United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Period Ended September 30, 1995 or [ ] 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 (IRS Employer I.D. No.) incorporation of organization) 10 West Broad Street, Souderton, Pennsylvania 18964 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code (215) 721-2400 Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $5 par value 3,137,016 (Title of Class) (Number of shares outstanding at 9/30/95) UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Financial Information The consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (Univest) and its wholly owned subsidiaries, including Union National Bank and Trust Company (Union) and Pennview Savings Bank (Pennview), collectively referred to herein as the "Banks". The condensed consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results and condition for the interim periods presented. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the registrant's Annual Report on Form 10-K for the year ended December 31, 1994, which has been filed with the Securities and Exchange Commission. <TABLE> UNIVEST CORPORATION OF PENNSYLVANIA AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <CAPTION> (UNAUDITED) (SEE NOTE)<F1> SEPTEMBER 30, 1995 DECEMBER 31, 1994 <S> <C> <C> ASSETS CASH AND DUE FROM BANKS $35,520 $35,177 INVESTMENT SECURITIES HELD-TO-MATURITY 173,603 172,227 (MARKET VALUE $174,117 AT 9/30/95 AND $168,106 AT 12/31/94) INVESTMENT SECURITIES AVAILABLE-FOR-SALE 23,541 30,335 FEDERAL FUNDS SOLD AND OTHER SHORT TERM INVESTMENTS 3,741 6,848 LOANS 591,148 580,779 LESS: RESERVE FOR POSSIBLE LOAN LOSSES (9,037) (8,876) -------- -------- NET LOANS 582,111 571,903 OTHER ASSETS 32,586 30,664 -------- -------- TOTAL ASSETS $851,102 $847,154 ======== ======== LIABILITIES DEMAND DEPOSITS, NON INTEREST BEARING $106,029 $104,404 DEMAND DEPOSITS, INTEREST BEARING 137,410 155,636 REGULAR SAVINGS DEPOSITS 121,386 126,975 TIME DEPOSITS 339,269 312,058 -------- --------- TOTAL DEPOSITS 704,094 699,073 SHORT-TERM BORROWINGS 42,576 44,923 OTHER LIABILITIES 12,620 13,562 LONG-TERM DEBT 4,085 9,438 -------- --------- TOTAL LIABILITIES 763,375 766,996 SHAREHOLDERS' EQUITY COMMON STOCK 15,717 15,717 ADDITIONAL PAID-IN CAPITAL 8,090 8,090 RETAINED EARNINGS 64,065 56,983 NET UNREALIZED SECURITIES GAINS (LOSSES) 5 (482) TREASURY STOCK (150) (150) -------- --------- TOTAL SHAREHOLDERS' EQUITY 87,727 80,158 -------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $851,102 $847,154 ======== ========= <FN> <F1>NOTE: THE BALANCE SHEET AT DECEMBER 31, 1994 HAS BEEN DERIVED FROM THE AUDITED FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE FINANCIAL STATEMENTS. </TABLE> <TABLE> UNIVEST CORPORATION OF PENNSYLVANIA AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) <CAPTION> (SEE NOTE) <F1> FOR THE QUARTER FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1995 1994 1995 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> INTEREST INCOME INTEREST AND FEES ON LOANS TAXABLE INTEREST AND FEES ON LOANS $12,543 $11,781 $36,839 $34,075 EXEMPT FROM FEDERAL INCOME TAXES 477 484 1,457 1,411 ------- ------- ------- ------- TOTAL INTEREST AND FEES ON LOANS 13,020 12,265 38,296 35,486 INTEREST AND DIVIDENDS ON INVESTMENT SECURITIES 2,887 1,838 8,462 5,111 OTHER INTEREST INCOME 144 242 437 409 ------- ------- ------- ------- TOTAL INTEREST INCOME 16,051 14,345 47,195 41,006 ------- ------- ------- ------- INTEREST EXPENSE INTEREST ON DEPOSITS 6,157 4,917 17,703 14,093 OTHER INTEREST EXPENSE 444 474 1,476 1,338 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 6,601 5,391 19,179 15,431 ------- ------- ------- ------- NET INTEREST INCOME 9,450 8,954 28,016 25,575 PROVISION FOR LOAN LOSSES 500 345 1,345 1,635 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,950 8,609 26,671 23,940 ------- ------- ------- ------- OTHER INCOME 1,407 1,434 4,519 4,213 LOSSES ON SALES OF SECURITIES (1) (27) ------- ------ ------- ------- TOTAL OTHER INCOME 1,407 1,434 4,518 4,186 OTHER EXPENSES SALARIES AND BENEFITS 3,187 3,112 9,849 9,277 OTHER EXPENSES 2,680 3,076 8,741 8,434 ------- ------- ------- ------ TOTAL OTHER EXPENSES 5,867 6,188 18,590 17,711 ------- ------- ------- ------ INCOME BEFORE INCOME TAXES 4,490 3,855 12,599 10,415 APPLICABLE INCOME TAXES 1,418 1,195 3,917 3,202 ------- ------- ------- ------ NET INCOME $3,072 $2,660 $8,682 $7,213 ======= ======= ======= ====== PER COMMON SHARE DATA (1): NET INCOME $0.98 $0.85 $2.77 $2.30 CASH DIVIDENDS DECLARED $0.17 $0.15 $0.51 $0.45 <FN> <F1>PER SHARE INFORMATION IS BASED ON THE WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUSTANDING OF 3,137,016 FOR BOTH PERIODS. </TABLE> <TABLE> UNIVEST CORPORATION OF PENNSYLVANIA CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <CAPTION> 9 MONTHS 9 MONTHS ENDED ENDED SEPT 30, 1995 SEPT 30, 1994 <S> <C> <C> Cash flows from operating activitites Net income $8,682 $7,213 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses in excess of net charge-offs 161 2,175 Depreciation of premises and equipment 1,233 1,132 (Discount accretion) premium amortization on investment securities (227) 303 Deferred income tax (117) (744) Realized loss on investment securities 1 27 Realized (gains) losses on sales of mortgages (72) 17 Decrease in net deferred loan fees (245) (466) Increase in interest receivable and other assets (413) (2,050) (Decrease) increase in accrued expenses and other liabilities (672) 4,295 -------- -------- Net cash provided by operating activities 8,331 11,902 Cash flows from investing activities Proceeds from maturing time deposits 83 1,816 Proceeds from sales of securities available for sale 3,002 7,246 Proceeds from maturing securities held to maturity 36,966 19,986 Proceeds from maturing securities available for sale 5,680 23,115 Purchases of investment securities held to maturity (38,179) (59,556) Purchases of investment securities available for sale (1,166) (12,567) Net decrease (increase) in federal funds sold and other short-term investments 3,107 (9,442) Net decrease in loans held for sale - 7,942 Proceeds from sales of mortgages 6,161 13,942 Net increase in loans (16,213) (30,221) Capital expenditures (2,742) (2,290) -------- ------- Net cash used in investing activities (3,301) (40,029) Cash flows from financing activities Assumption of deposits - 10,608 Net increase in deposits 5,021 9,747 Net (decrease) increase in short-term borrowings (2,347) 12,079 Cash dividends (2,008) (1,819) Repayments of long-term debt (5,353) (816) -------- ------- Net cash (used in) provided by financing activities (4,687) 29,799 Net increase in cash and due from banks 343 1,672 Cash and due from banks at beginning of period 35,177 34,702 -------- ------- Cash and due from banks at end of period $35,520 $36,374 ======== ======= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $17,771 $15,335 Income taxes $3,540 $3,552 </TABLE> Management's Discussion and Analysis of Financial Condition and Results of Operations Total assets increased approximately $3.9 million or 0.46% to $851.1 million at September 30, 1995 when compared to the $847.2 million at December 31, 1994. The increase was due mainly to a $10.2 million increase in net loans offset by decreases in the investment and federal funds sold portfolios. Deposits grew by $5.0 million due to an increase of $27.2 million in time deposits, demand deposits decreased by $18.2 million. Long term debt decreased by $5.0 million due to the redemption of outstanding subordinated debt, which was incurred by the Corporation in 1990 to partially finance the acquisition of Pennview Savings Bank. Shareholders' equity increased 9.35% or $7.5 million from $80.2 million at December 31, 1994 to $87.7 million at September 30, 1995. Cash dividends increased $0.06 per share from $0.45 for the nine months ended September 30, 1994 to $0.51 for the nine months ended September 30, 1995. Net income for the three months ended September 30, 1995 grew $0.4 million or 14.8% from $2.7 million at September 30, 1994 to $3.1 million at September 30, 1995. For the nine months ended September 30, 1995 net income increased $1.5 million or 20.8% from $7.2 million at September 30, 1994 to $8.7 million at September 30, 1995. Increases in both periods were due mainly to increased net interest income. Interest and fees on loans grew from $12.3 million for the three months ended September 30, 1994 to $13.0 million for the three months ended September 30, 1995, an increase of $0.7 million or 5.69%. For the nine months ended September 30, 1995 interest and fees on loans increased to $38.3 million as compared to $35.5 million at September 30, 1994, representing an increase of $2.8 million or 7.89%. The increase for both periods was due to prime rate increases. The prime rate increased throughout 1994 and into early 1995 from 6.00% at January 1, 1994 to 9.00% at July 7, 1995 when it decreased to 8.75%. Repricing of adjustable rate residential real estate loans and increased volume also contributed to the increase. Interest income on investment securities increased $1.1 million or 61.1% from $1.8 million for the three months ended September 30, 1994 to $2.9 million for the three months ended September 30, 1995. Interest on investment securities also grew from $5.1 million for the nine month period ended September 30, 1994 to $8.5 million for the nine month period ended September 30, 1995, an increase of $3.4 million or 66.7%. The increase in both periods is