United States SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Period Ended September 30, 1998. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ______________ to ______________. UNIVEST CORPORATION OF PENNSYLVANIA (Exact name of registrant as specified in its charter) Pennsylvania 23-1886144 (State or other jurisdiction of (IRS Employer Identification No.) incorporation of organization) 10 West Broad Street, Souderton, Pennsylvania 18964 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code (215) 721-2400 Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $5 par value 7,442,885 (Title of Class) (Number of shares outstanding at 9/30/98)
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES INDEX Page Number ----------- Part I. Financial Information: Item 1: Financial Statements (Unaudited) Condensed Consolidated Balance Sheets September 30, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Income Three and Six Months Ended September 30, 1998 and 1997 2 Consolidated Statements of Cash Flows Six Months Ended September 30, 1998 and 1997 3 Notes to Condensed Consolidated Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information: 17 Other Information Part III. Financial Data Schedule 19 2
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (UNAUDITED) (SEE NOTE) September 30, 1998 December 31, 1997 ------------------ ----------------- (In thousands) <S> <C> <C> ASSETS CASH AND DUE FROM BANKS $ 34,175 $ 33,352 INTEREST BEARING DEPOSITS WITH OTHER BANKS 11,906 5,001 INVESTMENT SECURITIES HELD-TO-MATURITY (MARKET VALUE $180,484 AT 9/30/98 AND $142,205 AT 12/31/97) 178,319 141,972 INVESTMENT SECURITIES AVAILABLE-FOR-SALE 102,957 116,193 FEDERAL FUNDS SOLD AND OTHER SHORT TERM INVESTMENTS 18,900 2,000 LONG TERM FEDERAL FUNDS SOLD 20,000 -- LOANS 641,689 635,563 LESS: RESERVE FOR POSSIBLE LOAN LOSSES (10,268) (10,270) ----------- ----------- NET LOANS 631,421 625,293 OTHER ASSETS 50,148 49,346 ----------- ----------- TOTAL ASSETS $ 1,047,826 $ 973,157 =========== =========== LIABILITIES DEMAND DEPOSITS, NON INTEREST BEARING $ 133,568 $ 129,892 DEMAND DEPOSITS, INTEREST BEARING 226,940 176,115 SAVINGS DEPOSITS 132,813 127,965 TIME DEPOSITS 355,770 358,896 ----------- ----------- TOTAL DEPOSITS 849,091 792,868 SHORT-TERM BORROWINGS 62,103 49,546 OTHER LIABILITIES 22,898 17,064 LONG-TERM DEBT 9,075 9,075 ----------- ----------- TOTAL LIABILITIES 943,167 868,553 SHAREHOLDERS' EQUITY COMMON STOCK 39,272 39,272 ADDITIONAL PAID-IN CAPITAL 14,908 14,908 RETAINED EARNINGS 61,107 53,691 ACCUMULATED OTHER COMPREHENSIVE INCOME 1,117 350 TREASURY STOCK (11,745) (3,617) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 104,659 104,604 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,047,826 $ 973,157 =========== =========== </TABLE> NOTE: THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31,1997 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. 3
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPT. 30, ENDED SEPT. 30, 1998 1997 1998 1997 (in thousands, except per share data) <S> <C> <C> <C> <C> INTEREST INCOME INTEREST AND FEES ON LOANS TAXABLE INTEREST AND FEES ON LOANS $13,096 $13,190 $39,350 $38,812 EXEMPT FROM FEDERAL INCOME TAXES 607 520 1,794 1,509 ------- ------- ------- ------- TOTAL INTEREST AND FEES ON LOANS 13,703 13,710 41,144 40,321 INTEREST AND DIVIDENDS ON INVESTMENT SECURITIES 4,058 3,671 11,936 11,110 OTHER INTEREST INCOME 699 111 1,167 174 ------- ------- ------- ------- TOTAL INTEREST INCOME 18,460 17,492 54,247 51,605 ------- ------- ------- ------- INTEREST EXPENSE INTEREST ON DEPOSITS 7,642 6,726 22,108 19,691 OTHER INTEREST EXPENSE 618 575 1,728 1,669 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 8,260 7,301 23,836 21,360 ------- ------- ------- ------- NET INTEREST INCOME 10,200 10,191 30,411 30,245 PROVISION FOR LOAN LOSSES 275 315 883 895 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,925 9,876 29,528 29,350 OTHER INCOME 2,660 2,075 7,829 5,693 GAINS ON SALES OF SECURITIES 85 41 97 99 ------- ------- ------- ------- TOTAL OTHER INCOME 2,745 2,116 7,926 5,792 OTHER EXPENSES SALARIES AND BENEFITS 3,851 3,852 11,579 11,359 OTHER EXPENSES 3,373 2,814 10,176 9,264 ------- ------- ------- ------- TOTAL OTHER EXPENSES 7,224 6,666 21,755 20,623 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 5,446 5,326 15,699 14,519 APPLICABLE INCOME TAXES 1,623 1,653 4,665 4,550 ------- ------- ------- ------- NET INCOME $ 3,823 $ 3,673 $11,034 $ 9,969 ======= ======= ======= ======= PER COMMON SHARE DATA: NET INCOME PER SHARE: BASIC $ 0.51 $ 0.47 $ 1.45 $ 1.28 DILUTED $ 0.50 $ 0.47 $ 1.44 $ 1.28 CASH DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.125 $ 0.425 $ 0.355 </TABLE> 4
