and construction real estate loans increased by 76 basis points; this along with average volume increases of $25.0 million contributed to a $2.4 million increase in interest income. The average volume of loans to individuals increased $34.4 million, primarily contributing to an increase in interest income of $1.3 million.

Interest Expense

The Corporation’s average rate on deposits increased 96 basis points for the six months ended June 30, 2006 compared to the same period in 2005. The average rate paid on money market savings increased 152 basis points due to new products and promotions offered to grow deposits in the Bank’s competitive marketplace; which contributed to a $2.6 million increase in interest expense. Interest on certificates of deposit increased $3.3 million, due to an 84 basis-point increase in average rate and average volume increases of $83.2 million. The average balance of PLGIT deposits increased $47.7 million comparing the six months ended June 30, 2006 over the same period in 2005.

19
Interest expense on short-term borrowings includes interest paid on federal funds purchased and short-term FHLB borrowings. In addition, the Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account (“sweep accounts”). Interest expense on short-term borrowings increased 133.9% during the six months ended June 30, 2006 compared to 2005 primarily due to a 112 basis point increase in the average rate paid on sweep accounts.

Interest on long-term debt increased primarily due to a 175 basis point increase in the rate paid on subordinated notes and trust preferred securities. This increase in rate was due to LIBOR increases which affect the variable rate paid on the trust preferred securities.

Provision for Loan and Lease Losses

The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease 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 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 bank’s primary regulators, as an integral part of their examination process, may require adjustments to the allowance. Continued growth in loan and lease volumes and current economic conditions indicated the need for an increase to the reserve in 2006. The provision for the six months ended June 30, 2006 and 2005 was $1.0 million and $900 thousand, respectively.

Non-interest Income

Non-interest income consists of trust department fee income, service charges on deposits income, commission income, net gains on sales of securities, and other miscellaneous types of income. It also includes various types of service fees, such as ATM fees, and life insurance income which primarily represents changes in the cash surrender value of bank-owned life insurance. Total noninterest income increased during the six months ended June 30, 2006 compared to 2005 primarily due to higher insurance commissions and fees, investment advisory commission as well as trust commissions.

   
For the Six Months
Ended June 30,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Trust fee income
  
$
2,999
  
$
2,663
  
$
336
    
12.6
%
Service charges on deposit accounts
    
3,343
    
3,344
    
(1
)
  
-
  
Investment advisory commission and fee income
    
1,156
    
921
    
235
    
25.5
  
Insurance commission and fee income
    
2,301
    
1,933
    
368
    
19.0
  
Life insurance income
    
621
   
604
    
17
    
2.8
  
Other service fee income
    
1,544
    
1,545
    
(1
)
  
(0.1
)
Net gain on sales of securities
    
47
    
87
    
(40
)
  
(46.0
)
Net loss on dispositions of fixed assets
    
(67
)
  
(215
)
  
148
    
68.8
  
Other
    
176
    
217
    
(41
)
  
(18.9
)
Total noninterest income
  
$
12,120
  
$
11,099
  
$
1,021
    
9.2
  

Trust fee income increased in 2006 over 2005 primarily due to an increase in the number and market value of managed accounts. Investment advisory commissions and fee income, the primary source of income for Univest Investments, Inc., increased in 2006 over 2005 due to market activity and volume. Insurance commission and fee income increased due to an increase in contingent commissions received during the first quarter 2006. Life insurance income is primarily the change in the cash surrender values of bank owned life insurance policies, which is primarily affected by the market value of the underlying assets. The increase recognized on these policies was slightly more in the 2006 compared to 2005.
 
20
Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (“Mastermoney fees”), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Other service fee income declined slightly in 2006 over 2005 primarily due to a decrease in mortgage servicing income that was offset mostly by an increase in Mastermoney fees.

Other non-interest income includes loss on investments in partnerships, gains on sales of mortgages, gains on sales of other real estate owned, reinsurance income and other miscellaneous income. The Corporation recognized a $139 thousand in gains on sales of other real estate owned during the first six months of 2006 as discussed below. Additionally, larger losses were recognized on investments in partnerships when comparing June 30, 2006 to the same period in 2005.

Gains on Sale of Assets

Sales of $1.2 million in mortgage loans during the first six months ended June 30, 2006 resulted in gains of $18 thousand compared to sales of $4.6 million for gains of $54 thousand for the six months ended June 30, 2005.