attributed to increased yields and volume. Other interest income consists mainly of income received on federal funds sold, which is the resulting daily investment activity that can be volatile on both interest yield and volume. Third quarter 1995 shows income of $144 thousand as compared to $242 thousand for third quarter 1994. For the nine months ended September 30, 1995 income of $437 thousand was recorded as compared to $409 thousand for the same period in 1994. The decrease for the three months ended September 30, 1995 was mainly due to lower volume and the increase for the nine months due mainly to increased yields. Interest expense increased $1.2 million or 22.2% to $6.6 million for the three months ended September 30, 1995 when compared to the $5.4 million recorded for the same period in 1994. For the nine month period ended September 30, 1995 interest expense increased $3.7 million or 24.0% to $19.1 million when compared to the $15.4 million shown for the nine months ended September 30, 1994. The increases were mainly due to increased rates and volumes on certificates of deposit. Third quarter 1995 increase was offset slightly by a decrease in interest expense due to the redemption of outstanding subordinated debt of $5.0 million during the third quarter of 1995. The asset/liability management process continues with its goal of providing stable reliable earnings through varying interest rate environments. Net interest income is the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. The amount of net interest income is affected by changes in interest rates, account balances or volume, and the mix of earning assets and interest bearing liabilities. Nine months ended September 30, 1995 shows $28.0 million in net interest income which is $2.4 million or 9.4% higher than the $25.6 million for the same period in 1994. A positive gap position is maintained on a cumulative basis at three months and longer. For the nine months period ended September 30, 1995 increases in net interest income resulted from rate rather than volume because the net interest spread for the period increased 6 basis points and the net interest margin increased by 22 basis points when compared to the nine months ended September 30, 1994. The following demonstrates the aforementioned effects: <TABLE> <CAPTION> NINE MONTHS ENDED 9/30/95 9/30/94 AVG. BALANCE RATE AVG. BALANCE RATE <S> <C> <C> <C> <C> Interest Earning Assets $788,868 7.98% $753,904 7.25% Interest Bearing Liabilities $642,141 3.98% $620,931 3.31% Net Interest Income $ 28,016 $ 25,575 Net Interest Spread 4.00% 3.94% Net Interest Margin 4.74% 4.52% </TABLE> The Corporation uses interest-rate swap agreements to effectively convert a portion of its floating rate commercial loans to a fixed rate basis, thus reducing the impact of interest changes on future income. During the third quarter of 1995 the Corporation entered into an interest rate swap with a notional amount of $10 million which matures in August 1997, and which provides for the Corporation to pay a floating rate based on the prime rate and to receive a fixed rate of 8.75%. ASSET QUALITY Management believes the allowance for loan losses is maintained at a level which is adequate to absorb potential losses in the loan portfolio. Management's methodology to determine the adequacy of and the provisions to the allowance considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth and composition of the loan portfolio. The allowance for loan losses is determined through a quarterly evaluation of reserve adequacy which takes into consideration the growth of the loan portfolio, the status of past-due loans, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant change in the charge-off activity. Loans are also reviewed for impairment based on discounted cash flows using the loans initial effective interest rate or the fair value of the collateral for certain collateral dependent loans as provided for under FAS 114, which was adopted by the Corporation effective January 1, 1995. Any of the above criteria may cause the provision to fluctuate. For the three and nine months ended September 30, 1995 the provisions for loan losses were $500 thousand and $1.3 million respectively. For the three and nine month periods ended September 30, 1994 the provisions were $345 thousand and $1.6 million respectively. Effective January 1, 1995, the Corporation adopted Financial Accounting Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan." Under the new standard, the 1995 allowance for credit losses related to loans that are identified as impaired in accordance with Statement 114 is based on discounted cash flows using the loan's initial effective rate or the fair value of collateral for certain