Univest Corporation of Pennsylvania and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> For the nine months ended, (in thousands) Sept. 30, 1998 Sept. 30, 1997 -------------- -------------- <S> <C> <C> Cash flows from operating activities: Net income $ 11,034 $ 9,969 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses (less than) in excess of net charge-offs (2) 590 Depreciation of premises and equipment 1,887 1,782 Discount accretion on investment securities (174) (342) Deferred tax benefit (242) (5) Realized gains on investment securities (97) (99) Realized gains on sales of mortgages (201) (59) Decrease in net deferred loan fees (24) (314) Increase in interest receivable and other assets (1,327) (2,987) Increase in accrued expenses and other liabilities 5,492 299 -------- -------- Net cash provided by operating activities 16,346 8,834 Cash flows from investing activities: Proceeds from sales of securities available for sale 25,079 21,028 Proceeds from maturing securities held to maturity 52,690 61,748 Proceeds from maturing securities available for sale 20,167 7,624 Purchases of time deposits (1,599) (1,321) Purchases of investment securities held to maturity (88,953) (26,163) Purchases of investment securities available for sale (30,642) (59,424) Premium paid to purchase Bank Owned Life Insurance -- (10,000) Net (increase) decrease in federal funds sold and other short-term investments (22,206) 69 Net increase in long term federal funds sold (20,000) -- Proceeds from sales of mortgages 18,268 5,071 Net increase in loans (24,169) (26,285) Capital expenditures (1,362) (1,310) -------- -------- Net cash used in investing activities (72,727) (28,963) Cash flows from financing activities: Net increase in deposits 56,223 14,341 Net increase (decrease) in short-term borrowings 12,557 (2,948) Proceeds from long-term debt -- 2,000 Purchases of treasury stock (9,712) (2,246) Stock issued under dividend reinvestment and employee stock purchase plans 878 625 Proceeds from exercise of stock options 311 59 Cash dividends (3,053) (2,677) -------- -------- Net cash provided by financing activities 57,204 9,154 Net increase (decrease) in cash and due from banks 823 (10,975) Cash and due from banks at beginning of period 33,352 38,934 -------- -------- Cash and due from banks at end of period $ 34,175 $ 27,959 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 23,881 $ 21,646 Income taxes $ 4,666 $ 4,375 </TABLE> 5
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Financial Information The accompanying condensed consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (Univest) and its wholly owned subsidiaries, including Union National Bank and Trust Company (Union) and Pennview Savings Bank (Pennview), collectively referred to herein as the "Banks". The condensed consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements reflect all adjustments which are, 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 three and nine-month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997, which has been filed with the Securities and Exchange Commission. Note 2. Per Share Data The following weighted average shares were used for the computation of earnings per share: <TABLE> <CAPTION> For the Three Months For the Nine Months Ended Sept. 30, Ended Sept. 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Weighted Average Shares 7,532,907.9 7,722,094.8 7,592,623.6 7,742,836.4 </TABLE> In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings per Share, which was adopted on December 31, 1997 by the Corporation. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. At that time, the Corporation changed the method currently used to compute earnings per share and restated all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options is excluded. Note 3. Stock Split On January 28, 1998 the Corporation's board of directors declared a 100% stock dividend in the form of a stock split which was paid on May 1, 1998, to shareholders of record as of April 14, 1998. All share and per share amounts have been retroactively adjusted to give effect to the stock split. 6
Note 4. Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) has issued Statement No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129), which is applicable to all companies. SFAS No. 129 consolidates the existing guidance in authoritative literature relating to a company's capital structure. SFAS No. 129 is effective for financial statements for periods ending after December 15, 1997. The adoption of this standard did not have any impact on the Corporation's financial statements. As of January 1, 1998, the Corporation adopted Statement No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Corporation's net income or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Corporation's available- for-sale securities which prior to adoption were reported separately in shareholders' equity, to be included in accumulated other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The following shows the comprehensive income for the periods stated: Three months Nine months ended Sept. 30, ended Sept. 30, 1998 1997 1998 1997 ------- ------- ------- ------- (in thousands) Net income $ 3,823 $ 3,673 $11,034 $ 9,969 Change in unrealized gain on available for sale investment securities 704 225 767 245 ------- ------- ------- ------- Total comprehensive income $ 4,527 $ 3,898 $11,801 $10,214 ======= ======= ======= ======= In