During the six months ended June 30, 2006 and 2005, approximately $1.6 million and $2.7 million of securities were sold recognizing gains $1 thousand and $87 thousand respectively. During the six months ended June 30, 2006, the Corporation also received $46 thousand resulting from the mandatory sale of shares created through conversion of one of its vendor relationships from a membership association to a private share corporation. 

During the six months ended June 30, 2006, the Corporation relocated a banking office within one of its supermarket locations and recognized a loss of $65 thousand. During the six months ended June 30, 2005 the Corporation closed two of its supermarket banking offices and retired additional long-term assets replaced by the new Kulpsville branch resulting in net losses of the disposition of fixed assets of $215 thousand.

During the six months ended June 30, 2006, the Corporation sold two other real estate owned properties resulting in a gain of $139 thousand. There were no sales of other real estate owned during the six months ended June 30, 2005.
 
Non-interest Expense

The operating costs of the Corporation are known as non-interest 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.

The following table presents noninterest expense for the periods indicated:

   
For the Six Months
Ended June 30,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Salaries and benefits
  
$
14,503
  
$
13,273
  
$
1,230
    
9.3
%
Net occupancy
   
2,127
   
2,205
    
(78
)
  
(3.5
)
Equipment
    
1,577
    
1,471
    
106
    
7.2
  
Other
    
6,788
   
6,153
    
635
    
10.3
  
Total noninterest expense
  
$
24,995
  
$
23,102
  
$
1,893
    
8.2
 

Salary and benefits increased due to the normal annual increases, the recognition of stock-based compensation expense of $258 thousand, increased hospital and medical expenses of $130 thousand and increased payroll taxes of $168 thousand when compared to the same period in 2005. Equipment expense increased due to depreciation on assets purchased for new branches opened in 2005. Other expenses increased primarily due to bank shares tax overpayments and credits utilized in 2005 which were no longer available in 2006 and increases in miscellaneous expense. These increases were partially offset by decreases in legal fees associated with loan work-outs as well as a reduction in advertising and marketing expenses.
 
21

Tax Provision

The provision for income taxes was $4.4 million for the first six months ended June 30, 2006 compared to $4.2 million in 2005, at effective rates of 26.53% and 26.17%, respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects and tax-exempt income from investments in municipal securities, loans and bank-owned life insurance. The increase in the effective tax rate between the six-month periods is primarily due to an increase in pre-tax income and non-deductible stock option compensation expense, partially offset by an increase in tax-exempt income.

Financial Condition

Assets

Total assets increased $82.3 million since December 31, 2005. The increase was primarily due to net growth in loans.

The following table presents the assets for the periods indicated:

   
At June 30,
  
At December 31,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Cash, deposits and federal funds sold
  
$
45,847
  
$
59,439
  
$
(13,592
)
  
(22.9
)%
Investment securities
    
366,347
    
343,259
    
23,088
    
6.7
  
Total loans and leases
    
1,321,299
    
1,249,652
    
71,647
    
5.7
  
Reserve for loan and lease losses
    
(14,280
)
  
(13,363
)
  
(917
)
  
6.9
  
Premises and equipment, net
    
22,019
    
21,635
    
384
    
1.8
  
Goodwill and other intangibles, net
    
43,244
    
43,387
    
(143
)
  
(0.3
)
Cash surrender value of insurance policies
    
35,832
    
35,211
    
621
    
1.8
  
Other assets
    
31,265
   
30,089
    
1,176
    
3.9
  
Total assets
  
$
1,851,573
  
$
1,769,309
  
$
82,264
    
4.6
 

Investment Securities

The investment portfolio is managed as part of the overall asset and liability management process to optimize income and market performance over an entire interest rate cycle while mitigating risk. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns on these investments. The securities portfolio consists primarily of U.S. Government agency, mortgage-backed and municipal securities.

Total investments increased primarily due to security purchases of $83.7 million that were offset by maturities of $39.3 million and sales and calls of $18.5 million.

Loans and Leases

Total loans and leases increased in the six months ended June 30, 2006 due to increases in commercial business loans and leases of $36.6 million, commercial real estate loans of $16.5 million, real estate construction loans of $15.9 million, non-real estate related loans to individuals of $5.6 million.

Asset Quality

Performance of the entire loan and lease 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 what actions should be taken when determining the collectibility of interest for accrual purposes.

