UNIVEST CORP OF PENNSYLVANIA - 10-K Annual Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File number 0-7617

Univest Corporation of Pennsylvania

(Exact name of registrant as specified in its charter)


Pennsylvania (State or other jurisdiction of incorporation of organization)		23-1886144 (IRS Employer Identification No.)
14 North Main Street Souderton, Pennsylvania (Address of principal executive offices)		18964 (Zip Code)

Registrant’s telephone number, including area code

(215) 721-2400

Securities registered pursuant to Section 12(g) of the Act:


Title of Class		Number of shares outstanding at 1/31/03

Common Stock, $5 par value		8,552,124

The approximate aggregate market value of voting stock held by non-affiliates of the registrant is $226,689,891 as of January 31, 2003.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. YES þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES þ NO o

Parts I and Part III incorporate information by reference from the proxy statement for the annual meeting of shareholders on April 8, 2003.

UNIVEST CORPORATION OF PENNSYLVANIA

TABLE OF CONTENTS


		Page

PART I
Item 1.	Business		2
Item 2.	Properties		5
Item 3.	Legal Proceedings		5
Item 4.	Submission of Matters to a Vote of Security Holders		5
PART II
Item 5.	Market for the Registrant’s Common Stock and Related Stockholder Matters		5
Item 6.	Selected Financial Data		8
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		28
Item 8.	Financial Statements and Supplementary Data		30
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		63
PART III
Item 10.	Directors and Executive Officers of the Registrant		64
Item 11.	Executive Compensation		64
Item 12.	Security Ownership of Certain Beneficial Owners and Management		64
Item 13.	Certain Relationships and Related Transactions		64
Item 14.	Controls and Procedures		64
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		64
Signatures			67

PART I


Item 1.	*Business*

General

Univest Corporation of Pennsylvania is a Pennsylvania corporation organized in 1973 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956. Univest elected to become a Financial Holding Company in 2000 as provided under Title I of the Gramm-Leach-Bliley Act. It owns all of the capital stock of Union National Bank and Trust Company (“Union National Bank”), Pennview Savings Bank, Univest Realty Corporation, Univest Delaware, Inc., and Univest Reinsurance Corporation.

The consolidated financial statements include the accounts of Univest Corporation of Pennsylvania and its wholly owned subsidiaries, including Union National Bank and Trust Company and Pennview Savings Bank, collectively referred to herein as the “Banks.”

Union National Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers through its 20 traditional offices and 8 supermarket branches that offer normal commercial bank and trust services, one work site office offering a payroll check cashing service and five off-premise automated teller machines. Union National also provides banking and trust services for the residents and employees of 10 retirement home communities.

Pennview Savings Bank has 4 offices engaged in attracting deposits from the general public and investing such deposits primarily in loans secured by residential properties and consumer loans. Pennview also provides banking services at 2 retirement home communities and an express banking center located in the Montgomery Mall. Delview, Inc., a wholly owned subsidiary of Pennview, is a passive investment holding company located in Delaware. Delview provides various financial management services and insurance products to individuals and businesses through its subsidiaries Univest Investments, Inc. and Univest Insurance, Inc. Univest Insurance Inc. acquired Gum Insurance on December 3, 2001. This allows Univest Corporation to provide a broader range of insurance products. Univest Investments, Inc. allows Univest Corporation to provide a range of financial services including financial planning, investment management, insurance products and brokerage services.

On January 18, 2003 Union National Bank and Trust Company of Souderton, PA and Pennview Savings Bank combined to form Univest National Bank and Trust Company.

Univest Leasing Corporation offered services of leasing commercial, industrial, and institutional equipment to firms and individuals in the same geographical area. This subsidiary closed January 1, 2002.

Univest Realty Corporation was established to obtain, hold and operate properties for the holding company and its subsidiaries.

Univest Reinsurance Corporation, as a reinsurer, offers life and disability insurance to individuals in connection with credit extended to them by the bank.

Univest Electronic Services Corporation provided the data processing operation and electronic development for all subsidiaries of the holding company. This subsidiary closed January 1, 2002.

Univest Delaware, Inc. is a passive investment holding company located in Delaware.

Employees

As of December 31, 2002, Univest and its subsidiaries employed four hundred and seventy-two (472) persons.

Competition

Univest’s service areas are characterized by intense competition for banking business among commercial banks, savings and loan associations, savings banks and other financial institutions. Each of the Corporation’s subsidiary banks actively compete with such banks and financial institutions for local retail and commercial accounts, in Bucks and Montgomery Counties, as well as other financial institutions outside their primary service area.

In competing with other banks, savings and loan associations, and other financial institutions, Union National Bank and Pennview Savings Bank seek to provide personalized services through management’s knowledge and awareness of their service area, customers and borrowers.

Other competitors, including credit unions, consumer finance companies, insurance companies and mutual funds, compete with certain lending and deposit gathering services offered by Union National Bank, Pennview Savings Bank, Univest Investments, Inc. and Univest Insurance Inc.

Supervision and Regulation

Union National Bank is subject to supervision and is regularly examined by the Office of the Comptroller of the Currency. Also, Union National Bank is subject to examination by the Federal Deposit Insurance Corporation and by the Federal Reserve System. Pennview Savings Bank is regulated by the Federal Deposit Insurance Corporation and by the Department of Banking of the Commonwealth of Pennsylvania.

Univest is subject to the provisions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. Univest is subject to the reporting requirements of the Board of Governors of the Federal Reserve System, and Univest, together with its subsidiaries, is subject to examination by the Board. The Federal Reserve Act limits the amount of credit that a member bank may extend to its affiliates, and the amount of its funds that it may invest in or lend on the collateral of the securities of its affiliates. Under the Federal Deposit Insurance Act, insured banks are subject to the same limitations.

Univest elected to become a Financial Holding Company in 2000 as provided under Title I of the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act provides a new regulatory framework for regulation through the financial holding company, which has as its umbrella regulator the Federal Reserve Board. The Gramm-Leach-Bliley Act requires “satisfactory” or higher Community Reinvestment Act compliance for insured depository institutions and their financial holding companies in order for them to engage in new financial activities. The Gramm-Leach-Bliley Act provides a federal right to privacy of non-public personal information of individual customers.

Univest is subject to the Sarbanes-Oxley Act of 2002 that went into effect on July 30, 2002. The Act legislated reforms that are intended to address corporate and accounting fraud. In order to ensure auditor independence the bill restricts the provision of both auditing and consulting services by an accounting firm and requires that any non-audit services being provided to an audit client be preapproved by the company’s audit committee. The bill also requires that the chief executive officer and chief financial officer certify the accuracy of periodic reports filed with the SEC.

FDICIA

In December 1991, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) was enacted, which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes.

Among other things, FDICIA requires the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements in order to minimize losses to the FDIC. FDICIA establishes five capital tiers: “well-capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”

and imposes significant restrictions on the operations of a bank that is not at least adequately capitalized. A depository institution’s capital tier will depend upon where its capital levels are in relation to various relevant capital measures, which will include a risk-based capital measure, a leverage ratio capital measure and certain other factors. Under the requirements, Univest had a Tier I capital ratio of 12.4% and total risk-based capital ratio of 13.6% at both December 31, 2002 and 2001. These ratios place Univest in the “well-capitalized” category under regulatory standards.

Regulations promulgated under FDICIA also require that an institution monitor its capital levels closely and notify its appropriate federal banking regulators within 15 days of any material events that affect the capital position of the institution.

FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses and such other standards as the agency deems appropriate.

FDICIA also contains a variety of other provisions that affect the operations of the Corporation, including new reporting requirements, regulatory standards for real estate lending, “truth in savings” provisions, certain restrictions on investments and activities of state-chartered insured banks and their subsidiaries and limitations on credit exposure between banks.

Finally, FDICIA limits the discretion of the FDIC with respect to deposit insurance coverage by requiring that, except in very limited circumstances, the FDIC’s course of action in resolving a problem bank must constitute the “least costly resolution” for the Bank Insurance Fund (“BIF”) or the Savings Association Insurance Fund (“SAIF”), as the case may be. The FDIC has interpreted this standard as requiring it not to protect deposits exceeding the $100,000 insurance limit in more situations than was previously the case. In addition, FDICIA prohibits payments by the FDIC on uninsured deposits in foreign branches of U.S. banks and will severely limit the “too big to fail” doctrine under which the FDIC formerly protected deposits exceeding the $100,000 insurance limit in certain failed banking institutions.

Implementation of FDICIA has not had a material impact on the business or operations of the Corporation.

Credit and Monetary Policies

Union National Bank is affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve System. An important function of the policies is to curb inflation and control recessions through control of the supply of money and credit. The Federal Reserve System uses its powers to regulate reserve requirements of member banks, the discount rate on member-bank borrowings, interest rates on time and savings deposits of member banks, and to conduct open-market operations in United States Government securities to exercise control over the supply of money and credit. The policies have a direct effect on the amount of bank loans and deposits and on the interest rates charged on loans and paid on deposits, with the result that the policies have a material effect on bank earnings. Future policies of the Federal Reserve Bank System and other authorities cannot be predicted, nor can their effect on future bank earnings be predicted.

Pennview Savings Bank and Union National Bank are members of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks, with each subject to supervision and regulation by the Federal Housing Finance Board. The Federal Home Loan Banks provide a central credit facility primarily for member institutions. The Banks, as members of the Federal Home Loan Bank of Pittsburgh, are required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount equal to 5% of outstanding loans plus 0.5% of the unused credit line from the Federal Home Loan Bank of Pittsburgh at December 31, 2002.

Statistical Disclosure

Univest was incorporated under Pennsylvania law in 1973 for the purpose of acquiring the stock of Union National Bank and subsequently to engage in other business activities permitted under the Bank Holding Company Act. On September 28, 1973, pursuant to an exchange offer, Univest acquired the outstanding stock of Union National Bank and on August 1, 1990 acquired the stock of Pennview Savings Bank. Two new subsidiaries were incorporated on September 8, 1998 in the State of Delaware. Univest Delaware, Inc. and Delview, Inc. were formed as passive investment companies. Univest Delaware, Inc. is wholly owned by the Corporation and Delview, Inc. is wholly owned by Pennview. Univest Insurance, Inc. is wholly owned by Delview, Inc. Univest Insurance, Inc. acquired Gum Insurance on December 31, 2001. This allows Univest Corporation to provide a broader range of insurance products. Univest Investments, Inc. is wholly owned by Delview, Inc. and allows Univest Corporation to provide a range of financial services.


Item 2.	*Properties*

Univest and its subsidiaries occupy thirty-two properties in Montgomery and Bucks Counties in Pennsylvania, which are used principally as banking offices.

Union National Bank and Trust Company, with its head office in Souderton, Montgomery County, serves the area through twenty-eight (28) banking offices, five off-premise automated teller machines, one work site office and provides banking and trust services to the residents and employees of ten retirement homes. Seventeen banking offices are in Montgomery County and thirteen banking offices are in Bucks County. A work site office is located in Montgomery County. Three off-premise automated teller machines are located in Montgomery County and two are located in Bucks County.

Pennview Savings Bank conducts operations through four (4) full-service offices located in Souderton, Hatfield, Franconia and Silverdale, Pennsylvania. Pennview also provides banking services to the residents and employees of two retirement homes and an express banking center located in Montgomery County.


Item 3.	*Legal Proceedings*

There are no proceedings pending other than the ordinary routine litigation incident to the business of the corporation.


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

Incorporated herein by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders on April 8, 2003.

PART II


Item 5.	*Market for the Registrant’s Common Stock and Related Stockholder Matters*

Univest Corporation of Pennsylvania stock is traded over the counter and is generally held by individuals residing within the market area of the Corporation as stated under Item 1. At December 31, 2002, Univest had 2,074 stockholders.

Range of Market Prices*

The following table shows the range of market values of the Corporation’s stock. The Trust Department of Union National Bank and Trust Company serves as the Corporation’s Stock Transfer Agent and Registrar and Dividend Disbursement Agent pursuant to the trust powers of national

banks. The prices shown on this page represent transactions between dealers and do not include retail markups, markdowns, or commissions.


	High		Low

2002

January — March	$	28.48	$	28.08
April — June		29.60		28.32
July — September		31.40		29.60
October — December		32.48		31.20


	High		Low

2001

January — March	$	20.00	$	17.80
April — June		26.00		19.60
July — September		27.20		25.80
October — December		28.32		27.20

*Cash Dividends Paid Per Share


2002

January 2	$	0.168
April 1		0.184
July 1		0.184
October 1		0.184

For the year 2002	$	0.720


2001

January 2	$	0.152
April 1		0.152
July 1		0.168
October 1		0.168

For the year 2001	$	0.640

* Per share data has been restated to give effect to a five for four stock split in the form of a dividend declared on January 22, 2003 to shareholders of record as of February 7, 2003, payable on February 28, 2003.


	*Equity Compensation Plan Information:*

The following table sets forth information regarding outstanding options and shares under the equity compensation plan as of December 31, 2002.

(c)

Number of

Securities

(a)

Remaining

Number of

(b)

Available for

Securities to be

Weighted-

Future Issuance

Issued Upon

average

Under Equity

Exercise of

Exercise Price

Compensation

Outstanding

of Outstanding

Plans (Excluding

Options,

Securities

Warrants and

Reflected in

Plan Category

Rights

Column (a))

Equity Compensation plans approved by security holders*

492,760

24.386

234,913

Equity compensation plans not approved by security holders

-0-

* One shareholder approved plan “Univest 1993 Long-term Incentive Plan.” A new plan “Univest 2003 Long-term Incentive Plan” is described in the proxy for the approval of Shareholders, see Exhibit I.

Securities and Exchange Commission Reports

The Corporation makes available free of charge its reports that are electronically filed with the SEC on its website as a hyperlink to EDGAR. These reports are available as soon as reasonably practicable after the material is electronically filed. Univest’s website address is www.univest-corp.com. The Corporation will provide at no charge a copy of the SEC Form 10-K annual report for the year 2002 to each shareholder who requests one in writing after March 31, 2003. Requests should be directed to: Wallace H. Bieler, Secretary, Univest Corporation of Pennsylvania, 14 N. Main Street, Souderton, PA 18964.

Item 6. Selected Financial Data



		Year Ended December 31,

		2002			2001			2000			1999			1998


		(In thousands, except per share data)
Earnings
	Interest income	$	73,040		$	79,208		$	79,877		$	73,844		$	72,460
	Interest expense		25,814			34,441			36,459			31,381			31,815

	Net interest income		47,226			44,767			43,418			42,463			40,645
	Provision for loan losses		1,303			763			205			1,052			958

	Net interest income after provision for loan losses		45,923			44,004			43,213			41,411			39,687
	Noninterest income		20,593			17,966			16,741			15,549			10,694
	Noninterest expense		37,790			35,789			35,815			34,542			29,834

	Net income before income taxes		28,726			26,181			24,139			22,418			20,547
	Applicable income taxes		7,620			6,971			6,791			6,614			6,046

	Net income*	$	21,106		$	19,210		$	17,348		$	15,804		$	14,501

Financial Condition at Year End
	Investments	$	398,979		$	347,922		$	364,616		$	313,675		$	340,365
	Net loans		814,860			788,035			729,020			711,770			650,430
	Assets		1,325,865			1,260,713			1,204,714			1,121,511			1,070,989
	Deposits		1,043,106			998,137			971,924			910,675			874,504
	Long-term obligations		31,075			24,075			26,075			18,075			9,075
	Shareholders’ equity		133,453			121,580			115,240			102,751			103,177
Per Common Share Data**
	Average shares outstanding		8,625			8,846			9,104			9,297			9,602
	Income before income taxes	$	3.33		$	2.96		$	2.65		$	2.37		$	2.10
	Applicable income taxes		0.88			0.79			0.74			0.71			0.63
	Earnings per share – basic		2.45			2.17			1.91			1.66			1.47
	Earnings per share – diluted		2.42			2.16			1.90			1.66			1.46
	Dividends declared per share		0.736			0.656			0.586			0.503			0.438
	Book value		15.61			13.93			12.77			11.67			11.41
	Dividend payout ratio		30.41	%		30.37	%		30.84	%		30.30	%		30.00	%
Profitability Ratios
	Return on assets		1.66	%		1.59	%		1.51	%		1.45	%		1.43	%
	Return on equity		16.70	%		16.11	%		16.14	%		15.38	%		13.84	%
	Average equity to average assets		9.91	%		9.84	%		9.38	%		9.43	%		10.30	%

* The Corporation adopted Financial Accounting Standards Board Opinion No. 142 on January 1, 2002 and ceased amortizing goodwill.