collateral dependent loans. Prior to 1995 the allowance for credit losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. At September 30, 1995 the recorded investment in loans that are considered to be impaired under Statement 114 was $3.4 million (all of which were on a nonaccrual basis); the related allowance for credit losses for those loans is $595 thousand. All loans considered impaired at September 30, 1995 have an allowance for credit loss. For the nine months ended September 30, 1995 the Corporation recognized $134 thousand in interest income on those impaired loans. Generally, a loan (including a loan impaired under Statement 114) is classified as nonaccrual and the accrual of interest on such loan is discontinued when the contractual payment of principal or interest has become 90 days due or management has serious doubts about the further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against "other expense." Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable periods of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Total cash basis and nonaccrual loans at September 30, 1995 are $5.3 million and consist mainly of real estate related commercial loans. Cash basis and nonaccrual loans at September 30, 1994 aggregated $8.1 million. For the quarter ended September 30, 1995 nonaccrual loans resulted in lost interest income of $103 thousand as compared to $216 thousand for the three months ended September 30, 1994. For the nine months ended September 30, 1995 lost interest income totaled $429 thousand as compared to $600 thousand for the same period in 1994. At September 30, 1995 the Corporation had no material commitments to lend additional funds with respect to nonperforming loans. In management's evaluation of the loan portfolio risks, any significant future increases in nonperforming loans are dependent to a large extent on the economic environment. The ratio of the reserve for loan losses to total loans at September 30, 1995 and December 31, 1994 is 1.53%. At September 30, 1995 the Corporation has approximately $1.3 million of Other Real Estate Owned ("OREO") consisting of two commercial properties and one single family residence. This amount is recorded in "Other Assets" at the lower of cost or fair market value in the accompanying consolidated balance sheets. Included in other operating expenses for the nine months ended September 30, 1995 were provisions for OREO write-down of $440 thousand as compared to $300 thousand for the nine months ended September 31, 1994. Other income which is not interest related consists mainly of general fee income, trust department commissions and other miscellaneous non- recurring types of income. Since these types of income are not tied directly to volume or rate structure, noticeable fluctuations may occur on a quarterly basis. For the quarter ended September 30, 1995 and September 30, 1994 other income remained constant at $1.4 million. For the nine months ended September 30, 1995 other income increased to $4.5 million from the $4.2 million recorded for the same period in 1994. This increase was primarily due to fluctuations in trust department income resulting from improved investment performance and general fee income, offset slightly by a decrease in commercial checking account fees resulting from a reduction of the charge for federal insurance premiums being reduced from 23 basis points to 4 basis points during the third quarter 1995. Debt securities that the Corporation has both the positive intent and ability to hold to maturity are carried at amortized cost. All other debt securities and all marketable equity securities are classified as available- for-sale or trading and carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of shareholders' equity. Unrealized holding gains and losses on securities classified as trading are reported in earnings. The total debt and equity securities held in the available-for-sale account as of September 30, 1995 is $23.5 million as compared to $30.3 million at December 31, 1994. At September 30, 1995 a net unrealized gain of $5 thousand was recorded, compared to a net unrealized loss of $482 thousand at December 31, 1994. This change was due to the increase in short-term rates during the period. Other expenses make up the operating costs of the Corporation, including but not limited to salaries and benefits, equipment, data- processing and occupancy costs. This category is usually referred to as noninterest expense and receives ongoing management attention in an attempt to contain and minimize the growth of the various expense categories, while encouraging technological innovation in conjunction with the expansion of the Corporation. The quarter ended September 30, 1995 