June 1997, Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" became effective for fiscal periods beginning after December 15, 1997, with early adoption permitted. The Corporation is currently evaluating the additional disclosure requirements this statement is expected to have on the Corporation's financial statements. The FASB has recently issued Statement No. 132, Employers' "Disclosures about Pensions and Other Postretirement Benefits", (SFAS No. 132) which is effective for financial statements issued for periods beginning after December 31, 1997. SFAS No. 132 does not change the recognition or measurement associated with pension or postretirement plans. It standardizes certain disclosures, requires additional information about changes in the benefit obligations and about change in the fair value of plan assets to facilitate analysis, and it eliminates certain disclosures that were not deemed useful. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which is required to be adopted in years beginning after June 15, 1999. The Statement will require the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Corporation has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company. 7
The FASB has recently issued Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS No. 134) which is effective for financial statements issued for the first fiscal quarter beginning after December 15, 1998. Statement 134 is not expected to have an impact on the Corporation's financial statements since the Corporation presently does not securitize mortgage loans. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net Income Net income for the three months ended September 30, 1998 increased 2.7% or $0.1 million from $3.7 million for the three months ended September 30, 1997 to $3.8 million for the three months ended September 30, 1998. Net income also increased $1.0 million or 10.0% to $11.0 million for the nine months ended September 30, 1998 as compared to $10.0 million for the nine months ended September 30, 1997. The increases for both the three and nine month periods were due mainly to an increase in other income. Net Interest Income Interest and fees on loans remained constant at $13.7 million for the three months ended September 30, 1997 and September 30, 1998. For the nine months ended September 30, 1998, interest and fees on loans increased $0.8 million from $40.3 million at September 30, 1997 to $41.1 million at September 30, 1998. There was growth in loan volume for both periods. However, the increase for the three months ended September 30, 1998 was offset by a decrease in rate. The increase for the nine months ended September 30, 1998 was partially offset by a decrease in rate. Interest on investment securities increased $0.4 million from $3.7 million for the three month period ended September 30, 1997 to $4.1 million for the three month period ended September 30, 1998. The increase was due to higher average volume. For the nine months ended September 30, 1998, interest on investments increased by $0.8 million from $11.1 million for the nine months ended September 30, 1997 to $11.9 million for the same period in 1998. This increase is also attributed to higher average volume for the period. Other interest income increased $0.6 million from $0.1 million for the three month period ended September 30, 1997 to $0.7 million for the three month period ended September 30, 1998. The investment in long term federal funds sold is the reason for the increase. For the nine months ended September 30, 1998, other interest income increased by $1.0 million from $0.2 million for the nine months ended September 30, 1997 to $1.2 million for the same period in 1998. This increase is also due to the higher volume of long term federal funds sold. Interest expense increased from $7.3 million for the three months ended September 30, 1997 to $8.3 million for the three months ended September 30, 1998, an 9
increase of $1.0 million. Interest expense increased $2.4 million from $21.4 million for the nine months ended September 30, 1997 to $23.8 million for the nine months ended September 30, 1998. The increase in both periods is attributed to volume and rate increases in certain types of money market accounts and special certificates of deposit for Individual Retirement Accounts. The asset/liability management process continues with its goal of providing stable reliable interest earnings through varying rate environments. Net interest income is the amount by which interest income on earnings' 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, 1998 shows net interest income of $30.4 million that is a $0.2 million increase over the $30.2 million recorded for the nine months ended September 30, 1997. The increase in net interest income for the nine months ended September 30, 1998 was attributed to growth in net interest earning assets of $4.2 million and was offset by a decline in the net interest margin. Average interest earning assets increased by $69.0 million for the nine month period ended September 30, 1998, as compared to the prior