When a loan or lease, including a loan or lease impaired under SFAS No. 114, is classified as nonaccrual, the accrual of interest on such a loan or lease is discontinued. A loan or lease 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 or lease may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan or lease is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans and leases is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal.

22
Loans and leases 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, restructured and nonaccrual loans and leases totaled $9.8 million at June 30, 2006, $3.3 million at December 31, 2005 and $8.2 million at June 30, 2005 and consist mainly of commercial loans and real estate related commercial loans. For the six months ended June 30, 2006 and 2005, nonaccrual loans and leases resulted in lost interest income of $233 thousand and $383 thousand, respectively. Loans and leases 90 days or more past due totaled $620 thousand at June 30, 2006, $610 thousand at December 31, 2005 and $498 thousand at June 30, 2005. Other real estate owned totaled $344 thousand at December 31, 2005 and $665 thousand at June 30, 2005. There was no other real estate owned at June 30, 2006. The Corporation's ratio of nonperforming assets to total loans and leases and other real estate owned was 0.79% at June 30, 2006, 0.34% at December 31, 2005 and .78% at June 30, 2005.

At June 30, 2006, the recorded investment in loans and leases that are considered to be impaired under SFAS No. 114 was $9.8 million, all of which were on a nonaccrual basis; the related reserve for loan and lease losses for those credits was $1.9 million. At December 31, 2005, the recorded investment in loans and leases that are considered to be impaired under SFAS No. 114 was $3.3 million, all of which were on a nonaccrual basis. The related reserve for loan and lease losses for those credits was $1.1 million. At June 30, 2005, the recorded investment in loans and leases that are considered to be impaired under SFAS No. 114 was $8.2 million and the related reserve for loan and lease losses for those credits was $2.4 million. The amount of the specific reserve needed for these credits could change in future periods subject to changes in facts and judgments related to these credits. Specific reserves have been established based on current facts and management’s judgments about the ultimate outcome of these credits. The increase in impaired loans since December 31, 2005 was primarily due to deterioration in a $5.2 million commercial relationship.

Reserve for Loan and Lease Losses

Management believes the reserve for loan and lease losses is maintained at a level that is adequate to absorb losses in the loan and lease portfolio. Management's methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past credit loss experience, current economic conditions and trends, and the volume, growth, and composition of the loan and lease portfolio.

The reserve for loan and lease losses is determined through a monthly evaluation of reserve adequacy. Quarterly, this analysis takes into consideration the growth of the loan and lease portfolio, the status of past-due credits, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Non-accrual loans and leases 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 or lease categories to develop the general or allocated portion of the 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 reserve 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 loan and lease losses is based on management's evaluation of the loan and lease portfolio under current economic conditions and such other factors, which deserve recognition in estimating credit 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 credits that may be susceptible to significant change. Additions to the reserve arise from the provision for loan and lease losses charged to operations or from the recovery of amounts previously charged off. Loan and lease charge-offs reduce the reserve. Loans and leases are charged off when there has been permanent impairment or when in the opinion of management the full amount of the loan or lease, in the case of non-collateral dependent borrowings, will not be realized. Certain impaired credits are reported at the present value of expected future cash flows using the loan's initial effective interest rate, or at the credit's observable market price or the fair value of the collateral if the credit is collateral dependent.

23
The specific reserve element is based on a regular analysis of impaired commercial and real estate credits. For these credits, the specific reserve established is based on an analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.

The class reserve element is determined by an internal credit grading process in conjunction with associated allowance factors. The Corporation revises the class reserve factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan or lease pool classification.

The Corporation maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded.

The reserve for loan and lease losses increased $917 thousand from December 31, 2005 to June 30, 2006 due to the need to increase the reserve for loan and lease growth. Management believes that the reserve is maintained at a level that is adequate to absorb losses in the loan and lease portfolio. The ratio of the reserve for loan and lease losses to total loans and leases was 1.08% at June 30, 2006 and 1.07% at December 31, 2005.

Goodwill and Other Intangible Assets

On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (“SFAS 142”). In accordance with the provisions of SFAS 142, the Corporation completes annual impairment tests during the fourth quarter. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

The Corporation has covenants not to compete, intangible assets due to bank and branch acquisitions, core deposit intangibles, 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 Corporation also has goodwill of $41.2 million, which is deemed to be an indefinite intangible asset and will not be amortized but is tested for impairment annually.