** Per share data has been restated to give effect to a five for four stock split in the form of a dividend declared on January 22, 2003 to shareholders of record as of February 7, 2003, payable on February 28, 2003.


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations


	*Results of Operations*

(All dollar amounts presented within tables are in thousands, except per share data.)

(Common stock data has been restated to give effect to a five for four stock split effected in the form of a dividend declared on January 22, 2003 to shareholders of record as of February 7, 2003, payable on February 28, 2003. All share and per share amounts have been retroactively adjusted to give effect to the stock split.)

Univest Corporation of Pennsylvania consolidated net income and earnings per share for 2002, 2001, and 2000 were as follows:


		2002		2001		2000

Net income		$	21,106	$	19,210	$	17,348
Net income per share:
	Basic		2.45		2.17		1.91
	Diluted		2.42		2.16		1.90


	2002 versus 2001

The 2002 results compared to 2001 include the following significant pretax components:

• Net interest income increased due to growth in average earning assets. The net interest margin remained constant at 4.0%.

• Total noninterest income increased by $2.6 million or 14.4% due primarily to growth in commission income and gains on the sales of securities. Commissions grew primarily due to the acquisition of the Gum Insurance Agency in December 2001.

• Other noninterest expense increased $2.0 million or 5.6% largely due to increases in salaries and benefits expense. The acquisition of the Gum Insurance Agency in December 2001 contributed to the increase.


	2001 versus 2000

The 2001 results compared to 2000 include the following significant pretax components:

• Net interest income increased due to growth in average earning assets offset by a decrease in the net interest margin. The net interest margin decreased to 4.0% from 4.1%.

• Total noninterest income increased by $1.3 million or 7.8% due primarily to growth in debit card compensation and the cash surrender value of bank owned life insurance policies.

• Other noninterest expense increased $1.2 million or 12.4% largely due to additional advertising, contribution and community relations expense.


	*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. Table 1 presents a summary of Univest’s average balances, the yields earned on average assets, the cost of average liabilities, and shareholders’ equity for the years ended December 31, 2002, 2001, and 2000. Table 2 analyzes the changes in net interest income for the periods broken down by their rate and volume components. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Asset/ Liability Management and Investment Committees work to maintain an adequate and predictable net interest margin for the Corporation.

Table 1 — Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential



				2002							2001							2000

				Average			Income/		Avg.		Average			Income/		Avg.		Average			Income/		Avg.
				Balance			Expense		Rate		Balance			Expense		Rate		Balance			Expense		Rate
Assets:
Cash and due from banks				$	36,531						$	36,260						$	35,309
Time deposits with other banks					6,333		$	99		1.6		9,472		$	345		3.6		4,544		$	285		6.3
U.S. Government obligations					102,253			4,544		4.4		98,290			5,233		5.3		125,937			7,333		5.8
Oblig. of states & political sub.					57,578			2,752		4.8		41,034			1,938		4.7		29,054			1,339		4.6
Other securities					196,324			12,112		6.2		192,616			12,483		6.5		154,777			10,196		6.6
Trading account					128			2		1.6		538			14		2.6		617			13		2.1
Federal Reserve bank stock					761			46		6.0		761			46		6.0		761			46		6.0
Federal funds sold and other short-term investments					11,084			181		1.6		16,303			746		4.6		25,791			1,672		6.5

	Total investments				368,128			19,637		5.3		349,542			20,460		5.9		336,937			20,599		6.1

Commercial loans					253,311			15,793		6.2		232,609			17,950		7.7		207,766			18,532		8.9
Mortgage loans					356,986			24,373		6.8		336,952			25,930		7.7		328,517			26,315		8.0
Installment loans					122,008			9,000		7.4		119,414			10,002		8.4		112,784			9,467		8.4
Home equity loans					13,575			957		7.0		12,716			1,202		9.5		13,190			1,494		11.3
Municipal loans					61,368			3,181		5.2		59,949			3,319		5.5		55,492			3,185		5.7

	Gross loans				807,248			53,304		6.6		761,640			58,403		7.7		717,749			58,993		8.2

		Less: valuation reserve			(10,683	)						(10,647	)						(10,242	)

			Net loans		796,565							750,993							707,507

Property, net					16,096							15,551							15,520
Other assets					51,626							49,083							47,079

	Total assets			$	1,275,279						$	1,210,901						$	1,146,896

Liabilities:
Demand deposits				$	159,919						$	152,716						$	150,911
Interest checking deposits					113,695		$	464		0.4		99,644		$	1,015		1.0		90,785		$	925		1.0
Money market savings					211,253			3,380		1.6		208,268			6,858		3.3		188,394			8,975		4.8
Regular savings					155,690			2,148		1.4		134,073			2,555		1.9		134,450			2,660		2.0
Certificates of deposit					354,530			16,775		4.7		351,751			19,376		5.5		345,076			19,025		5.5
Time open & club accounts					18,857			372		2.0		22,666			972		4.3		25,163			1,352		5.4

	Total time, int., and inv. checking deposits				854,025			23,139		2.7		816,402			30,776		3.8		783,868			32,937		4.2

		Total deposits			1,013,944							969,118							934,779
Federal funds purchased					2,896			56		1.9		876			25		2.9		496			29		5.8
Loans & securities sold under agreement to repurchase					82,219			1,101		1.3		75,386			2,174		2.9		64,525			2,257		3.5
Other borrowings					29,741			1,518		5.1		26,012			1,466		5.6		20,389			1,236		6.1
	Total borrowings				114,856			2,675		2.3		102,274			3,665		3.6		85,410			3,522		4.1

Accrued expenses & other liabilities					20,124							20,298							19,224

	Total liabilities				1,148,924							1,091,690							1,039,413

Shareholders’ Equity:
Common stock					41,061							41,037							40,608
Capital surplus					20,912							20,912							19,422
Retained earnings					64,382							57,262							47,453

	Total shareholders’ equity				126,355							119,211							107,483

	Total liabilities and shareholders’ equity			$	1,275,279						$	1,210,901						$	1,146,896

Weighted avg. yield on interest-earning assets										6.2							7.1							7.5
Weighted avg. rate paid on interest-bearing liabilities										2.7							3.7							4.2
Net yield										4.0							4.0							4.1

Note: 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.

Included in interest income are loan fees of $748 for 2002, $551 for 2001 and $571 for 2000.

Table I has not been tax equated.

Table 2 — Analysis of Changes in Net Interest Income

The rate-volume variance analysis set forth in the table below compares changes in 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.



		2002/2001									2001/2000

		Volume			Rate						Volume			Rate
Increase (Decrease)		Change			Change			Total			Change			Change			Total

Interest Income:
Time deposits with other banks		$	(57	)	$	(189	)	$	(246	)	$	183		$	(123	)	$	60
U.S. Government obligations			196			(885	)		(689	)		(1,470	)		(630	)		(2,100	)
Oblig. of states & political sub.			773			41			814			570			29			599
Other securities			207			(578	)		(371	)		2,442			(155	)		2,287
Trading account			(7	)		(5	)		(12	)		(2	)		3			1
Federal funds sold and other short-term investments			(76	)		(489	)		(565	)		(436	)		(490	)		(926	)
Commercial loans			1,332			(3,489	)		(2,157	)		1,911			(2,493	)		(582	)
Mortgage loans			1,476			(3,033	)		(1,557	)		601			(986	)		(385	)
Installment loans			192			(1,194	)		(1,002	)		535			—			535
Home equity loans			73			(318	)		(245	)		(55	)		(237	)		(292	)
Municipal loans			42			(180	)		(138	)		245			(111	)		134

	Total interest income		4,151			(10,319	)		(6,168	)		4,524			(5,193	)		(669	)

Interest expense:
Interest checking deposits			47			(598	)		(551	)		90			—			90
Money market savings			63			(3,541	)		(3,478	)		709			(2,826	)		(2,117	)
Regular savings			263			(670	)		(407	)		29			(134	)		(105	)
Certificates of deposit			213			(2,814	)		(2,601	)		351			—			351
Time open & club accounts			(79	)		(521	)		(600	)		(103	)		(277	)		(380	)
Federal funds purchased			40			(9	)		31			10			(14	)		(4	)
Loans & securities sold under agreement to repurchase			133			(1,206	)		(1,073	)		304			(387	)		(83	)
Other borrowings			182			(130	)		52			332			(102	)		230

	Total interest expense		862			(9,489	)		(8,627	)		1,722			(3,740	)		(2,018	)

Net interest income		$	3,289		$	(830	)	$	2,459		$	2,802		$	(1,453	)	$	1,349

Note: 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.

Table II has not been tax equated.

Interest Income

Interest and fees on loans decreased 8.7% or $5.1 million from the $58.4 million recorded for the year ended December 31, 2001 to $53.3 million for the year ended December 31, 2002. There was average loan volume growth in commercial loans that was offset by a decrease in loan yields. Mortgage loans and consumer loans also increased in average volume offset by a decrease in rate. Prime rate, which is an important factor of the banks’ loan interest income, decreased from 4.75% at December 31, 2001 to 4.25% at December 31, 2002. The average prime rate for the year ended December 31, 2002 was 4.67% compared to 6.77% for the year ended December 31, 2001. The

average interest yield on the portfolio decreased from 7.7% in 2001 to 6.6% in 2002. Comparing 2001 to 2000, interest and fees on loans decreased 1.0% or $0.6 million from the $59.0 million recorded for the year ended December 31, 2000 to $58.4 million for the year ended December 31, 2001. There was a significant increase in loan volume in commercial loans that was offset by a decrease in loan yields. Prime rate also decreased from 9.50% beginning in January 2001 to 4.75% at December 31, 2001. The average prime rate for the year ended December 31, 2001 was 6.77% compared to 9.27% for the year ended December 31, 2000. The average interest yield on the portfolio decreased from 8.2% in 2000 to 7.7% in 2001.

Tax-free interest on loans shows a comparatively constant trend when comparing the $3.2 million for December 31, 2002 with the $3.3 million for December 31, 2001 and the $3.2 million recorded for December 31, 2000.

Interest on U.S. Government obligations decreased from $5.2 million for the year ended December 31, 2001 to $4.5 million for the year ended December 31, 2002. Though the volume was higher than the previous year, as higher yielding U.S. government securities matured or were called, they were replaced with lower yielding securities. Interest on U.S. Government obligations decreased from $7.3 million for the year ended December 31, 2000 to $5.2 million for the year ended December 31, 2001. The decline was due to a decrease in volume and rate. As U.S. government securities matured or were called, many were replaced with agency mortgage-backed securities.

Interest and dividends on state and political subdivisions shows an increasing trend from $1.3 million in 2000 to $1.9 million in 2001 and $2.8 million in 2002. The increase is a result of a continued commitment to invest in tax-exempt securities. During 2002, 2001 and 2000, the Corporation acquired tax-exempt securities with a term of greater than ten years and at tax-equated yields substantially higher than investment opportunities.

The other securities category consists mainly of U.S. Government Agency mortgage-backed securities. Income on other securities declined from $12.5 million in 2001 to $12.2 million in 2002. Growth in average volume from $192.6 million in 2001 to $196.3 million in 2002 was offset by a decrease in the yield. Income on other securities grew from $10.3 million in 2000 to $12.5 million in 2001. The increase was due to increased average volume where average balances increased from $154.8 million for 2000 to $192.6 million for 2001. Corporate and asset-backed securities purchased during the second half of 2000 also contributed to the increase in income.

Interest on federal funds sold is the resulting daily investment activity that can be volatile in both rate and volume. Interest on federal funds sold decreased from $0.7 million in 2001 to $0.2 million in 2002 due to both decreased volume and a decline in the federal funds rate. Interest on federal funds sold decreased from $1.7 million in 2000 to $0.7 million in 2001 due to both decreased volume and a sharp decline in the federal funds rate.

Interest Expense

Interest expense on demand deposits decreased 51.9% or $4.1 million from $7.9 million in 2001 to $3.8 million in 2002. An increase in volume was offset by a decrease in the rate of interest checking accounts and money market accounts. Comparing 2000 to 2001, interest expense on demand deposits decreased 20.2% or $2.0 million from $9.9 million in 2000 to $7.9 million in 2001. An increase in volume was offset by a decrease in the rate of certain types of money market accounts.

Interest expense on savings deposits decreased from $2.6 million in 2001 to $2.1 million in 2002. Average volume increased but a reduction in rate caused the decrease in expense. Interest expense on savings deposits decreased from $2.7 million in 2000 to $2.6 million in 2001. A reduction in rate caused the decrease.

Interest expense on time deposits decreased from $20.3 million in 2001 to $17.1 million in 2002 primarily due to a decline in rates. Interest expense on time deposits decreased from $20.4 million in 2000 to $20.3 million in 2001 also due to a decline in rates.

Interest expense-all other consists of interest paid on short-term borrowings such as federal funds purchased, repurchase agreements and a treasury tax and loan note. In addition, Union National Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreements account. Interest expense decreased from $2.2 million in 2001 to $1.2 million in 2002 due to a decrease in rate that was offset by an increase in volume. Interest expense decreased from $2.4 million in 2000 to $2.2 million in 2001 due to a decrease in rate that was partially offset by an increase in volume.

Interest on long-term debt increased from $1.4 million at December 31, 2001 to $1.5 million at December 31, 2002. This increase represents interest on the additional $7.0 million borrowed from the Federal Home Loan Bank of Pittsburgh by Pennview in 2002. Interest on long-term debt increased from $1.2 million at December 31, 2000 to $1.4 million at December 31, 2001. This increase represents a full year of interest on the additional $8.0 million borrowed from the Federal Home Loan Bank of Pittsburgh by Pennview in 2000. Federal Home Loan Bank advances are available to meet seasonal and other withdrawals from deposit accounts, to purchase mortgage-backed securities and to expand lending.

Provision For Loan Losses

The reserve for loan losses is determined through a periodic evaluation that takes into consideration the growth of the loan portfolio, the status of past-due loans, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in the charge-off activity. Loans are also reviewed for impairment based on discounted cash flows using the loans’ initial effective interest rate or the fair value of the collateral for certain collateral dependent loans as provided for under SFAS No. 114. Any of the above criteria may cause the provision to fluctuate. The provision for the years ended December 31, 2002, 2001, and 2000 was $1.3 million, $0.8 million, and $0.2 million, respectively. The provision for loan losses was increased in 2002 due to the growth of the loan portfolio and current economic conditions. Growing loan volumes and a migration of credit risk assessment towards weaker loan grades indicated the need for an increase in the reserve for 2002 and 2001. As weakness in the economy became apparent in the latter part of 2001, the proportion of credits with identified credit issues also increased. The provision for December 31, 2000 was minimal due to improvements in the evaluation criteria and recoveries in the fourth quarter of 2000. The ratio of the reserve for loan losses to total loans was 1.3% at both December 31, 2002 and 2001. (Also refer to Note 1 of Notes to Consolidated Financial Statements.)

Noninterest Income

Trust income continues to be a major source of noninterest income. Income for the year ended December 31, 2002 of $4.2 million was $0.1 million or 2.3% less than the $4.3 million reported for year ended December 31, 2001. Income for the year ended December 31, 2001 of $4.3 million was $0.1 million or 2.3% less than the $4.4 million reported for year ended December 31, 2000. For both years ended December 31, 2002 and December 31, 2001, the increase in the number of trust accounts was offset by the decline in market conditions thereby lowering the dollar value of assets under management.

Service charges on deposit accounts increased $0.3 million from $5.2 million for the year ended December 31, 2001 to $5.5 million for the year ended December 31, 2002. Due to declining earnings credit rates in commercial accounts, service charges increased. Nonsufficient funds fees also increased. These increases were partially offset by a decrease in ATM fees. Service charges on deposit accounts increased $0.3 million from $4.9 million at December 31, 2000 to $5.2 million at

December 31, 2001. The realignment of checking account products resulted in an increase of deposit service fees.

Commission income, which is offset by commission expense, is the primary source of income for Univest Investments, Inc. and Univest Insurance, Inc. Commission income grew from $2.6 million at December 31, 2001 to $4.4 million at December 31, 2002, an increase of $1.8 million or 69.2%. The growth is primarily due to the acquisition of the Gum Insurance Agency in December 2001. Commission income decreased from $2.8 million at December 31, 2000 to $2.6 million at December 31, 2001, a reduction of $0.2 million or 7.1%. This decline is primarily due to an increase in broker/dealer commission that was adversely impacted by the decline in the equity markets.