year. Average interest bearing liabilities increased by $64.8 million for the nine month period ended September 30, 1998 as compared to the prior year. Average earning assets grew mainly due to investment growth and average interest bearing liabilities grew due to increased deposits. The increase in net interest income resulting from the increase in net interest earning assets was offset by a decline in interest rate margin of 32 basis points to 4.33% in September 1998 from 4.65% in September 1997. The following demonstrates the aforementioned effects: NINE MONTHS ENDED ------------------------------------------- 9/30/98 9/30/97 AVG. BALANCE RATE AVG. BALANCE RATE ----------------- ----------------- Interest Earnings Assets $935,988 7.73% $867,020 7.94% Interest Bearing Liabilities 756,416 4.20% 691,647 4.12% Net Interest Income 30,411 30,245 Net Interest Spread 3.53% 3.82% Net Interest Margin 4.33% 4.65% The Corporation is permitted to use interest-rate swap agreements which convert a portion of its floating rate commercial loans to a fixed basis, thus reducing the impact of interest changes on future income. In these swaps, the Corporation agrees to exchange, at specified intervals, the difference between fixed and floating-interest rates calculated on 10
an agreed upon notional principal amount. Because the Corporation's interest-earning assets tend to be short-term floating rate instruments while the Corporation's interest-bearing liabilities tend to be longer-term fixed rate instruments, interest rate swaps in which the Corporation pays a floating rate and receives a fixed rate are used to reduce the impact of changes in interest rates on the Corporation's net interest income. At September 30, 1998, September 30, 1997 and December 31, 1997, $50.0 million in notional amount of "Pay Floating, Receive Fixed" swaps were outstanding. The net payable or receivable from interest rate swap agreements is accrued as an adjustment to interest income. The $50.0 million in notional amount interest rate swaps outstanding at September 30, 1998 expire as follows: $20.0 million in notional principal amount in first quarter 1999, $10.0 million in notional principal amount in third quarter 1999, $10.0 million in first quarter 2000 and $10.0 million in second quarter 2000. The impact of interest rate swaps on net interest income for the quarter ended September 30, 1998 was a positive $23 thousand as compared to a positive $14 thousand for the quarter ended September 30, 1997. For the nine months ended September 30, 1998 the impact was a positive $63 thousand as compared to a positive $58 thousand for the nine months ended September 30, 1997. The Corporation's current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. As of September 30, 1998 the market value of interest-rate swaps in a favorable position was $467 thousand. There were no interest rate swaps with the market value in an unfavorable position. 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 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 SFAS 114. Any of the above criteria may cause the provision to fluctuate. For both the three and nine months ended September 30, 1998 and September 30, 1997, the provisions for loan losses happen to round the same at $0.3 million and $0.9 million respectively. At September 30, 1998, the recorded investment in loans that are considered to be impaired was $2.8 million, all of which were on a non-accrual basis. The related 11
allowance for credit losses for those loans was $0.7 million. At September 30, 1997, the recorded investment in loans considered to be impaired was $2.3 million and the related allowance for credit losses for these loans was $0.4 million. Generally, a loan (including a loan impaired) is classified as non-accrual 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 non-accrual 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 non-accrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Total cash basis, non-accrual and restructured loans at September 30, 1997 and 1998, was $4.7 million and $3.7 million respectively. They consist mainly of real estate related commercial loans. For the quarter ended September 30, 1998, non-accrual loans resulted in lost interest income of $84 thousand as compared to $48 thousand for the quarter ended September 30, 1997. For the nine months ended September 30, 1998 lost interest totaled $260 thousand as compared to $216 thousand for the same period in 1997. At September 30, 1998, the Corporation had no commitments to lend additional funds with respect to nonperforming loans. In management's evaluation of the loan portfolio risks, any significant future increases in nonperforming loans are dependent to a large extent on the economic environment, or specific industry problems. The Corporation is currently in the process of evaluating potential loss exposure for large commercial credits based on the results of a questionnaire dealing with Year 2000 readiness. Completion of this process has been extended to the end of the fourth quarter. The impact this analysis will have on the reserve is not known at this time. At September 30, 1998, and December 31, 1997, the reserve for loan losses remained constant at 1.6% of total loans. The Corporation, at September 30, 1998, has a total of $300 thousand of Other Real Estate Owned ("OREO") consisting of three commercial properties. This amount is recorded in "Other Assets" at lower of cost or fair market value in the accompanying consolidated balance sheets. Other Income Other income which is non-interest related consists mainly of general fee income, trust department fee income, and other miscellaneous non-recurring types of income. It also includes various types of service charges, such as ATM fees, gains on sales of 12