Liabilities

Total liabilities increased since December 31, 2005 primarily due to an increase in deposits. Borrowings also increased which were partially offset by a decrease in other liabilities. The following table presents the liabilities for the periods indicated:

   
At June 30,
  
At December 31,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Deposits
  
$
1,439,777
  
$
1,366,715
  
$
73,062
    
5.3
%
Borrowings
    
211,486
    
196,761
    
14,725
    
7.5
  
Accrued expenses and other liabilities
    
22,194
   
32,753
    
(10,559
)
  
(32.2
)
Total liabilities
  
$
1,673,457
  
$
1,596,229
  
$
77,228
    
4.8
 

Deposits

Total deposits grew at the Bank primarily due to increases in PLGIT deposits of $48.0 million. Growth in regular and money market savings accounts of $33.9 million were offset by decreases in interest-bearing checking accounts of $18.5 million and decreases in non-interest-bearing demand accounts of $15.4 million.

Borrowings

Long-term debt at June 30, 2006, includes $10.5 million in Subordinated Capital Notes, $20.6 million of Trust Preferred Securities, and $49.6 million in long-term borrowings from the FHLB. The consolidated balance sheet also includes a $1.8 million fair market value adjustment relating to FHLB long-term borrowings acquired in the First County Bank and Suburban Community Bank acquisitions. In April 2003, the Corporation secured $15.0 million in subordinated capital notes that qualify for Tier 2 capital status. In August 2003, the Corporation issued $20.0 million of trust preferred securities that qualify for Tier 1 capital status. Principal payments of $375 thousand are made quarterly and reduce the Subordinated Capital Notes balance. The Corporation deconsolidated its Capital Trust in the first quarter of 2004, as a result of the adoption of FIN 46. The result was an increase in the junior debt of $619 thousand. Short-term borrowings typically include federal funds purchased and short-term FHLB borrowings. In addition, the Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account (“sweep accounts”). Short-term borrowings increased due to an increase of short-term FHLB borrowings of $35.7 million offset by decreases in the sweep accounts of $15.0 million.

24
Other Liabilities

Other liabilities decreased primarily due to payments made to private investors for participated loans and taxes paid.

Shareholders' Equity

Total shareholders’ equity increased since December 31, 2005 primarily due to current earnings, partially offset by cash dividends paid. The following table presents the shareholders’ equity for the periods indicated:

   
At June 30,
  
At December 31,
  
Change
  
   
2006
  
2005
  
Amount
  
Percent
  
Common stock
  
$
74,370
  
$
74,370
  
$
─
    
─
%
Additional paid-in capital
    
22,059
    
22,051
    
8
    
─
 
Retained earnings
    
121,381
    
114,346
    
7,035
    
6.2
  
Accumulated other comprehensive loss
    
(2,923
)
  
(1,050
)
  
(1,873
)
  
(178.4
)
Treasury stock
    
(36,771
)
  
(36,637
)
  
(134
)
  
0.4
  
Total shareholders’ equity
  
$
178,116
  
$
173,080
  
$
5,036
    
2.9
 

Retained earnings was favorably impacted by six months of net income of $12.2 million partially offset by cash dividends of $4.9 million declared during the first six months of 2006. Treasury stock increased slightly primarily due to purchases. There is a buyback program in place that as of June 30, 2006 allows the Corporation to purchase an additional 445,813 shares of its outstanding common stock in the open market or in negotiated transactions.

Accumulated other comprehensive loss related to debt securities of $2.9 million, net of taxes, is included in shareholders' equity as of June 30, 2006. Accumulated other comprehensive loss related to debt securities of $989 thousand, net of taxes, has been included in shareholders' equity as of December 31, 2005. Accumulated other comprehensive income (loss) related to debt securities is the unrealized gain (loss), or difference between the book value and market value, on the available-for-sale investment portfolio, net of taxes. The period-to-period decrease in accumulated other comprehensive income (loss) was a result of declines in the market values of fixed rate mortgage-backed and non-mortgage-backed government agency debt securities, and a decline in the market value of municipal securities. The market value declines are attributable to increases, from December 31, 2005 to June 30, 2006, in the 2-, 3-, 5- and 10-year treasury yields, which ranged from 64 basis points to 72 basis points.