totals $5.9 million, which is 4.9% or $0.3 million less than the $6.2 million reported for the third quarter 1994. The decrease is mainly due to the reduction of Federal Deposit Insurance Corporation (FDIC) premiums paid by Union National Bank. Due to the Bank Insurance Fund (BIF) reaching its 1.25% reserve requirement, members of the BIF began paying premiums of 4 basis points on insured deposits during the third quarter 1995. Previously the bank paid 23 basis points. This decrease in premium resulted in an expense reduction of $0.3 million dollars during the third quarter 1995. This decrease was offset by a $140 thousand dollar charge for an additional reserve on other real estate owned. For the nine months ended September 30, 1995 other expenses totaled $18.6 million, which is 5.1% or $0.9 million more than the $17.7 million shown for the same period in 1994. The increase was due mainly to normal salary and staff increases, and occupancy and equipment expenses for four additional branch facilities opened since September 30, 1994. These categories will probably continue to increase in the future due to plans to open two new branch facilities and move another to a larger location during the fourth quarter 1995. Also, contributing to the increase was additional real estate owned expense along with the loss provisions to reflect the decline in the fair market value of the real estate owned. Increases in legal, consulting and student loan processing fees added to the increase, offset by the reduction in the FDIC premiums. Spurred by pressures of the budget reconciliation process, both the House and the Senate Banking Committees approved separate bills during the week of September 18, 1995 that include, among other items, a special one- time assessment to recapitalize the Savings Association Insurance Fund (SAIF) of which Pennview Savings Bank is a member. This one-time assessment of 85 basis points on insured deposits as of March 31, 1995 is intended to recapitalize the SAIF to the required 1.25% of insured deposits and could be payable in the fourth quarter of 1995 or early 1996. Should the bill pass in its present form, the Corporation would be required to make a charge to earnings of approximately $1.1 million. Succeeding deposit premiums beginning in 1996 may be reduced from the current level of 23 basis points to 4.5 basis points which will benefit the Corporation in future periods. An income tax provision of $1.4 million is shown for the quarter ended September 30, 1995 and $1.2 million for the quarter ended September 30, 1994 with effective tax rates of 31.6% and 31.0% respectively. For the nine months ended September 30, 1995 the provision was $3.9 million as compared to $3.2 million for the nine months ended September 30, 1994. The effective tax rate for both periods was 31.0% In May 1995, the Financial Accounting Standards Board issued FASB Statement No. 122, "Accounting for Mortgage Servicing Rights" an amendment of FASB 65, "Accounting for Certain Mortgage Banking Activities". FAS 122 requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others regardless of how those servicing rights are obtained (i.e., purchased or originated). Prior to the application of FAS 122, originated mortgage servicing rights were not recorded as assets. FAS 122 is applicable for transactions in fiscal years beginning after December 15, 1995. Given the current volume of mortgage loans being sold in the secondary market, with servicing retained, the adoption of FAS 122 will not have a material impact on the operations of the Corporation. In July 1995, Union National Bank signed a definitive agreement for the purchase of selected fixed assets and the assumption of deposit liabilities of the North Wales branch of Sovereign Bank by Union National Bank. Under the terms of the agreement, Union National Bank will pay a premium of approximately $568 thousand to assume the deposit liabilities of the branch and will purchase the furniture, fixtures and equipment of the branch, aggregating approximately $14.0 million. Union National Bank will also assume the obligations of the seller under the lease of the branch. This transaction is expected to be consummated during fourth quarter 1995. Part II. OTHER INFORMATION Item 1. Legal Proceedings--None Item 2. Changes in Securities--None Item 3. Defaults upon Senior Securities--None Item 4. Submission of Matters to a Vote of Security Holders--Not applicable Item 5. Other Information--None Item 6. Exhibits and Reports on Form 8-K--None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Univest Corporation of Pennsylvania Registrant Date: 10/30/95 Merrill S. Moyer, Chairman Date: 10/27/95 Wallace H. Bieler, Senior Vice President and Chief Financial Officer