mortgages and for 1998 and third quarter of 1997, increases in the cash surrender value of Bank-Owned Life Insurance (BOLI). Other income increased $0.6 million or 28.6% from $2.1 million for the three months ended September 30, 1997 to $2.7 million for the three months ended September 30, 1998. The increase is attributed to trust income, which continues to be a major source of non-interest income, fee income and gains on sales of mortgages. Trust income of $0.8 million for the three months ended September 30, 1998 was $0.1 million or 14.3% more than the $0.7 million reported for the three months ended September 30, 1997. Fee income, mainly due to increases in various transaction fees and deposit service fees, increased from $1.0 million for the three months ended September 30, 1997 to $1.4 million for the three months ended September 30, 1998, an increase of $0.4 million or 40.0%. Gains on sales of mortgages increased from $21 thousand for the three months ended September 30, 1997 to $45 thousand for the three months ended September 30, 1998, an increase of $24 thousand or 114.3%. Other income for the nine months ended September 30, 1998 increased $2.1 million or 36.8% from $5.7 million for the nine months ended September 30, 1997 to $7.8 million for the nine months ended September 30, 1998. The increase is attributed to a $0.5 million increase in the net cash surrender value of a $15.0 million Bank Owned Life Insurance Policy, trust income, fee income and gains on sales of mortgages. Trust income of $2.4 million for the nine months ended September 30, 1998 was $0.4 million or 20.0% more than the $2.0 million reported for the nine months ended September 30, 1997. Fee income, again due to increases in various transaction fees and deposit service fees, increased from $2.7 million for the nine months ended September 30, 1997 to $3.9 million for the nine months ended September 30, 1998, an increase of $1.2 million or 44.4%. Gains on sales of mortgages increased from $59 thousand for the nine months ended September 30, 1997 to $201 thousand for the nine months ended September 30, 1998, an increase of $142 thousand or 240.7%. The reason for the increase is lower long term interest rates that caused more refinancing. During the quarter ended September 30, 1998, investment securities totaling approximately $19 million were sold from the available for sale portfolio resulting in a net gain of $85 thousand compared to the $41 thousand for the quarter ended September 30, 1997. For the nine months ended September 30, 1998, gains on sale of securities total $97 thousand compared to the $99 thousand for the nine months ended September 30, 1997. Treasury securities were sold to purchase agency securities and therefore take advantage of the higher spreads between agency and treasuries in the market and the resulting gain on the sales in both the three and nine month periods ended September 30, 1998. 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 net of taxes and included in Accumulated Other Comprehensive Income. 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 13
September 30, 1998, is $103.0 million as compared to $116.2 million at December 31, 1997. At September 30, 1998, Accumulated Other Comprehensive Income was $1.1 million compared to $0.4 million at December 31, 1997. Other Expense 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 non-interest 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. Other expenses increased 7.5% or $0.5 million from $6.7 million for the quarter ended September 30, 1997 to $7.2 million for the quarter ended September 30, 1998. For the nine months ended September 30, 1998 other expenses increased 5.8% or $1.2 million from $20.6 million at September 30, 1997 to $21.8 million at September 30, 1998. Increases in both periods are due to increases in expenses such as advertising, other fee expense, intangible expense and software expense. Cautionary Statement for the Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The discussion regarding the Corporation's preparedness for Year 2000 as discussed in the following section entitled "Year 2000" contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements involve risks and uncertainties including changes in the Corporations' ability to execute its plan to address the Year 2000 issue, and the ability of third