In the third quarter of 2005, the Corporation entered into an interest-rate swap agreement that converts a portion of its floating rate commercial loans to a fixed rate basis. The accumulated other comprehensive loss related to interest-rate swaps, net of taxes, included in shareholders’ equity at June 30, 2006 and December 31, 2005 was $57 thousand and $61 thousand, respectively. Accumulated other comprehensive income (loss) related to interest-rate swaps reflects the current market value of the swap, net of taxes.

Capital Adequacy

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 1 and Tier 2. Minimum required total risk-based capital is 8.0%. The Corporation and the Bank continue to be in the "well-capitalized" category under regulatory standards.
25

 
Critical Accounting Policies
 
Management, in order to prepare the Corporation'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 affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the reserve for loan losses, intangible assets, investment securities, mortgage servicing rights, income taxes and benefit plans as its critical accounting policies. For more information on these critical accounting policies, please refer to our 2005 Annual Report on Form 10-K.

During the first quarter of 2006, the Corporation adopted SFAS 123R, “Accounting for Stock-based Compensation,” and added stock-based compensation to its list of critical accounting policies. The Corporation uses the Black-Scholes Model to estimate the fair value of each option on the date of grant. The Black-Scholes Model estimates the fair value of employee stock options using a pricing model which takes into consideration the exercise price of the option, the expected life of the options, the current market price and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Corporation’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. During the first six months ended June 30, 2006, the Corporation recognized stock-based compensation expense of $258 thousand.
 
Asset/Liability Management

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.

The Corporation uses both static gap analysis and simulation techniques to quantify its exposure to interest rate risk. The Corporation uses static gap analysis 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.

During the third quarter of 2005, the Corporation entered into an interest-rate swap agreement that converts a portion of its floating rate commercial loans to a fixed rate basis. Under this swap agreement, 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 June 30, 2006, the total notional amount of the “Pay Floating, Receive Fixed” swap outstanding was $20.0 million. The net payable or receivable from the interest-rate swap agreement is accrued as an adjustment to interest income. The $20.0 million in notional amount of interest-rate swap outstanding expires on November 2, 2006.

The impact of the interest-rate swap on net interest income for the six months ended June 30, 2006 was a negative $20 thousand. The Corporation’s credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. Credit risk would exist because the counterparty to a derivative contract with an unrealized gain might fail to perform according to the terms of the agreement. As of June 30, 2006, the market value of the interest-rate swap was in an unfavorable position of $88 thousand and there were no interest-rate swaps with a market value in a favorable position.
 
26
 
Liquidity

The Corporation, 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. The Corporation manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. The Corporation has a contingency funding plan in place to address liquidity needs in the event of an institution-specific or a systemic financial crisis.

Sources of Funds

Core deposits and cash management repurchase agreements (“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, 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.

The Corporation supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the Bank’s 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. Since August 2004, the Bank obtained deposits from PLGIT to augment its fixed funding sources. The PLGIT deposits are public funds collateralized with a letter of credit that PLGIT maintains with the FHLB; therefore, the Bank is not required to provide collateral on these deposits. These standby letters of credit are issued by the FHLB on behalf of the Corporation, which is the account party on the letters of credit and therefore is obligated to reimburse the FHLB for all payments made under the standby letter of credit. At June 30, 2006, the Bank had $98.0 million in PLGIT deposits.

The Corporation, through its Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $359.2 million. At June 30, 2006, under the FHLB credit facilities, the Corporation's outstanding short-term and long-term borrowings totaled $85.3 million and PLGIT letters of credit totaled $100.7 million. The maximum borrowing capacity changes as a function of the Bank’s 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 June 30, 2006, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.

The Corporation, through the Bank, 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 June 30, 2006, the Corporation had no outstanding borrowings under this line.

Cash Requirements

The Corporation has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The contractual obligations and commitments table that follows presents, as of June 30, 2006, significant fixed and determinable contractual obligations and commitments to third parties. The most significant contractual obligation, in both the under and over one year time period, is for the Bank to repay its certificates of deposit. Securities sold under agreement to repurchase constitute the next largest payment obligation which is short term in nature. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its branch network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market.

Commitments to extend credit are the Bank’s most significant commitment in both the under and over one year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.
 