Other income that is noninterest related consists mainly of general fee income and other miscellaneous types of income. Other noninterest income of $5.4 million for 2002 is $0.3 million or 5.3% lower than the $5.7 million earned in 2001. Increases in debit card compensation, cash surrender values of bank-owned life insurance policies and an adjustment to the off-balance sheet reserve account were offset by decreases in the cash surrender values of nonqualified plan annuities, financial planning service fees and mortgage servicing rights fees. Other noninterest income of $5.7 million for 2001 is $1.1 million or 23.9% higher than the $4.6 million earned in 2000. Increases in debit card compensation, cash surrender values of bank-owned life insurance policies and nonqualified plan annuities all contributed to the growth.

Asset Sales

Sales of mortgage loans during the year ended December 31, 2002 resulted in a gain of $0.2 million as compared to $0.1 million for the year ended December 31, 2001. Sales increased due to the large number of refinancings that was a result of record low mortgage rates during 2002. Sales of mortgage loans during the year ended December 31, 2001 resulted in a gain of $0.1 million as compared to $0.01 million for the year ended December 31, 2000. Sales increased also due to the large number of refinancings that was a result of the decreasing long-term rates during 2001 that went even lower in 2002.

During 2002, securities totaling approximately $27.9 million were sold from the available-for-sale portfolio resulting in a net gain of $0.9 million. Using the same philosophy as last year, short-term securities were sold and reinvested in medium-term securities to take advantage of an extremely steep yield curve. During 2001, securities totaling approximately $15.9 million were sold from the available-for-sale portfolio resulting in a net gain of $0.2 million. Short-term securities were sold and reinvested in medium-term securities to take advantage of the steepness of the yield curve during the 2001 year. In 2000, securities totaling approximately $9.0 million were sold from the available-for-sale portfolio or matured, resulting in a net gain of $1 thousand. Near maturity government securities were sold and reinvested in bank owned life insurance. The total of debt and equity securities held in the available-for-sale portfolio as of December 31, 2002 is $326.2 million versus $238.1 million at December 31, 2001. The accumulated other comprehensive income, related to debt securities, of $6.9 million, net of taxes, has been credited to shareholders’ equity as of December 31, 2002. Accumulated other comprehensive income, related to debt securities, of $2.8 million, net of taxes, was credited to shareholders’ equity as of December 31, 2001.

Noninterest Expense

The operating costs of the Corporation are known as noninterest expense, and include, but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses, attempting to provide technological innovation whenever practical, as operations change or expand. Salaries and benefits increased $1.9 million or 9.5% from $20.0 million in 2001 to $21.9 million in 2002. The acquisition of the Gum Insurance Agency in December 2001 mainly contributed to the increases in regular salary expense, bonus and commis-

sion expense, and pension expense. Salaries and benefits decreased $0.9 million or 4.3% from $20.9 million in 2000 to $20.0 million in 2001. Decreases in bonus and commission expense, nonqualified pension expense and vacation liability accrual are the reason for the reduction.

Net occupancy expense increased $0.3 million from $2.7 million for the year ended December 31, 2001 to $3.0 for the year ended December 31, 2002. Net occupancy expense remained constant at $2.7 million for the year ended December 31, 2000 and December 31, 2001. Equipment expense increased $0.1 million from $2.2 million in 2001 to $2.3 million in 2002. Equipment expense decreased $0.4 million from $2.6 million in 2000 to $2.2 million in 2001.

Other expenses of $10.6 million decreased $0.3 million or 2.8% for the year ended December 31, 2002 as compared to $10.9 million for the year ended December 31, 2001. Audits and regulatory examination fees, legal, consultant and pension advisory fees, and insurance expense all increased while goodwill expense decreased. Other expenses of $10.9 million increased $1.2 million or 12.4% for the year ended December 31, 2001 as compared to $9.7 million for the year ended December 31, 2000. Advertising, contributions, community relations and stock option modification expense all contributed to this increase.

Tax Provision

The provision for income taxes was $7.6 million for the year ended December 31, 2002, $7.0 million for the year ended December 31, 2001 and $6.8 million for the year ended December 31, 2000. The provision for income taxes for 2002, 2001, and 2000, was at effective rates of 26.5%, 26.7%, and 28.1%, respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects and tax-free income from investment in municipal securities, loans and bank-owned life insurance.

Financial Condition

During 2002, total assets increased to $1,325.9 million, a growth of $65.2 million or 5.2% over the $1,260.7 million in 2001. Total investments increased by $47.2 million from $347.9 million at December 31, 2001 to $395.1 million at December 31, 2002. Federal funds sold increased $3.8 million to $3.9 million as compared to the $0.1 million at December 31, 2001. Total loans increased $27.1 million from $798.3 million at December 31, 2001 to $825.4 million at December 31, 2002. Total deposits increased $45.0 million to $1,043.1 million as compared to the $998.1 million at December 31, 2001.

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 by $47.2 million from $347.9 million at December 31, 2001 to $395.1 million at December 31, 2002. The growth is primarily due to purchases of agency, tax-free municipal and mortgage-backed securities. The purchases were partially offset by called bonds and mortgage-backed prepayments due to the lowest interest rates in over forty years.

Table 3 — Investment Securities

The following table shows the carrying amount of investment securities as of the dates indicated. Held-to-maturity and available-for-sale portfolios are combined.



	December 31,

	2002		2001		2000

U.S. Treasury, government corporations and agencies	$	114,597	$	90,823	$	131,344
State and political subdivisions		71,248		49,638		39,346
Mortgage-backed securities		139,849		152,159		122,601
Other		69,385		55,238		55,135

Total	$	395,079	$	347,858	$	348,426

Table 4 — Investment Securities (Yields)

The following table shows the maturity distribution and weighted average yields of the investment securities for the periods indicated. The weighted average yield is calculated by dividing income, which has not been tax equated on tax-exempt obligations, within each maturity range by the outstanding amount of the related investment. Held-to-maturity and available-for-sale portfolios are combined.



	December 31,

	2002		2002			2001		2001			2000		2000
	Amount		Yield			Amount		Yield			Amount		Yield

1 Year or less	$	29,754		4.16	%	$	16,180		4.71	%	$	77,825		5.80	%
1 Year-5 Years		156,518		4.62	%		125,258		5.54	%		112,536		6.07	%
5 Years-10 Years		33,166		6.05	%		47,606		6.20	%		38,713		6.41	%
After 10 Years		175,641		5.61	%		158,814		6.22	%		119,352		6.42	%

Total	$	395,079		5.15	%	$	347,858		5.90	%	$	348,426		6.17	%

Loans

Total loans increased $27.1 million from $798.3 million at December 31, 2001 to $825.4 million at December 31, 2002. Commercial loans grew steadily through the year for an increase of $24.7 million. Consumer loans increased in the first quarter after loan promotion campaigns but then slowed as the year progressed to a decrease of $5.3 million for the year. Mortgage loans fluctuated throughout the year ending with net growth of $7.7 million.

Table 5 — Loan Portfolio

The following table presents the composition of the loan portfolio as of the dates indicated:



		December 31,

		2002		2001		2000		1999		1998

Commercial, financial and agricultural		$	271,719	$	254,032	$	221,101	$	212,656	$	171,699
Real estate — commercial			203,927		195,872		168,761		173,780		169,402
Real estate — construction			36,588		34,774		39,707		33,632		33,530
Real estate — mortgage			243,642		226,962		214,973		219,292		214,798
Loans to individuals			57,226		71,212		79,320		72,658		64,306
All other loans			12,281		15,495		15,425		10,591		7,117

	Total loans	$	825,383	$	798,347	$	739,287	$	722,609	$	660,852

Table 6 — Loan Maturities and Sensitivity to Changes in Interest Rates

The following table presents the maturity of the loan portfolio as of December 31, 2002:


	Due in One		Due in One		Due in Over
	Year or Less		to Five Years		Five Years		Total

Commercial, financial and agricultural	$	175,386	$	76,113	$	20,220	$	271,719
Real estate — construction		14,698		19,067		2,823		36,588

	$	190,084	$	95,180	$	23,043	$	308,307

Loans due after one year totaling $30.3 million have variable interest rates. The remaining $87.9 million in loans have fixed rates.

The commercial mortgages and Industrial Development Authority mortgages that are presently being written at both fixed and floating rates of interest include loans written for a three (3) or five (5) year term with a monthly payment based on a fifteen (15) year amortization schedule. At each three-year or five-year anniversary date of the mortgages, the interest rate is renegotiated and the term of the loan is extended for an additional three or five years. At each three-year or five-year anniversary date of the mortgages, the Bank also has the right to require payment in full. These are included in the “Due in One to Five Years” category on issue. The borrower has the right to prepay the loan at any time.

Asset Quality

Performance of the entire loan portfolio is reviewed on a regular basis by bank management and loan officers. A number of factors regarding the borrower, such as overall financial strength, collateral values, and repayment ability, are considered in deciding what actions should be taken when determining the collectibility of interest for accrual purposes.

When a loan, including a loan impaired under SFAS No. 114, is classified as nonaccrual, the accrual of interest on such a loan is discontinued. A loan is classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against other expense. Interest received on nonaccrual loans is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal.

Loans are usually restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Total cash basis, restructured and nonaccrual loans total $2.6 million at December 31, 2002 and $1.6 million at December 31, 2001 and $1.9 million at December 31, 2000 and consist mainly of commercial loans and real estate-related commercial loans. For the years ended December 31, 2002, 2001 and 2000, nonaccrual loans resulted in lost interest income of $0.2 million for each of the three years. The Corporation’s ratio of nonperforming assets to total loans was .32% as of December 31, 2002 and .20% as of December 31, 2001.

At December 31, 2002, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $2.5 million, all of which were on a nonaccrual basis. The related reserve for loan losses for those loans was $0.4 million. At December 31, 2001, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $1.4 million, all of which were on a nonaccrual basis. The related reserve for loan losses for those loans was $0.5 million.

At December 31, 2002, management is not aware of other potential problem loans that cause serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. In management’s evaluation of the loan portfolio risks, any significant future increases in nonperforming loans are dependent to a large extent on the economic environment, or specific industry problems.

At December 31, 2002 there were no concentrations of loans exceeding 10% of total loans other than disclosed in Table 5.

Table 7 — Nonaccrual, Past Due and Restructured Loans

The following table details the aggregate principal balance of loans classified as nonaccrual, past due and restructured:


		2002		2001		2000		1999		1998

Nonaccruing loans		$	2,639	$	1,617	$	1,865	$	2,285	$	3,424

Accruing loans 90 days or more past due:
Real estate loans
	Secured by 1-4 family dwellings		132		128		138		304		705
	Other real estate		—		—		—		—		14
Commercial and industrial loans			520		3		—		63		—
Loans to individuals			228		186		208		214		204

	Total accruing loans, 90 days or more past due		880		317		346		581		923

	Restructured loans, not included above		—		—		—		38		125

	Other real estate owned		—		—		—		45		393

Reserve For Loan Losses

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

The reserve for loan losses is determined through a monthly evaluation of reserve adequacy. Quarterly, this analysis takes into consideration the growth of the loan portfolio, the status of past-due loans, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in the charge-off activity. Non-accrual loans are evaluated individually. All other loans are evaluated as pools. Based on historical loss experience, loss factors are determined giving consideration to the areas noted in the first paragraph and applied to the pooled loan categories to develop the general or allocated portion of reserve. Loans are also reviewed for impairment based on discounted cash flows using the loans’ initial effective interest rate or the fair value of the collateral for certain collateral-dependent loans as provided under SFAS No. 114. Management also reviews the activity within the allowance to determine what actions, if any, should be taken to address differences between estimated and actual losses. Any of the above factors may cause the provision to fluctuate. The methodology for establishing the loan loss reserve has been enhanced to evaluate and support the range of loss factors produced (i.e. normalizing unusual influences, establishment of factor floors). The results of these changes in the methodology are immaterial.

The reserve for loan losses is made up of the allocated reserve and the unallocated portion. The following table summarizes the two categories for the periods indicated.



	December 31,

	2002		2001		2000

Allocated	$	9,246	$	8,920	$	8,630
Unallocated		1,272		1,374		1,578

Total	$	10,518	$	10,294	$	10,208

The $0.3 million increase in the allocated portion of the reserve for the year ended December 31, 2002 occurred as increased risk associated with the commercial loan portfolio more than offset lower risk identified for the retail loan portfolio. Commercial loan allocation increases were attributable to loan growth of $24.7 million together with a weakening of portfolio quality measures. Classified commercial loans outstanding experienced a year over year rise of $10.8 million. Retail loan allocations decreased due to a combination of reduced consumer loan volume, more favorable trends in recent historical loss experience and reserve methodology adjustments related to guaranteed student loans. The $0.1 million reduction in the unallocated position is a result of the enhancements noted above. Analysis of unallocated adequacy is based on a stress-testing model assessing loan grade migration as influenced by economic conditions and grading accuracy.

The $0.3 million increase in the allocated portion of the reserve for the year ended December 31, 2001 occurred due to higher reserves for growing loan volume and migration of credit risk assessment towards weaker loan grades. Total loans outstanding increased by 8.0% as moderate growth amongst retail portfolios was accompanied by significant commercial portfolio growth of 11.6%. As weakness in the economy became apparent in the latter part of the year, the proportion of credits with identified credit issues also increased. Classified loans, though still comparing favorably to historical benchmarks and peer experience, increased as a percent of total loans from 0.87% to 2.10%. The $0.2 million reduction in the unallocated reserve position was reflective of the above average credit quality and favorable level of non-performing loans experienced throughout the first three quarters of the year.

Management believes that both the allocated and unallocated portions of the reserve are maintained at a level that is adequate to absorb losses in the loan portfolio.

As the accompanying table indicates, the amount of loan loss provision charged to expense for 2002 was $1.3 million compared to $0.8 million in 2001 and $0.2 million in 2000.

Table 8 — Summary of Loan Loss Experience


		2002		2001		2000		1999		1998

Average amount of loans outstanding		$	796,575	$	751,030	$	707,084	$	674,798	$	635,939
Loan loss reserve at beginning of period		$	10,294	$	10,208	$	10,704	$	10,019	$	9,751
Charge-offs:
	Real estate loans		54		12		156		348		575
	Commercial and industrial loans		1,185		602		794		1,105		370
	Loans to individuals		535		603		423		304		427

Total charge-offs:			1,774		1,217		1,373		1,757		1,372

Recoveries:
	Real estate loans		367		143		98		857		324
	Commercial and industrial loans		182		223		463		440		256
	Loans to individuals		146		174		111		93		102

Total recoveries:			695		540		672		1,390		682

Net charge-offs:			1,079		677		701		367		690
Additions to loan loss reserve			1,303		763		205		1,052		958

Loan loss reserve at end of period		$	10,518	$	10,294	$	10,208	$	10,704	$	10,019

Loan type as percentage of loans and amount in reserve by category:


			2002				2001				2000				1999				1998

Real estate loans		58.7	$	3,777		57.3	$	3,515		57.3	$	2,370		59.0	$	2,571		63.2	$	2,358
Commercial and industrial loans		32.9		4,344		31.8		3,939		29.9		4,848		29.4		5,356		26.0		3,575
Loans to individuals		6.9		1,114		8.9		1,455		10.7		1,401		10.1		848		9.7		1,049
All other loans		1.5		11		2.0		11		2.1		11		1.5		11		1.1		11
Unallocated portion				1,272				1,374				1,578				1,918				3,026

	Total		$	10,518			$	10,294			$	10,208			$	10,704			$	10,019

Ratio of net charge-offs versus average loans				0.14	%			0.09	%			0.10	%			0.05	%			0.11	%

Total cash-basis and nonaccrual loans of $2,639 at December 31, 2002, were generally comprised of $135 in residential real estate loans, $1,350 in commercial real estate loans and $1,154 in commercial and other loans.

Goodwill and Other Intangible Assets

On January 1, 2002, the Corporation adopted Statement No. 141, “Business Combinations” (SFAS No. 141), and Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). In accordance with the adoption provisions of SFAS No. 142, the Corporation has completed the transitional and annual impairment tests and no impairment was noted. The Corporation will be required to perform goodwill impairment tests at least on an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

The Corporation has a covenant not to compete, intangible assets due to branch acquisitions and mortgage servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life. The amortization for these intangible assets was $0.3 million for the year ended December 31, 2002, $0.3 million for the year ended December 31, 2001 and $0.4 million for the year ended December 31, 2000. The Corporation also has costs in excess of net assets acquired, which are deemed to be an indefinite intangible asset and will not be amortized.