parties to effectively address their Year 2000 issues. The Corporation wishes to advise readers not to place undue reliance on any such forward-looking statements which reflect Management's analysis only as of the date hereof. Although the Corporation believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Year 2000 As reported in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 a Year 2000 (Y2K) committee has been established. This group has developed a plan, inventoried software, identified hardware, contracts with external vendors, and insurance issues all of which are under review. The Corporation has fully completed the assessment phase related to Y2K issues as it relates to the Corporation's hardware and software applications. The Corporation's assessment indicated that most of the significant information technology systems, particularly the general ledger and subsidiary applications including loans, deposits, payroll and trust systems could be affected. All of these software applications are 14
licensed from vendors and run on hardware operated by the Corporation. These vendors have represented that such applications are Y2K compliant. At present, testing of these software applications is approximately fifty percent complete with satisfactory results. Testing of the Corporation's computer hardware is complete and determined to be Y2K compliant. Testing of effected software applications is expected to be fully completed by December 31, 1998. The Corporation's contingency plans include self-remediation of licensed software, manual workarounds, and the use of outsourcing alternatives in the case of the payroll application. The assessment also indicated that certain internally developed programs were affected by the Y2K issue. Such programs have been remedied, tested and successfully implemented. Additionally, the Corporation has substantially completed the assessment of the potential effects on the Corporation related to its commercial customers' preparedness for Year 2000. Specifically, the Corporation is subject to the risk of loss of customer deposits and customers' inability to meet contracted loan obligations in the event customers experience disruptions in their operations and experience loss of business and liquidity problems. This assessment is expected to be completed by year end 1998. The results of this assessment will enable the Corporation to more closely monitor those higher risk customers so as to promptly determine the possible effects on the Corporation's liquidity and loan loss reserves. The inability of customers to complete their Y2K resolution process in a timely manner could materially impact the Corporation. In early 1999, the Corporation will conduct external testing with third parties, including ATMs, major customers, other financial institutions and payment systems providers. This testing is expected to be completed by June 30, 1999. The total cost of the Y2K project cost is estimated at $400 thousand. To date, the Corporation has incurred approximately $105 thousand, all of which has been expensed. The remaining $295 thousand will be expensed as incurred. Management believes it has an effective program in place to resolve the Y2K issue in a timely manner. Failure to complete the project as herein described may have a negative impact on our ability to effectively serve our customers. In this event, the Corporation may experience the loss of customers, strain on liquidity and a material negative effect on the results of operations. Management of the Corporation believes that our readiness program will be completed and if any need to rely on contingency plans arises, the impact will not have a material financial impact on the Corporation. However, there can be no guarantee that the estimates to complete the Y2K project or the contingency plans will be achieved and actual results could differ from those anticipated. 15
Tax Provision An income tax provision of $1.6 million was recorded for the quarter ended September 30, 1998 and $1.7 million for the quarter ended September 30, 1997. The effective tax rates were 29.8% and 31.0% respectively. For the nine months ended September 30, 1998 the provision was $4.7 million as compared to $4.6 million for the nine months ended September 30, 1997 with effective tax rates of 29.7% and 31.3% respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects, tax-free income from investment in securities, loans and bank-owned life insurance. Financial Condition Total assets increased $74.6 million or 7.7% from $973.2 million at December 31, 1997 to $1,047.8 million at September 30, 1998. Interest bearing deposits increased $6.9 million. Investments increased $23.1 million. Federal funds sold and Term federal funds sold increased $36.9 million. Net loans increased $6.1 million. Deposits increased $56.2 million mainly due to increased activity in certain types of money market accounts paying higher rates. Short-term borrowings increased $12.6 million due to the normal business cycle volatility in the corporate daily sweep repurchase