27
Contractual Obligations and Commitments

The Corporation enters into contractual obligations in the normal course of business as a source of funds for its asset growth and its asset/liability management, to fund acquisitions and to meet required capital needs. These obligations require the Corporation to make cash payments over time as detailed in the table below.

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to manage the Corporation’s exposure to fluctuation in interest rates. These financial instruments include commitments to extend credit, standby and commercial letters of credit and forward contracts. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of these financial instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.  

The Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Corporation does not require and is not required to pledge collateral or other security to support financial instruments with credit risk. These commitments expire over time as detailed in the following table. 

The PLGIT deposits are public funds collateralized with a letter of credit that PLGIT maintains with the FHLB; therefore, the Corporation is not required to provide collateral on these deposits. These standby letters of credit are issued by the FHLB on behalf of the Corporation, which is the account party on the letters of credit and therefore is obligated to reimburse the FHLB for all payments made under the standby letter of credit. The Corporation’s exposure is represented by the contractual amount of these instruments.

Forward contracts represent agreements for delayed delivery of financial instruments or commodities in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument or commodity at a specified price or yield. Forward contracts are not traded on organized exchanges and their contractual terms are not standardized. The Corporation’s forward contracts are commitments to sell loans secured by 1-to-4 family residential properties whose predominant risk characteristic is interest rate risk. The Corporation had no forward contracts at June 30, 2006.

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows, including interest payable, as of June 30, 2006:
 
   
Payments Due by Period
  
     
Total
    
Due in One
Year or Less
    
Due in One to Three Years
    
Due in Four
to Five Years
    
Due in Over
Five Years
  
                                 
Long-term debt
  
$
59,825
  
$
3,717
  
$
16,629
  
$
34,192
  
$
5,287
  
Subordinated capital notes 
    
13,165
   
2,161
   
4,030
   
3,689
   
3,285
 
Trust preferred securities
    
68,587
   
1,759
   
3,518
   
3,518
   
59,792
 
Securities sold under agreement to repurchase 
    
93,327
   
93,327
   
—
   
—
   
—
 
Other short-term borrowings
    
35,702
   
35,702
   
—
   
—
   
—
 
Time deposits
    
587,538
   
442,151
   
100,172
   
38,465
   
6,750
 
Operating leases 
    
7,927
   
1,378
   
2,165
   
1,303
   
3,081
 
Standby and commercial letters of credit 
    
55,357
   
47,472
   
7,885
   
—
   
—
 
Commitments to extend credit 
    
591,379
   
117,993
   
198,942
   
29,218
   
245,226
 
PLGIT letters of credit
    
100,701
   
100,701
   
—
   
—
   
—
 
Total contractual obligations 
  
$
1,613,508
  
$
846,361
  
$
333,341
  
$
110,385
  
$
323,421
  

 
28
Recent Accounting Pronouncements

 
In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). SFAS 155 amends SFAS Nos. 133 and 140. SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS 155: a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, e) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption of SFAS 155. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company does not anticipate that SFAS 155 will have a material impact on their consolidated financial statements upon adoption. The Corporation has not completed its assessment of SFAS 155 and the impact, if any, on the financial statements.
 
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.” SFAS 156: 1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a) a transfer of the servicer’s financial assets that meets the requirements for sale accounting; b) a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”); or, c) an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities: a) amortization method—amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date; or, b) fair value measurement method—measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and, 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS 156 as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of SFAS 156 is the date an entity adopts the requirements of this Statement. The Corporation has not completed its assessment of SFAS 156 and the impact, if any, on the financial statements.
 
 
In June 2006, FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. According to FIN 48, a tax position is recognized if it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize and should be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation has not completed its assessment of FIN 48 and the impact, if any, on the financial statements.
 
29

Item 3. Quantitative and Qualitative Disclosure About 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, 2005.

Item 4.Controls and Procedures

Management is responsible for the disclosure controls and procedures of Univest Corporation of Pennsylvania (“Univest”). Disclosure controls and procedures are in place to assure that all material information is collected and disclosed in accordance with Rule 13a - 15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on their evaluation Management believes that the financial information required to be disclosed in accordance with the Securities Exchange Act of 1934 is presented fairly, recorded, summarized and reported within the required time periods.

As of June 30, 2006 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 and there have been no changes in the Corporation's internal controls or in other factors that have materially affected or are reasonably likely to materially affect internal controls subsequent to December 31, 2005.