The following table reflects the results of operations as if SFAS No. 142 had been adopted as of January 1, 2001:



		For the Twelve Months
		Ended December 31

		2002		2001

Net income, as reported		$	21,106	$	19,210
Add back: Goodwill amortization, net of income tax benefit of $22			—		467

Adjusted net income		$	21,106	$	19,677
Per common share data:
Net income per share:
	Basic as reported	$	2.45	$	2.17
	Goodwill amortization		—		0.05
	Adjusted basic earnings per share	$	2.45	$	2.22

	Diluted as reported	$	2.42	$	2.16
	Goodwill amortization		—		0.05
	Adjusted diluted earnings per share	$	2.42	$	2.21

Deposits

Total deposits grew from $998.1 million at December 31, 2001 to $1,043.1 million at December 31, 2002, an increase of $45.0 million or 4.5%. Deposit growth was due mainly to an increase in demand deposit accounts, savings accounts, interest checking and certain types of money market accounts. Savings accounts’ growth of $25.0 million was the majority of the increase. Univest and its subsidiaries do not have any foreign offices or foreign deposits.

Table 9 — Deposits

The following table summarizes the average amount of deposits for the years indicated:


		2002		2001		2000

A. Average:	Noninterest-bearing demand deposits	$	159,919	$	152,716	$	150,911
	Interest checking		113,695		99,644		90,785
	Money Market savings		211,253		208,268		188,394
	Saving deposits		155,690		134,073		134,450
	Time deposits		373,387		374,417		370,239

	Total	$	1,013,944	$	969,118	$	934,779

The following table summarizes the maturities of certificates of deposit and other time deposits with balances of $100 or more:


		Due 3 Months		Due 3 -		Due 6 -		Due Over
		or Less		6 Months		12 Months		12 Months

B. Year-end balance:	Certificates of deposit	$	11,074	$	6,758	$	14,546	$	7,140
	Other time deposits		7,652		6,712		305		478

Borrowings

Long-term debt increased $7.0 million from $24.1 million at December 31, 2001 to $31.1 million at December 31, 2002.

Table 10 — Short Term Borrowings

The following table details key information pertaining to securities sold under agreement to repurchase on a overnight basis for the periods indicated:


	2002			2001			2000

Balance at December 31	$	88,347		$	73,745		$	67,370
Weighted average interest rate at year end		1.0	%		1.5	%		3.7	%
Maximum amount outstanding at any month’s end	$	102,993		$	91,986		$	71,830
Average amount outstanding during the year	$	82,219		$	75,386		$	64,525
Weighted average interest rate during the year		1.3	%		2.9	%		3.5	%

Shareholders’ Equity

Shareholders’ equity increased $11.9 million or 9.8% to $133.5 million at December 31, 2002 compared to $121.6 million at December 31, 2001. Treasury stock increased to $39.8 million from $33.1 million at December 31, 2001. On December 31, 2001, the Board of Directors approved the continuation of the Buyback Program for another two years. This approval allows the Corporation to buy back up to 5% or 351,047 shares of its outstanding common stock in open market or negotiated transactions. The net number of shares purchased since December 31, 2001 is 181,343.

Subsequent to December 31, 2002, the Board of Directors announced a five for four stock split in the form of a dividend. All share and per share data has been restated to give effect of the dividend.

The accumulated other comprehensive income, related to debt securities, of $6.9 million, net of taxes, has been included in shareholders’ equity as of December 31, 2002. At December 31, 2001, the accumulated other comprehensive income, related to debt securities, included in shareholders’ equity was $2.8 million, net of taxes.

The accumulated other comprehensive income, related to interest-rate swaps, of $0.3 million, net of taxes, has been included in shareholders’ equity as of December 31, 2002 and December 31, 2001.

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 I and Tier II. Tier I is composed of total shareholders’ equity, excluding the adjustment for the unrealized securities gains and losses, and also excluding any goodwill. Tier II includes the applicable portion of the reserve for loan losses. Minimum required total risk-based capital is 8.0%. Under the requirements, Univest has Tier I capital ratios of 12.4% and total risk-based capital ratios of 13.6% at both December 31, 2002 and 2001. These ratios place Univest in the “well-capitalized” category under regulatory standards.

On January 10, 2003, Univest Corporation announced the signing of a definitive agreement for First County Bank to merge with and into Univest National Bank in a cash transaction for approximately $29.5 million. The transaction is expected to close in the second quarter of 2003. In the absence of any addition of Tier I or Tier II capital, the Total Capital to Risk-Weighted-Assets and Tier 1 to Total Risk-Weighted-Assets ratios, of Univest Corporation and Univest National Bank, are anticipated to decline by more than 3 percentage points and the Tier I Capital to Average Assets ratio is anticipated to decline by more than 2 percentage points as a result of this merger. Management believes that all these ratios will remain above levels considered “well-capitalized” under the current regulatory framework for prompt corrective action. Management continues to evaluate its alternatives to enhance the Bank’s capital position.

Critical Accounting Policies

Management, in order to prepare Univest’s financial statements in conformity with generally accepted accounting principles, is required to make estimates and assumptions that effect the amounts reported in the Corporation’s financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially effect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified reserves for loan losses, derivatives, intangible assets, investment securities, mortgage servicing rights and benefit plans as its critical accounting policies.

Reserves for loan losses are provided using techniques that specifically identify losses on impaired loans, estimate losses on pools of homogeneous loans, and estimate the amount of unallocated reserve necessary to account for losses that are present in the loan portfolio but not yet currently identifiable. The adequacies of these reserves are sensitive to changes in current economic conditions that may affect the ability of borrowers to make contractual payments as well as the value of the collateral committed to secure such payments. Rapid or sustained downturns in the economy may require increases in reserves that may negatively impact the corporation’s results of operation and statements of financial condition in the periods requiring additional reserves.

The Corporation accounts for its interest-rate swap contracts, in compliance with SFAS No. 133, by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows of certain prime-rate-based loans held by the bank. When the effectiveness of the hedge can be established and adequately documented, the change in market value of the swap is recorded on the balance sheet of the company but only the accrued payments due under the contract for the current period are passed through the statement of operations. Should the company be unable to document the effectiveness of all or part of the cash flow hedge, the change in market value of the ineffective part of the instrument will need to be marked-to-market through the statement of operations, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods. At December 31, 2002, Univest’s interest-rate swap hedges were considered to be effective.

Intangible assets have been recorded on the books of the Corporation in connection with its acquisitions of Pennview Savings Bank, Univest Investments, and Univest Insurance. These assets, both identifiable and unidentifiable, are subject to tests for impairment. Changes in the useful life or economic value of acquired assets may require a reduction in the asset value carried on the financial statements of the Corporation and a related change in the statement of operations. Such changes in asset value could result from a change in market demand for the products or services offered by an acquired business or by reductions in the expected profit margins that can be obtained through the future delivery of the acquired product or service line. SFAS No. 142, which took effect January 1, 2002, defines the methods that are acceptable for determining whether intangible asset values are sustainable.

Univest designates its investment securities as held-to-maturity, available-for-sale or trading in accordance with SFAS No. 115. Each of these designations affords different treatment in the statement of operations and statement of financial condition for market value changes effecting securities that are otherwise identical. Should evidence emerge that indicates that management’s intent or ability to manage the securities as originally asserted is not supportable, securities in the held-to-maturity or available-for-sale designations may be re-categorized so that either statement of financial position or statement of operations adjustments may be required.

Univest accounts for mortgage servicing rights for mortgages it originated but subsequently sold in accordance with SFAS No. 140. As such, the value of the rights is booked as income when the corresponding mortgages are sold. The income booked at sale is the estimated present value of the cash flows that will be received from servicing the loans over the entire future term. The term of a servicing right can be reasonably estimated using prepayment assumptions of comparable assets

priced in the secondary market. As mortgage rates being offered to the public decrease, the life of loan servicing rights tends to shorten, as borrowers have increased incentive to refinance. Shortened loan servicing lives require a change in the value of the servicing rights that have already been recorded to be marked down in the statement of operations of the servicing company. This may cause a material change in reported operations for the Corporation depending on the size of the servicing portfolio and the degree of change in the prepayment speed of the type and coupon of loans being serviced.

The Corporation has a retirement plan and supplemental retirement plans that it provides as a benefit to employees and former employees. Determining the adequacy of the funding of these plans may require estimates of future salary rate increases, of long-term rates of investment return, and the use of an appropriate discount rate for the obligation. Changes in these estimates and assumptions due to changes in the economic environment or financial markets may result in material changes in the Corporation’s report of operation or statement of financial condition.

Readers of the Corporation’s financial statements should be aware that the estimates and assumptions used in the Corporation’s current financial statements may need to be updated in future financial presentations for changes in circumstances, business or economic conditions in order to fairly represent the condition of the Corporation at that time.

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.

Univest uses both GAP and simulation techniques to quantify its exposure to interest rate risk. The Corporation uses GAP techniques to identify and monitor long term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year horizon. The simulation uses existing portfolio rate and repricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities.

The Corporation is permitted to use interest-rate swap agreements that convert a portion of its floating rate commercial loans to a fixed rate basis. In these swaps, the Corporation agrees to exchange, at specified intervals, the difference between fixed and floating interest rates calculated on an agreed upon notional principal amount. Interest-rate swaps in which the Corporation pays a floating rate and receives a fixed rate are used to reduce the impact of changes in interest rates on the Corporation’s net interest income.

At December 31, 2002, $30.0 million in notional interest-rate swaps were outstanding. The contracts entered into by the Corporation expire as follows: $10.0 million in notional principal amount in the second quarter 2003, $10.0 million in the third quarter 2003 and $10.0 million in the first quarter 2004. The impact of the interest-rate swaps on net interest income for the year ended December 31, 2002 was a positive $0.7 million and for the year ended December 31, 2001 was a positive $0.4 million.

The Corporation’s current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. As of December 31, 2002 and December 31, 2001, the market value of interest-rate swaps in a favorable value position was $0.5 million. There were no interest-rate swaps with the market value in an unfavorable position at either date. Credit

risk exists when the counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement.

Liquidity

Univest, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans and deposit withdrawals. Univest manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs.

Core deposits and cash management repurchase 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 of Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, thrifts, mutual funds, security dealers and others.

Univest supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the banks investment portfolio and are at current money market mutual fund rates. This funding source is subject to changes in the asset allocations of the trust accounts.

Univest, through its Banks, has short-term and long-term credit facilities with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $268.4 million. At December 31, 2002, Univest’s outstanding borrowings under the FHLB credit facilities totaled $31.1 million. The maximum borrowing capacity changes as a function of the Banks’ qualifying collateral assets and the amount of funds received may be reduced by additional required purchases of FHLB stock.

The Corporation maintains federal fund lines with several correspondent banks totaling $70 million. At December 31, 2002, 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.

Univest, through Union National 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 December 31, 2002, the Corporation had no outstanding borrowings under this line.

On January 10, 2003 Univest Corporation announced the signing of a definitive agreement for First County Bank to merge with and into Univest National Bank in a cash transaction for approximately $29.5 million. The transaction is expected to close in the second quarter of 2003. Management believes that the liquidity position of Univest National Bank will remain adequate following the transaction.

Credit Risk

Extending credit exposes Univest to credit risk, which is the risk that the principal balance of a loan and any related interest will not be collected due to the inability of the borrower to repay the loan. Univest manages credit risk in the loan portfolio through adherence to consistent standards, guidelines and limitations established by the Board of Directors. Written loan policies establish underwriting standards, lending limits and other standards or limits as deemed necessary and prudent.

The loan review department conducts ongoing, independent reviews of the lending process to ensure adherence to established policies and procedures, monitors compliance with applicable laws and regulations, provides objective measurement of the risk inherent in the loan portfolio, and ensures that proper documentation exists.

Univest focuses on both assessing the borrower’s capacity and willingness to repay and on obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Eastern Pennsylvania market area and are secured by developed real estate at conservative loan-to-value ratios and often by a guarantee of the borrowers. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that significant credit concentrations by borrower or industry do not exist.

Credit risk in the direct consumer loan portfolio is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values. In the home equity loan portfolio, combined loan-to-value ratios are generally limited to 80%. Other credit considerations may warrant higher combined loan-to-value ratios for approved loans.

Univest originates fixed-rate and adjustable-rate residential mortgage loans that are secured by the underlying 1- to 4-family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more that 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

Univest closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts begin after a loan payment is missed, by attempting to contact all borrowers. If collection attempts fail, Univest will proceed to gain control of any and all collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all monies owed to Univest. Univest monitors delinquency trends and past due reports are submitted to the Board of Directors.

Contractual Obligations and Commercial Commitments

Univest 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 Univest to make cash payments over time as detailed in the table below. For further information regarding Univest’s contractual obligations, refer to Footnote 14 of the Consolidated Financial Statements, herein.

Contractual Obligations



			Payments Due by Period

			Due in One		Due in One		Due in Four		Due in Over
	Total		Year or Less		to Three Years		to Five Years		Five Years

Long-term debt	$	31,075	$	4,000	$	3,000	$	75	$	24,000
Securities sold under agreement to repurchase		88,347		88,347		—		—		—
Other short-term borrowings		1,155		1,155		—		—		—
Certificates of deposit		366,927		285,117		51,364		30,446		—
Operating leases		3,273		861		1,141		528		743

Total contractual cash obligations	$	490,777	$	379,480	$	55,505	$	31,049	$	24,743

Univest 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 or commercial letters of credit, and interest rate swaps. 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. For interest rate swaps, the contract or notional amounts do not represent exposure to credit loss. Univest controls the credit risk of its interest rate swaps through credit approvals, limits and monitoring procedures. Unless noted otherwise, Univest 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 table below. For further information regarding Univest’s commitments, refer to Footnote 14 of the Consolidated Financial Statements, herein.

Other Commercial Commitments


			Due in One		Due in One		Due in Four		Due in Over
	Total		Year or Less		to Three Years		to Five Years		Five Years

Commitments to extend credit	$	320,453	$	212,798	$	63,820	$	15,039	$	28,796
Standby and commercial letters of credit		18,572		15,446		1,571		1,555		—

Total commercial commitments	$	339,025	$	228,244	$	65,391	$	16,594	$	28,796

Recent Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Corporation adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have any impact on the Corporation’s financial position and results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (SFAS No. 145), which updates, clarifies and simplifies existing accounting pronouncements. In part, this statement rescinds SFAS No. 4 “Reporting Gains and Losses for Extinguishment of Debt”. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The Corporation adopted SFAS No. 145 on January 1, 2003 and the adoption of SFAS No. 145 did not have any impact on the Corporation’s financial position and results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The provisions of SFAS No. 146 will be applied prospectively after the adoption date.

In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147, “Acquisitions of Certain Financial Institutions an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9” (SFAS No. 147) which removed financial institutions from the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 and SFAS No. 142. As a result, the requirement to recognize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions of financial institutions. Additionally, SFAS No. 147 amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. The provisions of SFAS No. 147 are effective October 1, 2002. The adoption of SFAS No. 147 did not have any impact on the Corporation’s financial position and results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS No. 148). SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for their employee stock-based awards using the fair value method. The disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did not have any impact on the Corporation’s financial position and results of operations.


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*

When used or incorporated by reference in disclosure documents, the words “anticipate,” “estimate,” “expect,” “project,” “target,” “goal” and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the document. The Corporation expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Corporation’s expectations with regard to any change in events, conditions or circumstances on which any such statement is based.

Market risk is the risk of loss from adverse changes in market prices and rates. In the course of its lending and deposit taking activities, Univest is subject to changes in the economic value and/or earnings potential of these assets and liabilities due to changes in interest rates. Univest’s Asset/ Liability Management Committee (ALMC) manages interest rate risk in a manner so as to provide adequate and predictable earnings. This is accomplished through the establishment of policy limits on maximum risk exposures, as well as the regular and timely monitoring of reports designed to quantify risk and return levels.

Univest uses both GAP and simulation techniques to quantify its exposure to interest rate risk. The Corporation uses GAP techniques to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest

margin over a 1-year horizon. The simulation uses existing portfolio rate and repricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is permitted to use interest-rate swaps and interest-rate caps/floors with indices that correlate to on-balance sheet instruments, to modify its indicated net interest sensitivity to levels deemed to be appropriate based on the Corporation’s current economic outlook. The effect of the interest-rate swaps that the bank uses to reduce its earnings volatility due to rate risk is also included in the results of the simulation.