account. Shareholders' equity increased to $104.7 million at September 30, 1998 from $104.6 million at December 31, 1997, an increase of $0.1 million or 0.1%. Treasury stock increased to $11.7 million at September 30, 1998 from $3.6 million at December 31, 1997. On November 26, 1997, the Board of Directors approved the continuation of the Buyback Program for another two years. This approval allows the Corporation to buy back up to 5% or approximately 385,000 shares of its outstanding common stock in open market or negotiated transactions. The net number of shares purchased since November, 1997 is 211,440. Book value per share increased from $13.64 at December 31, 1997 to $14.06 at September 30, 1998. An increase of $.42 per share or 3.1%. Recent Accounting Pronouncements In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. The Financial Accounting Standards Board (FASB) has issued Statement No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129), which is applicable to all companies. SFAS No. 129 consolidates the existing guidance in authoritative literature relating to a company's capital structure. SFAS No. 129 is 16
effective for financial statements for periods ending after December 15, 1997. The adoption of this standard did not have any impact on the Corporation's financial statements. As of January 1, 1998, the Corporation adopted Statement No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. However, the adoption of this Statement had no impact on the Corporation's net income or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Corporation's available-for-sale securities which prior to adoption were reported separately in shareholders' equity, to be included in accumulated other comprehensive income. Prior year financial statements have been reclassified to conform to the requirement of SFAS No. 130. The following shows the comprehensive income for the periods stated: <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, 1998 1997 1998 1997 ------- ------- ------- ------- (in thousands) <S> <C> <C> <C> <C> Net income $ 3,823 $ 3,673 $11,034 $ 9,969 Change in unrealized gain on available for sale investment securities 704 225 767 245 ------- ------- ------- ------- Total comprehensive income $ 4,527 $ 3,898 $11,801 $10,214 ======= ======= ======= ======= </TABLE> In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement becomes effective for fiscal periods beginning after December 15, 1997, with early adoption permitted. The Corporation is evaluating the additional disclosure requirements this Statement is expected to have on the Corporation's financial statements. The FASB has recently issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132) which is effective for financial statements issued for periods beginning after December 31, 1997. SFAS No. 132 does not change the recognition or measurement associated with pension or postretirement plans. It standardizes certain disclosures, requires additional information about changes in the benefit obligations and about change in the fair value of plan assets to facilitate analysis, and it eliminates certain disclosures that were not deemed useful. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which is required to be adopted in years beginning after June 15, 1999. The Statement will require the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either 17
be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Corporation has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Corporation. The FASB has recently issued Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS No. 134) which is effective for financial statements issued for the first fiscal quarter beginning after December 15, 1998. Statement 134 is not expected to have an impact on the Corporation's financial statements since the Corporation presently does not securitize mortgage loans. Other Univest Corporation announced that it has reached an agreement in principle to acquire Fin-Plan Group of Wayne, Pennsylvania. This will enable the Corporation to provide a broader range of financial services including financial planning, investment management, insurance products and brokerages services. The transaction is expected to be completed in the first quarter of 1999. 18
Part II. OTHER INFORMATION Item 1. Legal Proceedings--None Item 2. Changes in Securities--None Item 3. Defaults upon Senior Securities--None Item 4. Submission of Matters to a Vote of Security Holders--Not applicable Item 5. Other Information--None Item 6. Exhibits and Reports on Form 8-K Exhibit 27 - Financial Data Schedule No reports on Form 8-K were filed during the quarter for which this report is filed. 19
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Univest Corporation of Pennsylvania ----------------------------------- (Registrant) Date: October 27, 1998 /s/ Merrill S. Moyer --------------------------------------- Merrill S. Moyer, Chairman Date: October 26, 1998 /s/ Wallace H. Bieler --------------------------------------- Wallace H. Bieler, Executive Vice President and Chief Financial Officer 20