PART II. OTHER INFORMATION


Item 1.  Legal Proceedings

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation. In addition, there are no material proceedings pending or known to be threatened or contemplated against the Corporation or the Bank by government authorities.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K, Part 1, Item 1A, for the Year Ended December 31, 2005 as filed with the Securities and Exchange Commission on March 6, 2006.
 

30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information on repurchases by the Corporation of its common stock during the three months ended June 30, 2006.
 
   
ISSUER PURCHASES OF EQUITY SECURITIES
  
Period
  
 Total Number of Shares Purchased
  
 Average Price Paid per share
  
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 
  
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 
  
April 1 - 30, 2006
    
19,611
    
25.04
    
19,611
    
440,438
  
May 1 - 31, 2006
    
25,389
    
26.43
    
25,389
    
445,813
  
June 1 - 30, 2006
    
─
    
─
    
─
    
445,813
  
Total
    
45,000
          
45,000
        

1.  
Transactions are reported as of settlement dates.
2.  
The Corporation’s current stock repurchase program was approved by its Board of Directors and announced on 12/31/2001. The repurchased shares limit is net of normal Treasury activity such as purchases to fund the Dividend Reinvestment Program, Employee Stock Purchase Program and the equity compensation plan.
3.  
The number of shares originally approved for repurchase under the Corporation’s current stock repurchase program is 526,571.
4.  
The Corporation’s current stock repurchase program does not have an expiration date.
5.  
No stock repurchase plan or program of the Corporation expired during the period covered by the table.
6.  
The Corporation has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases. The plans are restricted during certain blackout periods in conformance with the Corporation’s Insider Trading Policy.


Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

The Corporation’s Annual Meeting of Shareholders was held on April 11, 2006, the results of this meeting were disclosed in the Corporation’s Form 10-Q for March 31, 2006, filed with the Securities and Exchange Commission on May 9, 2006.

Item 5. Other Information

None.  
 
31
Item 6. Exhibits

a.
Exhibits
    
       
Exhibit 31.1
  
Certification of William S. Aichele, Chairman, President and Chief Executive Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
Exhibit 31.2
  
Certification of Wallace H. Bieler, Senior Executive Vice President, Chief Financial Officer, Chief Operation Officer and Corporate Secretary of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
Exhibit 32.1
  
Certification of William S. Aichele, Chief Executive Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
    
 
Exhibit 32.2
  
Certification of Wallace H. Bieler, Chief Financial Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32
 

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: August 4, 2006            /s/ William S. Aichele
 
William S. Aichele, Chairman, President
and Chief Executive Officer

     
 
 		  
 		  
 
Date: August 4, 2006            /s/ Wallace H. Bieler
 
Wallace H. Bieler, Senior Executive Vice President,
Chief Operation Officer and Chief Financial Officer

   
  
 
33
 

 
 EX-31.1 2 v049111_ex31-1.htm
Exhibit 31.1

CERTIFICATION

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 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 report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)  
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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 over financial reporting.

Date: August 4, 2006
 
/s/ William S. Aichele
William S. Aichele, Chairman, President
and Chief Executive Officer
 EX-31.2 3 v049111_ex31-2.htm
Exhibit 31.2
CERTIFICATION

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 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 report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)  
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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 over financial reporting.

Date: August 4, 2006

 
/s/ Wallace H. Bieler
Wallace H. Bieler, Senior Executive Vice President,
Chief Financial Officer, Chief Operation Officer, and
Corporate Secretary
 EX-32.1 4 v049111_ex32-1.htm
Exhibit 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Univest Corporation of Pennsylvania on Form 10-Q for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

A signed original of this written statement required by Section 906 has been provided to Univest Corporation of Pennsylvania and will be retained by Univest Corporation of Pennsylvania and furnished to the Securities and Exchange Commission or its staff upon request.


/s/ William S. Aichele  
William S. Aichele
Chief Executive Officer
August 4, 2006

 EX-32.2 5 v049111_ex32-2.htm
Exhibit 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Univest Corporation of Pennsylvania on Form 10-Q for the period ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

A signed original of this written statement required by Section 906 has been provided to Univest Corporation of Pennsylvania and will be retained by Univest Corporation of Pennsylvania and furnished to the Securities and Exchange Commission or its staff upon request.


/s/ Wallace H. Bieler
Wallace H. Bieler
Chief Financial Officer
August 4, 2006
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