At December 31, 2002, the simulation, based upon forward-looking assumptions, projects that Univest’s greatest interest margin exposure to interest-rate risk would occur if interest rates decline from present levels. Given the assumptions, a 200 basis point parallel shift in the yield curve applied on a ramp-down basis would cause Univest’s interest margin, over a 1-year horizon, to be approximately 2.00% less than it would be if market rates would remain unchanged. At December 31, 2001, the simulation projected that Univest’s greatest interest margin exposure to interest-rate risk would occur if interest rates had risen. A 200 basis point parallel shift in the yield curve applied on a ramp-up basis would cause Univest’s interest margin, over a 1-year horizon, to be approximately 0.60% less than it would be if market rates would remain unchanged. Policy limits have been established which allow a tolerance for no more than approximately a 3.10% negative impact to the interest margin resulting from a 200 basis point parallel yield curve shift over a forward looking 12-month period. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Net Interest Income” and “Asset/ Liability Management, Liquidity” and the table below:

Table 13 — Interest Sensitivity Analysis

Interest Sensitivity Analysis at December 31, 2002 (Dollars in thousands)


		Within			1-5		Over
		1 Year			Years		5 Years

Rate Sensitive Interest Earning Assets
	Federal funds sold	$	3,900		$	—	$	—
	Investment securities		120,833			206,391		68,596
	Loans		429,417			342,419		53,542
	Hedging instruments		(10,000	)		10,000		—

			544,150			558,810		122,138
Rate Sensitive Liabilities
	Interest bearing deposits		449,484			417,916		98
	Borrowed funds		45,292			63,483		11,802
	Net noninterest-bearing funds(a)		—			—		237,023

			494,776			481,399		248,923
Excess interest-earning assets (liabilities)			49,374			77,411		(126,785	)
Cumulative excess interest-earning assets (liabilities)		$	49,374		$	126,785	$	—

Notes to interest sensitivity analysis:

(a) Net noninterest-bearing funds is the sum of non-interest bearing liabilities and shareholders’ equity minus non-interest earning assets.


Item 8.	*Financial Statements and Supplementary Data*

The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the following pages:


Report of Independent Auditors		31
Consolidated Balance Sheets		32
Consolidated Statements of Income		33
Consolidated Statements of Changes in Shareholders’ Equity		34
Consolidated Statements of Cash Flows		35
Notes to Consolidated Financial Statements		36

Report of Independent Auditors

Board of Directors and Shareholders

Univest Corporation of Pennsylvania

We have audited the accompanying consolidated balance sheets of Univest Corporation of Pennsylvania as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Univest Corporation of Pennsylvania at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the Consolidated Financial Statements, in 2002, Univest Corporation of Pennsylvania changed its method of accounting for its goodwill.

ERNST & YOUNG LLP

Philadelphia, Pennsylvania

January 22, 2003

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED BALANCE SHEETS



			December 31,

			2002			2001


			(In thousands,
			except share data)
ASSETS
Cash and due from banks			$	40,879		$	39,107
Interest-bearing deposits with other banks				741			15,731
Investment securities held-to-maturity (market value $71,498 and $112,689 at December 31, 2002 and 2001, respectively)				68,871			109,805
Investment securities available-for-sale				326,208			238,053
Federal funds sold and other short-term investments				3,900			64
Loans				825,378			798,329
	Less: Reserve for loan losses			(10,518	)		(10,294	)

	Net loans			814,860			788,035

Premises and equipment, net				16,036			16,025
Accrued interest and other assets				54,370			53,893

		Total assets	$	1,325,865		$	1,260,713

LIABILITIES
Demand deposits, noninterest bearing			$	175,608		$	166,254
Demand deposits, interest bearing				337,169			322,245
Savings deposits				163,403			139,449
Time deposits				366,926			370,189

		Total deposits		1,043,106			998,137

Securities sold under agreements to repurchase				88,347			73,745
Other short-term borrowings				1,155			17,855
Accrued expenses and other liabilities				28,729			25,321
Long-term debt				31,075			24,075

		Total liabilities		1,192,412			1,139,133

SHAREHOLDERS’ EQUITY
Common stock, $5 par value; 24,000,000 shares authorized at December 31, 2002 and 2001 and 9,917,397 shares issued at December 31, 2002 and 2001 and 8,549,502 and 8,730,845 shares outstanding at December 31, 2002 and 2001, respectively*				49,587			41,037
Additional paid-in capital				20,912			20,912
Retained earnings				95,550			89,688
Accumulated other comprehensive income				7,240			3,070
Treasury stock, at cost; 1,367,895 shares and 1,186,552 shares at December 31, 2002 and 2001, respectively				(39,836	)		(33,127	)

	Total shareholders’ equity			133,453			121,580

	Total liabilities and shareholders’ equity		$	1,325,865		$	1,260,713

See accompanying notes to consolidated financial statements.

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF INCOME



			Year Ended December 31,

			2002		2001		2000


			(In thousands, except share data)
Interest income
	Interest and fees on loans:
		Taxable	$	50,123	$	55,084	$	55,808
		Exempt from federal income taxes		3,181		3,319		3,185

	Total interest and fees on loans			53,304		58,403		58,993
	Interest and dividends on investment securities:
		U.S. Government obligations		4,544		5,233		7,333
		Obligations of state and political subdivisions		2,752		1,938		1,339
		Other securities		12,160		12,543		10,255
	Interest on time deposits with other banks			99		345		285
	Interest on federal funds sold and term federal funds			181		746		1,672

		Total interest income		73,040		79,208		79,877

Interest expense
	Interest on demand deposits			3,844		7,873		9,900
	Interest on savings deposits			2,148		2,555		2,660
	Interest on time deposits			17,147		20,348		20,377
	Interest on long-term debt			1,504		1,429		1,171
	Interest — all other			1,171		2,236		2,351

		Total interest expense		25,814		34,441		36,459

Net interest income				47,226		44,767		43,418
Provision for loan losses				1,303		763		205

Net interest income after provision for loan losses				45,923		44,004		43,213

Noninterest income
	Trust			4,181		4,260		4,404
	Service charges on deposit accounts			5,532		5,215		4,935
	Commission income			4,449		2,596		2,776
	Net gains on sales of securities			885		150		1
	Net gains on sales of mortgages			169		83		14
	Other			5,377		5,662		4,611

		Total other income		20,593		17,966		16,741

Noninterest expense
	Salaries and benefits			21,944		19,961		20,887
	Net occupancy			2,978		2,734		2,652
	Equipment			2,281		2,214		2,556
	Other			10,587		10,880		9,720

		Total other expenses		37,790		35,789		35,815

Income before income taxes				28,726		26,181		24,139
Applicable income taxes				7,620		6,971		6,791

Net income			$	21,106	$	19,210	$	17,348

Net income per share:*
	Basic		$	2.45	$	2.17	$	1.91

	Diluted		$	2.42	$	2.16	$	1.90

See accompanying notes to consolidated financial statements.

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


			Accumulated
			Other					Additional
			Comprehensive			Common		Paid-in		Retained			Treasury
			Income			Stock		Capital		Earnings			Stock			Total


			(In thousands, except share data)
Balance at December 31, 1999			$	(2,672	)	$	39,272	$	14,908	$	73,409		$	(22,166	)	$	102,751

Comprehensive Income
	Net Income for 2000										17,348						17,348
	Other comprehensive income, net of income taxes of $1,927
		Unrealized gains and (losses) on investment securities available-for-sale		3,520													3,520

Total comprehensive income																	20,868

	Cash dividends declared* ($0.586 per share)										(5,420	)					(5,420	)
	5% stock dividend paid May 1, 2000						1,765		6,004		(7,769	)
	Stock issued under dividend reinvestment and employee stock purchase plans (57,550 shares)										(27	)		1,266			1,239
	Exercise of stock options (4,491 shares)										(43	)		109			66
	Acquisition of treasury stock (192,921 shares)													(4,264	)		(4,264	)

Balance at December 31, 2000				848			41,037		20,912		77,498			(25,055	)		115,240

Comprehensive Income
	Net Income for 2001										19,210						19,210
	Other comprehensive income, net of income taxes of $1,197
		Unrealized gains and (losses) on investment securities available-for-sale		1,919													1,919
		Unrealized gains and (losses) on swaps		303													303

Total comprehensive income																	21,432

	Cash dividends declared* ($0.656 per share)										(5,843	)					(5,843	)
	Stock issued under dividend reinvestment and employee stock purchase plans (44,060 shares)										(16	)		1,221			1,205
	Exercise of stock options (67,628 shares)										(1,161	)		2,213			1,052
	Acquisition of treasury stock (404,302 shares)													(11,506	)		(11,506	)

Balance at December 31, 2001				3,070			41,037		20,912		89,688			(33,127	)		121,580

Comprehensive Income
	Net Income for 2002										21,106						21,106
	Other comprehensive income, net of income taxes of $2,228
		Unrealized gains and (losses) on investment securities available-for-sale		4,147													4,147
		Unrealized gains and (losses) on swaps		23													23

Total comprehensive income																	25,276

	Five for four stock split payable on February 28, 2003						8,550				(8,550	)
	*Cash dividends declared ($0.736 per share)**										(6,354	)					(6,354	)
	Stock issued under dividend reinvestment and employee stock purchase plans (36,641 shares)										(16	)		1,365			1,349
	Exercise of stock options (29,780 shares)										(324	)		1,116			792
	Acquisition of treasury stock (247,768 shares)													(9,190	)		(9,190	)

Balance at December 31, 2002			$	7,240		$	49,587	$	20,912	$	95,550		$	(39,836	)	$	133,453

See accompanying notes to consolidated financial statements.

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CASH FLOWS



				Year Ended December 31,

				2002			2001			2000


				(In thousands)
Cash flows from operating activities
	Net income			$	21,106		$	19,210		$	17,348
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses in excess of (less than) net charge-offs			224			86			(496	)
		Depreciation of premises and equipment			2,057			2,495			2,284
		Discount accretion on investment securities			(154	)		(764	)		(338	)
		Deferred income tax (benefit)			247			(757	)		(458	)
		Realized gains on investment securities			(885	)		(150	)		(1	)
		Realized gains on sales of mortgages			(169	)		(83	)		(14	)
		Increase (decrease) in net deferred loan fees			132			479			(315	)
		(Increase) decrease in interest receivable and other assets			(442	)		(836	)		60
		Increase in accrued expenses and other liabilities			843			1,814			3,409

			Net cash provided by operating activities		22,959			21,494			21,479
Cash flows from investing activities
	Proceeds from maturing securities held-to-maturity				64,634			163,329			61,707
	Proceeds from maturing securities available-for-sale				78,358			111,274			20,114
	Proceeds from sales of securities available-for-sale				27,890			15,893			9,041
	Purchases of investment securities held-to-maturity				(23,535	)		(114,198	)		(82,671	)
	Purchases of investment securities available-for-sale				(187,165	)		(171,862	)		(38,956	)
	Decrease (increase) in interest-bearing deposits				14,990			(10,600	)		(1,292	)
	Premium paid to purchase bank-owned life insurance				—			—			(8,000	)
	Net (increase) decrease in federal funds sold and other short-term investments				(3,836	)		16,126			(14,390	)
	Proceeds from sales of mortgages				12,509			9,016			2,362
	Net increase in loans				(39,521	)		(68,513	)		(18,787	)
	Capital expenditures				(2,068	)		(2,982	)		(2,414	)
	Other investing activities				—			(2,700	)		(200	)

			Net cash used in investing activities		(57,744	)		(55,217	)		(73,486	)
Cash flows from financing activities
	Net increase in deposits				44,969			26,213			61,249
	Net (decrease) increase in short-term borrowings				(2,098	)		23,101			(3,599	)
	Repayment of long-term debt				—			(7,000	)		(2,000	)
	Proceeds from long-term debt				7,000			5,000			10,000
	Purchases of treasury stock				(9,190	)		(11,506	)		(4,264	)
	Stock issued under dividend reinvestment and employee stock purchase plans				1,349			1,205			1,239
	Proceeds from exercise of stock options				792			1,052			66
	Cash dividends				(6,265	)		(5,752	)		(5,233	)

			Net cash provided by financing activities		36,557			32,313			57,458

	Net increase (decrease) in cash and due from banks				1,772			(1,410	)		5,451
	Cash and due from banks at beginning of year				39,107			40,517			35,066

	Cash and due from banks at end of year			$	40,879		$	39,107		$	40,517

Supplemental disclosures of cash flow information
	Cash paid during the year for:
		Interest		$	26,615		$	34,893		$	34,497
		Income taxes		$	7,724		$	7,678		$	7,077

See accompanying notes to consolidated financial statements.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements

(All dollar amounts presented are in thousands, except per share data)


Note 1.	Summary of Significant Accounting Policies


	*Organization*

Univest Corporation of Pennsylvania (the Corporation) through its wholly owned subsidiaries, Union National Bank and Trust Company (Union) and Pennview Savings Bank (Pennview), is engaged in domestic commercial and retail banking services and provides a full range of banking and trust services to its customers. Delview, a subsidiary of Pennview, provides financial planning, investment management, insurance products and brokerage services. Union and Pennview serve the Montgomery and Bucks Counties of Pennsylvania through 30 banking offices and provide banking and trust services to the residents and employees of 12 retirement communities, a work site office at Moyer Packing Company, which performs a payroll check cashing service and an express banking center located in the Montgomery Mall.


	*Principles of Consolidation*


	*Reclassification*

Certain prior year amounts have been reclassified to conform to the current year presentation.


	*Use of Estimates*

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.


	*Interest-bearing Deposits with Other Banks*

Interest-bearing deposits with other banks consist of deposit accounts with other financial institutions generally having maturities of three months or less.


	*Investment Securities*

Securities are classified as investment securities held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Securities purchased with the intention of recognizing short-term profits are placed in the trading account and are carried at market value. Securities not classified as held-to-maturity or trading are designated securities available-for-sale and carried at fair value with unrealized gains and losses reflected in accumulated other comprehensive income, net of estimated income taxes. The net unrealized gain on available-for-sale securities included in accumulated other comprehensive income was $6,915 and $2,767 at December 31, 2002 and December 31, 2001, respectively.

Gains and losses on sales of securities are computed on a specific security basis.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


	*Loans*

Loans are stated at the principal amount less net deferred loan fees and unearned discount. Interest income on commercial, consumer, and mortgage loans is recorded on the outstanding balance method, using actual interest rates applied to daily principal balances. Accrual of interest income on loans ceases when collectibility of interest and/or principal is questionable. If it is determined that the collection of interest previously accrued is uncertain, such accrual is reversed and charged to current earnings. Thereafter, income is only recognized as payments are received for loans on which there is no uncertainty as to the collectibility of principal. Loans are considered past due based upon failure to comply with contractual terms.


	*Loan Fees*

Fees collected upon loan origination and certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as yield adjustments. Upon prepayment or other disposition of the underlying loans before their contractual maturities, any associated unamortized fees or costs are recognized.


	*Derivative Financial Instruments*

The Corporation uses interest-rate swap agreements to manage the interest-rate risk of its floating-rate loan portfolio. Univest accounts for its interest-rate swap contracts in compliance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows of certain prime-rate-based loans held by the bank. When the effectiveness of the hedge can be established and adequately documented at the inception of the derivative contract, the change in market value of the swap is recorded on the balance sheet of the Corporation but only the accrued payments due under the contract for the current period are passed through the statement of operations. To ensure effectiveness, Univest performs an analysis to ensure that changes in fair value or cash flow of the derivative correlates to the equivalent changes in the loans being hedged. Related fees, if any, are deferred and amortized on a straight-line basis over the life of the swap, which corresponds to the estimated life of the asset being hedged. Interest-rate differentials to be paid or received as a result of interest-rate swap agreements are accrued and recognized as an adjustment of interest income related to the designated floating-rate loans. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. Should the Corporation be unable to document the effectiveness of all or part of the cash flow hedge, the change in market value of the ineffective part of the instrument will need to be marked-to-market through the statement of operations, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods.


	*Reserve for Loan Losses*

The reserve for loan losses is based on management’s evaluation of the loan portfolio under current economic conditions and such other factors, which deserve recognition in estimating loan losses. This evaluation is inherently subjective as it requires estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Additions to the reserve arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge-offs reduce the reserve. Loans are charged off when there has been permanent impairment or when in the opinion of management the full amount of the loan, in the case of non-collateral dependent borrowings, will not be realized. Certain impaired loans are reported at the present value of expected future cash

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

flows using the loan’s initial effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

The reserve for loan losses consists of an allocated reserve and an unallocated reserve. The allocated reserve is comprised of reserves established on specific loans, and class reserves based on historical loan loss experience, current trends, and management assessments. The unallocated reserve is based on both general economic conditions and other risk factors in the Corporation’s individual markets and portfolios, and is to account for a level of imprecision in management’s estimation process.

The specific reserve element is based on a regular analysis of impaired commercial and real estate loans. The specific reserve established for these loans is based on a careful analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.

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

The Corporation maintains an unallocated reserve to recognize the existence of credit exposures that are within the loan portfolio although currently are undetected. There are many factors considered such as the inherent delay in obtaining information regarding a customer’s financial condition or changes in their business condition, the judgmental nature of loan evaluations, the delay in the interpretation of economic trends and the judgmental nature of collateral assessments.

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


	*Premises and Equipment*

Land is stated at cost, and bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method and charged to operating expenses over the estimated useful lives of the assets (bank premises and improvements — average life 25 years; furniture and equipment — average life 10 years).


	*Other Real Estate Owned*

Other real estate owned represents properties acquired through customers’ loan defaults and is included in accrued interest and other assets. The real estate is stated at an amount equal to the loan balance prior to foreclosure, plus costs incurred for improvements to the property, but no more than the fair market value of the property, less estimated costs to sell.


	*Stock Options*

The Corporation grants stock options to employees with an exercise price equal to the fair value of the shares at the date of grant. The Corporation has elected to follow the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations in accounting for its employee stock options. The Corporation has not determined whether or when it will adopt Financial Accounting Standard No. 123, “Accounting for Stock-Based-Compensation” (SFAS No. 123). The Corporation has adopted Financial Accounting Standard No. 148, “Accounting for Stock-Based-Compensation — Transition and Disclosure” (SFAS No. 148). Note 10 provides a proforma presentation of the effects that such an election would have on income and earning per share. Under APB 25, no

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

compensation expense is recognized because the exercise price of the Corporation’s employee stock options equals the market price of the underlying stock on the date of grant.


	*Dividend Reinvestment and Employee Stock Purchase Plans*

The Univest Dividend Reinvestment Plan (the “Reinvestment Plan”) provided 1,250,000 shares of common stock and the 1996 Employee Stock Purchase Plan (the “Purchase Plan”) provided 625,000 shares of common stock available for issuance. Employees may elect to make contributions to the Purchase Plan in an aggregate amount not less than 2% nor more than 10% of such employee’s total compensation. These contributions are then used to purchase stock during an offering period determined by the Corporation’s Administrative Committee. The purchase price of the stock is established by the Administrative Committee provided, however, that the purchase price will not be less than 85% of the lesser of the market price on the first day or last day of the offering period.

During 2002 and 2001, 40,553 and 47,448 shares, respectively, were issued under the Reinvestment Plan, with 1,006,983 shares available for future purchase as of December 31, 2002. During 2002 and 2001, 5,249 and 7,628 shares, respectively, were issued under the Purchase Plan, with 609,970 shares available for future purchase as of December 31, 2002.


	*Income Taxes*

Deferred income taxes are provided on temporary differences between amounts reported for financial statement and tax purposes in accordance with SFAS No. 109, “Accounting for Income Taxes.”


	*Intangible Assets*

The Corporation acquired intangible assets in connection with the acquisitions of Pennview, Univest Investments, Inc. and Univest Insurance, Inc. that include goodwill, a covenant not to compete and core deposit intangibles. In accordance with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is no longer amortized. The net carrying amount at December 31, 2002 was $6,210, $5,790 at December 31, 2001. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards SFAS No. 141 and SFAS No. 142, which changed the initial measurement and subsequent recording of goodwill and intangible assets. The effect of adopting SFAS No. 141 is discussed in Note 7, Intangible Assets. Core deposit intangibles have been fully amortized over their estimated useful lives of ten years. The covenant not to compete is being amortized over the five year contractual life.

Mortgage servicing rights are recognized as separate assets when mortgage loans are sold and the rights are retained. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing period of the underlying mortgage loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized amount. The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2002 was $353 and at December 31, 2001 was $526. The fair value of these rights were $409 and $567, respectively. The fair value of servicing rights was determined using discount rates ranging from 6.0% to 7.5%. Amortization of mortgage servicing rights of approximately $15 was recorded during 2002, $19 was recorded in 2001 and $22 was recorded in 2000. The valuation allowance was $439 at December 31, 2002 and $152 at December 31, 2001.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


	*Retirement Plan, Supplemental Plans and Other Postretirement Benefit Plans*

Substantially all employees are covered by a noncontributory retirement plan. The plan provides benefits based on a formula of each participant’s final average pay.

The Corporation also provides supplemental executive retirement benefits, a portion of which is in excess of limits imposed on qualified plans by federal tax law. These plans are nonqualified benefit plans.

Univest sponsors a 401(k) deferred salary savings plan, which is a qualified defined contribution plan, and which covers all employees of Univest and its subsidiaries, and provides that the Corporation make matching contributions as defined by the plan.

The Corporation provides certain postretirement healthcare and life insurance benefits for retired employees. The Corporation accrues the costs associated with providing these benefits during the active service periods of employees in accordance with Statement of Financial Accounting Standard No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (SFAS No. 106).


	*Statement of Cash Flows*

Univest has defined those items included in the caption “Cash and due from banks” as cash and cash equivalents.


	*Trust Assets*

Assets held by the Corporation in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Corporation.


	*Stock Split*

On January 22, 2003, the Corporation’s board of directors declared a five for four stock split in the form of a stock dividend to be paid on February 28, 2003 to all shareholders of record as of February 7, 2003. All share and per share amounts have been retroactively adjusted to give effect to the stock split.


	*Earnings Per Share*

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method.


	*Comprehensive Income*

Unrealized gains or losses on the Corporation’s available-for-sale securities and cash flow hedges are included in comprehensive income.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

The following shows the accumulated comprehensive income, net of income taxes, for the periods presented:



	Period Ended Dec. 31,

	2002		2001

Net income	$	21,106	$	19,210
Change in accumulated unrealized gain on cash flow hedges		23		303
Change in unrealized gain (loss) on available-for-sale investment securities		4,147		1,919

Total comprehensive income	$	25,276	$	21,432


	*Recent Accounting Pronouncements*

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (SFAS No. 145), which updates, clarifies and simplifies existing accounting pronouncements. In part, this statement rescinds SFAS No. 4 “Reporting Gains and Losses for Extinguishment of Debt”. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The Corporation adopted SFAS No. 145 on January 1, 2003. The adoption of SFAS No. 145 did not have any impact on the Corporation’s financial position and results of operations.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. The provisions of SFAS No. 147 are effective October 1, 2002. The adoption of SFAS No. 147 did not have any impact on the Corporation’s financial position and results of operations.

Note 2. Restrictions on Cash and Due from Bank Accounts

Union is required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances was $0.9 million at December 31, 2002 and $2.7 million at December 31, 2001. In 2002 Union made a change in its transaction account sweep program that resulted in a lower level of required reserve balances.

Note 3. Investment Securities

The following table shows the amortized cost and the approximate market value of the held-to-maturity securities and available-for-sale securities at December 31, 2002 and 2001, by maturity within each type:



		December 31, 2002								December 31, 2001

				Gross		Gross						Gross		Gross
		Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized			Market
		Cost		Gains		Losses		Value		Cost		Gains		Losses			Value

Held-to-Maturity Securities
U.S. Treasury, government corporations and agencies obligations:
	Within 1 year	$	9,560	$	239	$	—	$	9,799	$	7,000	$	102	$	—		$	7,102
	1 to 5 years		9,100		221		—		9,321		23,100		446		(9	)		23,537

			18,660		460		—		19,120		30,100		548		(9	)		30,639

State and political subdivisions:
	Within 1 year		6,331		103		—		6,434		2,960		26		—			2,986
	1 to 5 years		2,849		67		—		2,916		9,180		195		—			9,375
	Over 10 years		1,154		41		—		1,195		1,154		4		—			1,158

			10,334		211		—		10,545		13,294		225		—			13,519

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)



		December 31, 2002								December 31, 2001

				Gross		Gross						Gross		Gross
		Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized			Market
		Cost		Gains		Losses		Value		Cost		Gains		Losses			Value

Mortgage-backed securities:
	1 to 5 years	$	369	$	9	$	—	$	378	$	934	$	17	$	—		$	951
	5 to 10 years		4,893		278		—		5,171		5,726		104		—			5,830
	Over 10 years		15,751		915		—		16,666		39,384		1,027		(83	)		40,328

			21,013		1,202		—		22,215		46,044		1,148		(83	)		47,109

Other:
	Within 1 year		100		—		—		100		—		—		—			—
	1 to 5 years		15,231		599		—		15,830		10,145		532		—			10,677
	5 to 10 years		—		—		—		—		6,351		298		—			6,649
	Over 10 years		3,533		155		—		3,688		3,871		225		—			4,096

			18,864		754		—		19,618		20,367		1,055		—			21,422

Total		$	68,871	$	2,627	$	—	$	71,498	$	109,805	$	2,976	$	(92	)	$	112,689



		December 31, 2002									December 31, 2001

				Gross		Gross							Gross		Gross
		Amortized		Unrealized		Unrealized			Market		Amortized		Unrealized		Unrealized			Market
		Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

Securities Available-for-Sale
U.S. Treasury, government Corporations and agencies Obligations:
	Within 1 year	$	—	$	—	$	—		$	—	$	5,497	$	54	$	—		$	5,551
	1 to 5 years		94,002		1,935		—			95,937		52,260		868		—			53,128
	5 to 10 years		—		—		—			—		2,000		44		—			2,044

			94,002		1,935		—			95,937		59,757		966		—			60,723

State and political subdivisions:
	1 to 5 years		973		14		(1	)		986		974		6		—			980
	5 to 10 years		1,706		67		—			1,773		1,224		20		—			1,244
	Over 10 years		55,594		2,591		(30	)		58,155		33,918		569		(367	)		34,120

			58,273		2,672		(31	)		60,914		36,116		595		(367	)		36,344

Mortgage-backed securities:
	1 to 5 years		2,146		105		—			2,251		2,436		50		—			2,486
	5 to 10 years		23,297		1,168		—			24,465		29,400		795		—			30,195
	Over 10 years		89,183		2,937		—			92,120		72,627		977		(170	)		73,434

			114,626		4,210		—			118,836		104,463		1,822		(170	)		106,115

Other:
	Within 1 year		13,747		16		—			13,763		669		—		—			669
	1 to 5 years		28,048		1,747		—			29,795		23,994		1,311		—			25,305
	5 to 10 years		2,000		35		—			2,035		2,000		46		—			2,046
	Over 10 years		4,886		42		—			4,928		6,797		54		—			6,851

			48,681		1,840		—			50,521		33,460		1,411		—			34,871

Total		$	315,582	$	10,657	$	(31	)	$	326,208	$	233,796	$	4,794	$	(537	)	$	238,053

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties.

Securities with a market value of $222.0 million and $206.0 million at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes as required by law.

During the year ended December 31, 2002, available-for-sale securities with a fair value at the date of sale of $27,890 were sold, $15,893 in 2001. Gross realized gains on such sales totaled $885 during 2002, $151 in 2001 and $9 in 2000, and the gross realized losses totaled $0 during 2002, $1 in 2001 and $8 in 2000. Tax expense related to net realized gains from the sales of investments securities for the years ended December 31, 2002, 2001 and 2000 were $310, $51, $0, respectively. Net unrealized gains on available-for-sale securities included in accumulated other comprehensive income as a separate component of shareholders’ equity totaled $6,915 in 2002 and $2,767 in 2001. Unrealized losses in investment securities at December 31, 2002 and 2001 do not represent permanent impairments.

At December 31, 2002 and 2001, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.

Note 4. Loans

The following is a summary of the major loan categories:



	December 31,

	2002			2001

Commercial, financial and agricultural	$	271,719		$	254,032
Real estate — commercial		203,927			195,872
Real estate — construction		36,588			34,774
Real estate — mortgage		243,642			226,962
Loans to individuals		57,226			71,212
All other loans		12,281			15,495

Total loans		825,383			798,347
Less: Unearned income		(5	)		(18	)

	$	825,378		$	798,329

Net unamortized deferred fees and costs for the years ended December 31, 2002 and 2001 were $1,747 and $1,654 respectively.

At December 31, 2002, loans to directors and executive officers of Univest and companies in which directors have an interest aggregated $18,459. These loans have been made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with customers and did not involve more than the normal risk of collectibility or present other unfavorable terms. The summary of activity for the past year is as follows:


Balance at				Amounts		Balance at
January 1, 2002		Additions		Collected		December 31, 2002

$	19,735	$	16,046	$	17,322	$	18,459

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

Note 5. Reserve for Loan Losses

A summary of the transactions in the reserve for loan losses is as follows:


	2002			2001			2000

Balance at beginning of year	$	10,294		$	10,208		$	10,704
Provision charged to operating expense		1,303			763			205
Recoveries		695			540			672
Loans charged off		(1,774	)		(1,217	)		(1,373	)

Balance at end of year	$	10,518		$	10,294		$	10,208

Information with respect to loans that are considered to be impaired under SFAS No. 114 for the year ended December 31 is as follows:



	December 31,

	2002		2001

Average recorded investment in impaired loans	$	2,682	$	2,154
Recorded investment in impaired loans at year-end subject to a reserve for loan losses		701		832
Corresponding reserve		443		540
Recorded investment in impaired loans at year-end requiring no reserve for loan losses		1,803		574
Recorded investment in impaired loans at year-end		2,504		1,406
Recorded investment in nonaccrual and restructured*		2,639		1,617

Loans greater than 90 days past due and still accruing interest were $880 and $317 at December 31, 2002 and 2001 respectively.

* Included in the nonaccrual total are Pennview’s first residential mortgage loans which were over 90 days delinquent of $135 at December 31, 2002 and $211 at December 31, 2001.

The following is an analysis of interest on nonaccrual and restructured loans at December 31 as follows:


	2002		2001		2000

Nonaccrual and restructured loans	$	2,639	$	1,617	$	1,865
Interest income that would have been recognized under original terms		198		176		229

There was no other real estate owned at December 31, 2002 and December 31, 2001.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

Note 6. Premises and Equipment



	December 31,

	2002			2001

Land and land improvements	$	4,313		$	4,230
Premises and improvements		18,075			17,759
Furniture and equipment		18,043			17,528

		40,431			39,517
Less: accumulated depreciation		(24,395	)		(23,492	)

	$	16,036		$	16,025

Note 7. Intangible Assets

On January 1, 2002, the Corporation adopted Statement No. 141, “Business Combinations” (SFAS No. 141), and Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) and ceased amortization of its goodwill. In accordance with the adoption provisions of SFAS No. 142, the Corporation has completed the transitional and annual impairment tests and no impairment was noted. The Corporation will be required to perform goodwill impairment tests at least on an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

The following table reflects the components of intangible assets as of December 31, 2002 and December 31, 2001:

December 31, 2002

December 31, 2001

Gross

Accumulated

Gross Carrying

Accumulated

Carrying Amount

Amortization

Amount

Amortization

(In thousands)

Non-amortized intangible assets:

Goodwill

9,055

2,845

8,635

2,845

Amortized intangible assets:

Covenants not to compete

200

200

Branch acquisitions

2,951

2,130

2,951

1,888

Mortgage servicing rights, net

409

567

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

The estimated aggregate amortization expense for each of the five succeeding fiscal years ending December 31, is:


Year	Amount

2003	$	231
2004		230
2005		228
2006		224
2007		160

The following table reflects the components of mortgage servicing rights as of the periods indicated:



			Years Ended December 31,

			2002			2001			2000

Mortgage servicing rights capitalized			$	129		$	108		$	20
Mortgage servicing rights amortized				15			19			22
Valuation allowance:
	Balance at beginning of year			(152	)		(40	)		—
		(Increase)/decrease		(287	)		(112	)		(40	)

	Balance at end of year		$	(439	)	$	(152	)	$	(40	)

The following table reflects the results of operations as if SFAS No. 142 had been adopted as of January 1, 2001:



		For the Twelve Months
		Ended December 31,

		2002		2001

Net income, as reported		$	21,106	$	19,210
Add back: Goodwill amortization, net of income tax benefit of $22			—		467

Adjusted net income		$	21,106	$	19,677
Per common share data:
Net income per share:
	Basic as reported	$	2.45	$	2.17
	Goodwill amortization		—		0.05
	Adjusted basic earnings per share	$	2.45	$	2.22
	Diluted as reported	$	2.42	$	2.16
	Goodwill amortization		—		0.05
	Adjusted diluted earnings per share	$	2.42	$	2.21

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

Note 8. Income Taxes

The provision for federal and state income taxes included in the accompanying consolidated statements of income consists of the following:


	2002		2001			2000

Current	$	7,373	$	7,728		$	7,249
Deferred		247		(757	)		(458	)

	$	7,620	$	6,971		$	6,791

The provision for income taxes differs from the expected statutory provision as follows:


		2002			2001

Expected provision at statutory rate			35.0	%		35.0	%
Difference resulting from:
	Tax exempt interest income		(6.6	)%		(6.7	)%
	Increase in value of contracts		(1.8	)%		(2.4	)%
	Other, including state income taxes		0.1	%		0.7	%

			26.5	%		26.6	%

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The assets and liabilities giving rise to the Corporation’s deferred tax assets and liabilities as of December 31, 2002 and 2001 are as follows:


		2002			2001

Deferred tax assets:
	Loan loss	$	3,828		$	3,831
	Deferred compensation		527			426
	Postretirement benefits		408			407
	Vacation accrual		231			227
	Deferred expense		156			106
	Depreciation		38			242
	Other		87			191

Total deferred tax assets		$	5,275		$	5,430
Deferred tax liabilities:
	Market discount	$	278		$	311
	Retirement plans		443			153
	Intangible assets		282			291
	Prepaid expenses		230			123
	Deferred income		325			616
	Mark-to-market adjustment		3,874			1,921
	Other		51			61

Total deferred tax liabilities			5,483			3,476

Net deferred tax (liabilities)/ assets		$	(208	)	$	1,954

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

No valuation allowance was recognized for the deferred tax assets at December 31, 2002 and 2001.

Note 9. Retirement Plan and Supplemental Retirement Plans

Information with respect to the Retirement and Supplemental Retirement Plans and Other Postretirement Benefits follows:



							Other Postretirement
	Retirement Plans						Benefits

	2002			2001			2002			2001

Change in benefit obligation
Benefit obligation at beginning of year		$19,651			$19,615			$967			$929
Service cost — benefits earned during the period		919			635			37			34
Interest cost on projected benefit obligation		1,372			1,266			62			66
Actuarial (gain) loss		1,097			(802	)		5			7
Benefits paid		(1,450	)		(1,063	)		(83	)		(69	)

Benefit obligation at end of year		$21,589			$19,651			$988			$967

Change in plan assets
Fair value of plan assets at beginning of year		$16,395			$17,583		$	—		$	—
Actual return on plan assets		(1,480	)		(435	)		—			—
Benefits paid		(1,450	)		(1,063	)		(83	)		(69	)
Employer contribution		1,656			310			83			69

Fair value of plan assets at end of year		15,121			16,395			—			—

Funded status		(6,468	)		(3,256	)		(988	)		(967	)
Unrecognized net actuarial gain		4,549			619			47			42
Unrecognized prior service costs		(196	)		(270	)		(231	)		(251	)

Pension liability		$(2,115	)		$(2,907	)	$	(1,172	)	$	(1,176	)


Weighted-average assumptions as of December 31
Assumed discount rate for obligation	6.70%	7.00% - 7.50%	6.70%	7.25%
Assumed long-term rate of investment return	8.50%	8.50%	—	—
Assumed salary increase rate	4.00% - 5.10%	4.00% - 5.10%	—	—

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

The retirement benefit cost includes the following components:



	Retirement Plans									Other Postretirement

	2002			2001			2000			2002			2001			2000

Service cost — benefits earned during the period	$	919		$	635		$	1,221		$	37		$	34		$	32
Interest cost on projected benefit obligation		1,372			1,266			1,322			62			66			64
Expected return on plan assets		(1,367	)		(1,476	)		(1,593	)		—			—			—
Amortization of net transition asset		—			—			(126	)		—			—			—
Amortization of prior service cost		(60	)		(72	)		(144	)		(20	)		(20	)		(20	)

	$	864		$	353		$	680		$	79		$	80		$	76

For measurement purposes, the health care cost trend rate on covered charges is assumed to decrease gradually 1/2 percent per year, reaching 5 percent in 2003 and after.

The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, a one-percentage-point change in the assumed health care cost trend rates would have the following effect:



	One Percentage Point

	Increase		Decrease

Effect on total of service and interest cost components	$	3	$	(3	)
Effect on postretirement benefit obligation		36		(35	)

The unrecognized net asset at transition is being amortized on the straight-line method over 15 years. Plan assets include marketable equity securities, corporate and government debt securities, and certificates of deposit. The Corporation contributed $1,300 to the pension plan in December 2002. The Corporation has invested in bank-owned life insurance contracts to meet its future obligations under the supplemental retirement plans. For the nonqualified supplemental retirement plan, the projected benefit obligation in excess of plan assets was $4,164 and $3,920 for December 31, 2002 and 2001 respectively.

Expense recorded by the Corporation for the 401(k) deferred salary savings plan for the years ended December 31, 2002, 2001 and 2000 was $359, $298 and $306, respectively.

The Corporation provides supplemental executive retirement benefits covering selected employees and retirees. These plans are nonqualified defined benefit plans. Assumptions used in determining the net periodic pension costs are similar to those used to determine the costs of the Corporation’s retirement plan. Expenses charged to salaries and benefits were not material to the Corporation’s consolidated financial statements.

Note 10. Long-Term Incentive Plan

The Corporation adopted the 1993 Long-Term Incentive Plan, whereby the Corporation may grant options to employees to purchase up to 1,000,000 shares of common stock. The plan provides for the issuance of options to purchase common shares at prices not less than 100 percent of the fair market value at the date of option grant. After two years, 33 percent of the optioned shares are exercisable each year for a period not exceeding six years. 234,913 common shares were available

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

for future options and 492,760 common shares were exercisable at December 31, 2002. Transactions involving the plan are summarized as follows:


				Weighted Average
	Shares			Exercise Price
	Under Option			Per Share

Outstanding at December 31, 1999		296,521		$	17.67
Granted		79,375			18.09
Exercised		(5,614	)		11.81

Outstanding at December 31, 2000		370,282		$	17.85
Granted		143,125			26.67
Forfeited		(5,906	)		19.43
Exercised		(84,516	)		12.33

Outstanding at December 31, 2001		422,985		$	21.92
Granted		107,000			32.42
Exercised		(37,225	)		19.41

Outstanding at December 31, 2002		492,760		$	24.39

The following table summarizes Univest’s stock options outstanding at December 31, 2002:



	Options Outstanding						Options Exercisable

					Weighted
			Weighted		Average				Weighted
			Average		Remaining				Average
			Exercise		Contractual				Exercise
Exercise Prices	Shares		Price		Life		Shares		Price

$17.80-$19.52		221,572	$	18.97		3.29		107,733	$	19.16
$20.28-$25.33		49,813		22.25		2.64		15,750		24.40
$28.28-$32.42		221,375		30.28		5.48		—		—

		492,760	$	24.39		4.21		123,483	$	19.82

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

Had compensation expense for stock option awards been determined consistent with SFAS No. 123, net income and earnings per share would be reduced to the pro forma amounts indicated as follows:



		Year Ended December 31,

		2002		2001		2000

Net income:
	As reported	$	21,106	$	19,210	$	17,348
	Compensation cost		—		—		—

	Net income		21,106		19,210		17,348
Pro forma:
	Compensation cost		539		342		245

	Pro forma net income	$	20,567	$	18,868	$	17,103

Basic earnings per share:
	As reported	$	2.45	$	2.17	$	1.91
	Pro forma	$	2.38	$	2.13	$	1.88
Diluted earnings per share:
	As reported	$	2.42	$	2.16	$	1.90
	Pro forma	$	2.36	$	2.12	$	1.87

Significant assumptions used to calculate the above are as follows:


	2002			2001			2000

Risk free interest rate		2.82	%		4.46	%		5.17	%
Expected option life in years		4			4			4
Expected volatility		.219			.238			.239
Expected dividend yield		2.26	%		2.50	%		3.20	%

The pro forma effects are presented in accordance with the requirements of SFAS No. 123, however, such effects are not representative of the effects to be reported in future years due to the fact that options vest over several years and additional awards generally are made each year. For purposes of providing the pro forma disclosures required under SFAS 123 and SFAS 148, the fair value of stock options granted were estimated at the date of grant using a Black-Sholes option pricing model. The model is sensitive to changes in subjective assumptions, which can affect the resulting fair value estimates. The assumptions required by the pricing model include, expected volatility, expected life, risk-free rate, and expected dividend yield. The Corporation used assumptions for volatility, expected life of the options, assumed risk-free rates, and expected dividend rates. The model applies these assumptions along with the known characteristics of the options such as vesting period and exercise price to establish a fair value estimate. The estimated pro forma presentation of compensation expense and resulting pro forma net income and earnings per share is sensitive to the subjective assumptions mentioned which affect the fair value estimates of the options at the date of grant. Management cautions the reader that the Black-Sholes option pricing model does not necessarily provide an accurate estimate of the fair value of the stock options that the Corporation has granted. The options in question have vesting restrictions and are limited in their transferability, characteristics that are not factored into the Black-Sholes option pricing model methodology for establishing fair value estimates of options.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


Note 11.	Time Deposits

The aggregate amount of certificates of deposit in denominations of $100 or more was $39,518 at December 31, 2002, and $37,867 at December 31, 2001, with interest expense of $1,791 for 2002 and $1,887 for 2001. Other time deposits in denominations of $100 or more were $15,147 at December 31, 2002, and $13,314 at December 31, 2001, with interest expense of $344 for 2002 and $879 for 2001.

At December 31, 2002, the scheduled maturities of time deposits in denominations of $100 or more are as follows:


Due in 2003		$	47,006
Due in 2004			2,688
Due in 2005			1,371
Due in 2006			1,914
Due in 2007			1,686

	Total	$	54,665


Note 12.	Borrowings

At December 31, 2002 and 2001, long-term debt consisted of the following:



	December 31,

Description	2002		2001		Interest Rate			Maturity

Federal Home Loan Bank Advance	$	4,000	$	—		3.34	%		December 2003
Federal Home Loan Bank Advance		3,000		—		3.80	%		June 2004
Federal Home Loan Bank Advance		75		75		4.00	%		September 2006
Federal Home Loan Bank Advance		4,000		4,000		4.99	%		January 2009
Federal Home Loan Bank Advance		5,000		5,000		6.30	%		November 2009
Federal Home Loan Bank Advance		5,000		5,000		6.10	%		September 2010
Federal Home Loan Bank Advance		5,000		5,000		5.89	%		December 2010
Federal Home Loan Bank Advance		5,000		5,000		4.68	%		March 2011

	$	31,075	$	24,075

The contractual maturities of long-term debt as of December 31, 2002 are as follows:


Due in 2003	$	4,000
Due in 2004		3,000
Due in 2005		—
Due in 2006		75
Due in 2007		—
Thereafter		24,000

	$	31,075

Advances from the Federal Home Loan Bank are collateralized by Federal Home Loan Bank stock and substantially all first mortgage loans of the Banks. These advances may be convertible to a floating interest rate and could be subject to a prepayment fee.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

Univest maintains verbal federal fund credit lines with several correspondent banks totaling $70 million. At December 31, 2002, Univest had no outstanding borrowings under these lines. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.

Univest, through Union, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At December 31, 2002, the Corporation had no outstanding borrowings under this line.

The following table details key information pertaining to securities sold under agreement to repurchase on a overnight basis for the periods indicated:


	2002			2001			2000

Balance at December 31	$	88,347		$	73,745		$	67,370
Weighted average interest rate at year end		1.0	%		1.5	%		3.7	%
Maximum amount outstanding at any month’s end	$	102,993		$	91,986		$	71,830
Average amount outstanding during the year	$	82,219		$	75,386		$	64,525
Weighted average interest rate during the year		1.3	%		2.9	%		3.5	%


Note 13.	Earnings per Share

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


			2002		2001		2000

Numerator:
	Net income		$	21,106	$	19,210	$	17,348
	Numerator for basic and diluted earnings per share — income available to common shareholders		$	21,106	$	19,210	$	17,348
Denominator:
	Denominator for basic earnings per share — weighted- average shares outstanding			8,625		8,846		9,104
	Effect of dilutive securities:
		Employee stock options		87		63		21

	Denominator for diluted earnings per share adjusted weighted-average shares outstanding			8,712		8,909		9,125

Basic earnings per share			$	2.45	$	2.17	$	1.91

Diluted earnings per share			$	2.42	$	2.16	$	1.90

For additional disclosures regarding the employee stock options, see Note 10.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


Note 14.	Commitments and Contingencies

Loan commitments are made to accommodate the financial needs of the Banks’ customers. Standby letters of credit commit the Banks to make payments on behalf of customers when certain specified future events occur. They primarily are issued to support commercial paper, medium and long-term notes and debentures, including industrial revenue obligations. Historically, substantially all standby letters of credit expire unfunded. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Banks’ normal credit policies. Collateral is obtained based on management’s credit assessment of the customer.

The Banks offer commercial, mortgage, and consumer credit products to their customers in the normal course of business, which are detailed in Note 4. These products represent a diversified credit portfolio and are generally issued to borrowers within the Banks’ branch office systems in eastern Pennsylvania. The ability of the customers to repay their credit is, to some extent, dependent upon the economy in the Banks’ market areas.

The Banks also control their credit risks by limiting the amount of credit to any business, institution, or individual. As of December 31, 2002, the Banks have identified the due from banks’ balance of $22,900 as a significant concentration of credit risk because it contains a balance due from a single depository institution that is unsecured. Management evaluates the creditworthiness of the institution on at least a quarterly basis in an effort to monitor its credit risk associated with this concentration.

The following schedule summarizes the Corporation’s off-balance sheet financial instruments:


		Contract or
		Notional Amount

Financial instruments representing credit risk:
	Commitments to extend credit	$	320,453
	Letters of credit		18,572
	Interest-rate swap, notional principal amount		30,000

As of December 31, 2002, Univest and its subsidiaries were obligated under noncancelable leases for various premises and equipment. A summary of the future minimum rental commitments under noncancelable operating leases net of related sublease revenue is as follows:


Year	Amount

2003	$	861
2004		677
2005		464
2006		337
2007		191
Thereafter		743

Total	$	3,273

Rental expense charged to operations was $926, $707, and $685 for 2002, 2001, and 2000, respectively.


Note 15.	Derivative Instruments and Hedging Activities

The Corporation may enter into interest-rate swaps in managing its interest-rate risk. In these swaps, the Corporation agrees to exchange, at specified intervals, the difference between fixed and

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

floating interest amounts calculated on an agreed-upon notional principal amount. Interest-rate swaps in which the Corporation pays a floating rate and receives a fixed rate are used to reduce the impact of changes in interest rates on the Corporation’s net interest income.

At December 31, 2002, $30 million in notional interest-rate swaps were outstanding. The contracts entered into by the Corporation expire as follows: $10 million in notional principal amount in second quarter 2003, $10 million in third quarter 2003 and $10 million in first quarter of 2004. The impact of the interest-rate swaps on net interest income for the year ended December 31, 2002 was a positive $746 and for the year ended December 31, 2001, a positive $440. The ineffective portion of the swaps’ change in fair value is to be immediately recognized in earnings. For the Corporation, the amount of the ineffective portion is immaterial.

The Corporation’s current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. As of December 31, 2002, the market value of interest-rate swaps in a favorable position was $500. There were no interest-rate swaps in an unfavorable position. At December 31, 2001, the market value of interest-rate swaps in a favorable position was $465 and there were no interest-rate swaps in an unfavorable position. Credit risk also exists when the counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement.


Note 16.	Fair Values of Financial Instruments

Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments” (SFAS No. 107), requires all entities to disclose the estimated fair value of its financial instruments whether or not recognized in the balance sheet. For Univest, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. Many of the Corporation’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporation’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities other than residential mortgage loans held-for-sale and those investment securities classified as available-for-sale. Significant estimations and present value calculations, which are affected by the assumptions used, including the discount rate and estimate of future cash flows, were used by the Corporation for the purposes of this disclosure.

The Corporation, using the best available data and an estimation methodology suitable for each category of financial instruments, has determined estimated fair values. For certain loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. Various methodologies are described in the accompanying notes.

SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of readily available active secondary market valuations for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Certain estimated fair values cannot be substantiated by comparison to independent valuation sources and, in many cases, might not be realized in immediate settlement of the instrument.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)

The following table represents the estimates of fair value of financial instruments:



		December 31, 2002					December 31, 2001

		Carry or					Carrying or
		Notional/Contract					Notional/Contract
		Amount		Fair Value			Amount		Fair Value

Assets:
	Cash and short-term assets	$	45,520	$	45,520		$	54,902	$	54,902
	Investment securities		395,079		397,706			347,858		350,742
	Net loans		814,860		854,349			788,035		817,072
Liabilities:
	Deposits	$	1,043,106	$	1,054,764		$	998,137	$	1,006,435
	Short-term borrowings		89,502		89,502			91,600		91,600
	Long-term debt		31,075		34,887			24,075		25,241
Off-Balance-Sheet:
	Commitments to extend credit	$	320,453	$	(891	)	$	247,271	$	(610	)
	Letters of credit		18,572		(279	)		19,759		(296	)
	Interest-rate swap, notional principal amount		30,000		500			30,000		465

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and due from banks and short-term investments: The carrying amounts reported in the balance sheets for cash and due from banks, time deposits with other banks, and federal funds sold and other short-term investments approximates those assets’ fair values.

Investment securities (including mortgage-backed securities): Fair values for investment securities are based on quoted market prices.

Loans: The fair values for loans are estimated using discounted cash flow analyses, using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and imbedded prepayment options.

Deposit liabilities: The fair values for deposits with fixed maturities are estimated by discounting the final maturity, and the fair values for non-maturity deposits are established using a decay factor estimate of cash flows based upon industry-accepted assumptions. The discount rate applied to deposits consists of an appropriate risk free rate and included components for credit risk, operating expense, and imbedded prepayment options.

Short-term borrowings: The carrying amounts of securities sold under repurchase agreements, and other short-term borrowings approximate their fair values.

Long-term debt: The fair values of the Corporation’s long-term borrowings (other than deposits) are estimated using a discounted cash flow analysis using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and imbedded prepayment options.

Off-balance-sheet instruments: Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


Note 17.	Regulatory Matters

The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002, that the Banks meet all capital adequacy requirements to which they are subject.

As of December 31, 2002, the most recent notification from the Office of Comptroller of the Currency and Federal Deposit Insurance Corporation (FDIC) categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks’ category.

The Banks’ actual capital amounts and ratios are also presented in the table.

To Be Well-

For Capital

Capitalized Under

Adequacy

Prompt Corrective

Actual

Purposes

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2002:

Total Capital (to Risk-Weighted Assets):

Consolidated

130,117

13.55

76,821

8.00

96,026

10.00

Union National Bank

112,490

12.97

69,365

8.00

86,706

10.00

Pennview Savings Bank

13,266

15.77

6,732

8.00

8,415

10.00

Tier I Capital (to Risk-Weighted Assets):

Consolidated

119,170

12.41

38,410

4.00

57,616

6.00

Union National Bank

102,408

11.81

34,682

4.00

52,024

6.00

Pennview Savings Bank

12,411

14.75

3,366

4.00

5,049

6.00

Tier I Capital (to Average Assets):

Consolidated

119,170

9.40

38,041

3.00

50,721

4.00

Union National Bank

102,408

9.24

33,242

3.00

44,322

4.00

Pennview Savings Bank

12,411

8.04

4,629

3.00

6,172

4.00

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)



													To Be Well-
								For Capital					Capitalized Under
								Adequacy					Prompt Corrective
			Actual					Purposes					Action Provisions

			Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2001:
	Total Capital (to Risk-Weighted Assets):
		Consolidated	$	121,702		13.55	%	$	71,877		8.00	%	$	89,846		10.00	%
		Union National Bank		106,712		13.18	%		64,754		8.00	%		80,942		10.00	%
		Pennview Savings Bank		12,078		14.84	%		6,512		8.00	%		8,140		10.00	%
	Tier I Capital (to Risk-Weighted Assets):
		Consolidated		111,408		12.40	%		35,938		4.00	%		53,907		6.00	%
		Union National Bank		96,822		11.96	%		32,377		4.00	%		48,565		6.00	%
		Pennview Savings Bank		11,170		13.72	%		3,256		4.00	%		4,884		6.00	%
	Tier I Capital (to Average Assets):
		Consolidated		111,408		9.24	%		36,168		3.00	%		48,224		4.00	%
		Union National Bank		96,822		9.24	%		31,444		3.00	%		41,925		4.00	%
		Pennview Savings Bank		11,170		7.39	%		4,536		3.00	%		6,048		4.00	%


	*Dividend and Other Restrictions*

The approval of the Office of Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, Union can declare dividends in 2003 without approval of the Office of Comptroller of the Currency of approximately $7,963 plus an additional amount equal to the Bank’s net profits for 2003 up to the date of any such dividend declaration.

The Federal Reserve Act requires that extension of credit by Union to certain affiliates, including Univest (parent), be secured by readily marketable securities, that extension of credit to any one affiliate be limited to 10% of Union’s capital and surplus (as defined), and that extensions of credit to all such affiliates be limited to 20% of Union’s capital and surplus.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


Note 18.	Parent Company Financial Information

Condensed financial statements of Univest, parent company only, follow:



				December 31,

				2002		2001
Balance Sheets
Assets:
	Deposits with bank subsidiary			$	121	$	222
	Investments in securities				1,804		1,000
	Investments in subsidiaries, at equity in net assets:
		Banks			129,260		118,166
		Non-banks			5,149		5,760
	Other assets				5,243		3,469

			Total assets	$	141,577	$	128,617

Liabilities:
	Dividends payable			$	1,575	$	1,486
	Other liabilities				6,549		5,551

	Total liabilities				8,124		7,037

Shareholders’ equity					133,453		121,580

			Total liabilities and shareholders’ equity	$	141,577	$	128,617



		Year Ended December 31,

		2002			2001			2000
Statements of Income
Dividends from banks		$	15,131		$	15,193		$	8,139
Other income			11,004			10,249			9,500

	Total operating income		26,135			25,442			17,639
Operating expenses			11,701			10,531			9,975

Income before income tax benefit and equity in undistributed income of subsidiaries			14,434			14,911			7,664
Applicable income tax benefit			(198	)		(140	)		(81	)

Income before equity in undistributed income of subsidiaries			14,632			15,051			7,745
Equity in undistributed income of subsidiaries:
	Banks		6,287			3,868			9,503
	Non-banks		187			291			100

Net income		$	21,106		$	19,210		$	17,348

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)



				Year Ended December 31,

				2002			2001			2000
Statements of Cash Flows
Cash flows from operating activities
	Net income			$	21,106		$	19,210		$	17,348
	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in undistributed net income/ loss of subsidiaries			(6,474	)		(4,159	)		(9,603	)
		Increase in other assets			(2,163	)		(968	)		(545	)
		Depreciation of premises and equipment			389			315			520
		Increase in other liabilities			998			188			500

			Net cash provided by operating activities		13,856			14,586			8,220
Cash flows from investing activities
	Liquidation of subsidiary				122			—			—
	Proceeds from sales of securities				1,000			1,570			1,542
	Purchases of investment securities				(1,781	)		(1,000	)		(1,570	)

			Net cash (used in) provided by investing activities		(659	)		570			(28	)
Cash flows from financing activities
	Purchases of treasury stock				(9,190	)		(11,506	)		(4,264	)
	Stock issued under dividend reinvestment and employee stock purchase plans				1,349			1,205			1,239
	Proceeds from exercise of stock options				808			1,052			66
	Cash dividends				(6,265	)		(5,752	)		(5,233	)

			Net cash used in financing activities		(13,298	)		(15,001	)		(8,192	)

	Net (decrease) increase in deposits with bank subsidiary				(101	)		155			—
	Deposits with bank subsidiary at beginning of year				222			67			67

	Deposits with bank subsidiary at end of year			$	121		$	222		$	67

During 2002, 2001, and 2000, the parent company made income tax payments of $7,724, $7,678, and $7,077, respectively. No interest payments were made.

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


Note 19.	Quarterly Data (Unaudited)

The unaudited results of operations for the quarters for the years ended December 31, 2002 and 2001 were as follows:

December 31

September 30

June 30

March 31

2002 Quarterly Financial Data

Interest income

17,943

18,386

18,383

18,328

Interest expense

5,847

6,401

6,759

6,807

Net interest income

12,096

11,985

11,624

11,521

Provision for loan losses

130

391

Net interest income after provision for loan losses

11,966

11,594

11,233

11,130

Net gains on sales of securities

217

313

355

—

Noninterest income

5,211

4,634

4,738

5,125

Noninterest expense

9,553

9,353

9,299

9,585

Income before income taxes

7,841

7,188

7,027

6,670

Applicable income taxes

2,075

1,866

1,872

1,807

Net income

5,766

5,322

5,155

4,863

Per share data:

Net income:

Basic

0.674

0.619

0.596

0.559

Diluted

0.667

0.612

0.591

0.554

Dividends per share

0.184


		December 31		September 30		June 30		March 31
2001 Quarterly Financial Data
Interest income		$	19,038	$	19,938	$	19,984	$	20,248
Interest expense			7,436		8,470		9,073		9,462

	Net interest income		11,602		11,468		10,911		10,786
Provision for loan losses			316		216		216		15

	Net interest income after provision for loan losses		11,286		11,252		10,695		10,771
	Net gains on sales of securities		38		9		76		27
Noninterest income			4,836		4,179		4,603		4,198
Noninterest expense			9,230		8,628		8,567		9,364

Income before income taxes			6,930		6,812		6,807		5,632
Applicable income taxes			1,794		1,913		1,793		1,471

	Net income	$	5,136	$	4,899	$	5,014	$	4,161

UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Consolidated Financial Statements — (Continued)


			December 31		September 30		June 30		March 31
2001 Quarterly Financial Data
Per share data:
	Net income:
		Basic	$	0.585	$	0.555	$	0.566	$	0.467

		Diluted	$	0.582	$	0.551	$	0.563	$	0.465

Dividends per share			$	0.168	$	0.168	$	0.168	$	0.152


Note 20.	Subsequent Events

On January 10, 2003, Univest Corporation announced the signing of a definitive agreement for First County Bank to merge with and into Univest National Bank in a cash transaction for approximately $29.5 million. First County Bank is a $135 million Pennsylvania state-chartered bank headquartered in Doylestown with additional branches in Bensalem, Langhorne, Newtown, and Warminster. The transaction is expected to close in the second quarter of 2003.

On January 18, 2003, Union National Bank and Trust Company of Souderton, PA and Pennview Savings Bank combined to form Univest National Bank and Trust Company.

On January 22, 2003, Univest Corporation of Pennsylvania board of directors declared a five for four stock split in the form of a stock dividend to be paid on February 28, 2003 to all shareholders of record as of February 7, 2003.


Item 9.	*Change in and Disagreements with Accountants on Accounting and Financial Disclosures*

None

PART III

Item 10. Directors and Executive Officers of the Registrant

Incorporated herein by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders on April 8, 2003.

Item 11. Executive Compensation

Incorporated herein by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders on April 8, 2003.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Incorporated herein by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders on April 8, 2003.

Item 13. Certain Relationships and Related Transactions

Incorporated herein by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders on April 8, 2003.

Item 14. Controls and Procedures

As of December 31, 2002, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s management, including the CEO and CFO, concluded that the Corporation’s disclosure controls and procedures were effective as of December 31, 2002. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2002.

Part IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1. & 2. Financial Statements and Schedules

The financial statements listed in the accompanying index to financial statements are filed as part of this annual report.

3. Listing of Exhibits

The exhibits listed on the accompanying index to exhibits are filed as part of this annual report.

(b) There were no reports on Form 8-K filed in the fourth quarter of 2002.

(d) Financial Statement Schedules — none.

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

[Item 15(a)]



Annual Report
to Shareholders

Report of Independent Auditors			31
Consolidated balance sheets at December 31, 2002 and 2001			32
Consolidated statements of income for each of the three years in the period ended December 31, 2002			33
Consolidated statements of changes in shareholders’ equity for each of the three years in the period ended December 31, 2002			34
Consolidated statements of cash flows for each of the three years in the period ended December 31, 2002			35
Notes to consolidated financial statements			36

Financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX TO EXHIBITS

[Item 15(a)]


		Description

(3)		Articles of Incorporation and By-Laws
		Articles of Incorporation and Charter are incorporated by reference to the 1973 Form 10-K.
(4)		Instruments Defining the Rights of Security Holders, Including Debentures
		Specimen Copy of Common Stock is incorporated herein by reference to the 1973 Form 10-K.
(10)		Material Contracts — Not Applicable.
(11)		Statement Re Computation of Per Share Earnings — See Footnote 13 in Item (8).
(12)		Statements Re Computation of Ratios — Not Applicable.
(18)		Letter Re Change in Accounting Principles — Not Applicable.
(19)		Previously Unfiled Documents — Not Applicable.
(21)		Subsidiaries of the Registrant
(23)		Consent of independent auditors
(24)		Power of Attorney — Not Applicable.
(99.1)		Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99.2)		Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

UNIVEST CORPORATION OF PENNSYLVANIA

Registrant

By: /s/ WALLACE H. BIELER

Wallace H. Bieler

Secretary, Executive Vice President and CFO, February 11, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



Signature	Title	Date


/s/ WILLIAM S. AICHELE William S. Aichele	President, CEO and Director	February 11, 2003

/s/ MARVIN A. ANDERS Marvin A. Anders	Chairman and Director	February 11, 2003

/s/ K. LEON MOYER K. Leon Moyer	Executive Vice President	February 11, 2003

/s/ CHARLES H. HOEFLICH Charles H. Hoeflich	Chairman Emeritus	February 11, 2003

/s/ MERRILL S. MOYER Merrill S. Moyer	Director	February 11, 2003

/s/ JOHN U. YOUNG John U. Young	Director	February 11, 2003

/s/ JAMES L. BERGEY James L. Bergey	Director	February 11, 2003

/s/ H. RAY MININGER H. Ray Mininger	Director	February 11, 2003

/s/ PAUL G. SHELLY Paul G. Shelly	Director	February 11, 2003

/s/ R. LEE DELP R. Lee Delp	Director	February 11,2003

/s/ THOMAS K. LEIDY Thomas K. Leidy	Director	February 11, 2003

CERTIFICATIONS

I, William S. Aichele, certify that:

      1.     I have reviewed this annual report on Form 10-K of Univest Corporation of Pennsylvania;

      2.     Based on my knowledge, this annual 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 annual report;

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

      4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

      a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

      b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

      c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ WILLIAM S. AICHELE

William S. Aichele,

President and

Chief Executive Officer

Date: 02/11/03

CERTIFICATIONS

I, Wallace H. Bieler, certify that:

/s/ WALLACE H. BIELER

Wallace H. Bieler,

Executive Vice President and

Chief Financial Officer

Date: 02/11/03


*	Per share data has been restated to give effect to a five for four stock split in the form of a dividend declared on January 22, 2003 to shareholders of record as of February 7, 2003, payable on February 28, 2003.


*	One shareholder approved plan “Univest 1993 Long-term Incentive Plan.” A new plan “Univest 2003 Long-term Incentive Plan” is described in the proxy for the approval of Shareholders, see Exhibit I.


	*	The Corporation adopted Financial Accounting Standards Board Opinion No. 142 on January 1, 2002 and ceased amortizing goodwill.


	•	Net interest income increased due to growth in average earning assets. The net interest margin remained constant at 4.0%.

	•	Total noninterest income increased by $2.6 million or 14.4% due primarily to growth in commission income and gains on the sales of securities. Commissions grew primarily due to the acquisition of the Gum Insurance Agency in December 2001.

	•	Other noninterest expense increased $2.0 million or 5.6% largely due to increases in salaries and benefits expense. The acquisition of the Gum Insurance Agency in December 2001 contributed to the increase.


	•	Net interest income increased due to growth in average earning assets offset by a decrease in the net interest margin. The net interest margin decreased to 4.0% from 4.1%.

	•	Total noninterest income increased by $1.3 million or 7.8% due primarily to growth in debit card compensation and the cash surrender value of bank owned life insurance policies.

	•	Other noninterest expense increased $1.2 million or 12.4% largely due to additional advertising, contribution and community relations expense.


Note:	For rate calculation purposes, average loan categories include unearned discount.


(a)	Net noninterest-bearing funds is the sum of non-interest bearing liabilities and shareholders’ equity minus non-interest earning assets.


*	Included in the nonaccrual total are Pennview’s first residential mortgage loans which were over 90 days delinquent of $135 at December 31, 2002 and $211 at December 31, 2001.



	Wallace H. Bieler
	Secretary, Executive Vice President and CFO, February 11, 2003


	1. I have reviewed this annual report on Form 10-K of Univest Corporation of Pennsylvania;

	2. Based on my knowledge, this annual 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 annual report;

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

	4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	/s/ WILLIAM S. AICHELE
	William S. Aichele,
	President and
	Chief Executive Officer


	/s/ WALLACE H. BIELER
	Wallace H. Bieler,
	Executive Vice President and
	Chief Financial Officer