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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, 1996 Commission File number 0-7617
----------------- ------
UNIVEST CORPORATION OF PENNSYLVANIA
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1886144
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
14 North Main Street
Souderton, Pennsylvania 18964
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 721-2400
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $5 par value 3,877,015
- -------------------------- ------------------------------
(Title of Class) (Number of shares outstanding
at 2/28/97)
The approximate aggregate market value of voting stock held by non
affiliates of the registrant is $121,052,917 as of February 28,1997.
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 X NO
----- -----
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. ( )
Parts I and Part III incorporate information by reference from the
proxy statement for the annual meeting of shareholders on April 8, 1997. Parts
I, II, and IV incorporate information by reference from the annual report to
shareholders for the year ended December 31, 1996.
PART I
Item 1. Business
General
Univest Corporation of Pennsylvania ("Univest") is a Pennsylvania
corporation organized in 1973 and registered as a bank holding company pursuant
to the Bank Holding Company Act of 1956. It owns all of the capital stock of
Union National Bank and Trust Company ("Union National Bank"), Pennview Savings
Bank, Univest Realty Corporation, Univest Leasing Corporation, Univest Mortgage
Company, Univest Financial Planning Corporation, Univest Insurance Company, and
Univest Electronic Services Corporation.
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. Pennview Savings Bank is engaged in attracting deposits from general
public and investing such deposits primarily in loans secured by residential
properties and consumer loans. The Realty Corporation was established to obtain,
hold and operate properties for the holding company and its subsidiaries. Both
the Leasing Corporation and Univest Mortgage Company are inactive. Univest
Insurance Company offers credit-related reinsurance plans. Univest Electronic
Services Corporation was established to provide data processing services to
Union National Bank in Souderton and other subsidiaries of Univest Corporation
of Pennsylvania.
Union National Bank and Trust Company, with its head office in
Souderton, Montgomery County, serves the area through twenty (23) banking
offices, two off-premises automated teller machines and provides banking and
trust services to the residents and employees of ten retirement homes. Fourteen
banking offices are in Montgomery County and nine banking offices are in Bucks
County. One off-premises automated teller machine is located in Bucks County and
the other is located in Montgomery County.
Pennview Savings Bank conducts operations through five full-service
offices located in Souderton, Hatfield, Franconia, Silverdale and
Montgomeryville, Pennsylvania and provides banking services to the residents and
employees of two retirement homes.
As of January 31, 1997, Univest and its subsidiaries employed four
hundred and thirty (430) 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 and Pennview Savings Bank.
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 Pennsylvania Department of Banking.
Univest is subject to the provisions of the Bank Holding Company Act of
1956, as amended, and is registered pursuant to its provisions. The Act
prohibits the acquisition by a bank holding company of a direct or indirect
ownership of more than five percent of the voting shares of any bank within the
United States without prior approval of the Board of Governors of the Federal
Reserve System, and also prohibits the granting of such approval in respect to
any bank within the United States located outside of the state where the bank
holding company's principal operations are conducted, unless the acquisition is
specifically authorized by the statutes of the state in which the bank is
located. With certain exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company which is not a bank, and from engaging directly
or indirectly in businesses unrelated to the business of banking, or managing,
or controlling banks. Under the Bank Holding Company Act Amendments of 1970,
which became effective on December 3, 1970, the Federal Reserve Board may
approve the acquisition by bank holding companies of non bank subsidiaries to
engage in activities that are closely related to banking and are in the public
interest. The amendments include a provision which prohibits banks, bank holding
companies and subsidiaries from engaging in tie-in arrangements. Bank tie-ins
involving a loan, discount, deposit, or trust service are specifically exempted,
and the Federal Reserve Board is authorized to make exceptions by regulations.
As a bank holding company, 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 which a member bank may
extend to its affiliates, and the amount of its funds which 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.
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 has Tier I capital ratios of 14.3% and 13.8%,
and total risk-based capital ratios of 15.5% and 15% at December 31, 1996 and
1995, respectively. 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, a minimum ratio of market value to book value for publicly traded
shares (if feasible) 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 newly created
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 at least 1%
of the aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or 5%
of its advances (borrowings) from the Federal Home Loan Bank of Pittsburgh,
whichever is greater.
Interstate Banking
Legislation was passed, and signed by President Clinton on September
29, 1994, which will eliminate many currently existing restrictions on
interstate banking. The legislation will authorize interstate acquisition of
banks by bank holding companies without geographic limitations one year after
enactment. Beginning June 1, 1997, the legislation will allow interstate
branching in states that have not passed legislation prohibiting interstate
branching, except that de novo branching or acquisition of a branch in another
state without acquisition of the entire bank will only be permitted if expressly
permitted by the law of the state in which such branch would be located.
Interstate branching prior to June 1, 1997, will be possible in states that pass
laws affirmatively authorizing such interstate branching. The effect of this
legislation on Univest cannot be predicted at this time.
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. The following financial data appearing on pages
6 through 17 reflects consolidated information. Where averages are reported,
daily information has been used for all subsidiaries.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
1996 1996/1995
Average Income/ Avg. Volume Rate Average
ASSETS: Balance Expense Rate Change Change Total Balance
--------- --------- ---- ------ ------ ----- -------
Cash and due from banks $ 30,866 $ 30,645
Time deposits with other banks 588 $ 30 5.1 $ 9 $ (2) $ 7 406
U.S. Government obligations 213,981 13,197 6.2 2,402 349 2,751 174,355
Oblig. of states & political sub. 3,967 172 4.3 64 (10) 54 2,535
Other securities 16,278 1,034 6.4 87 (29) 58 14,697
Federal Reserve bank stock 752 45 6.0 0 0 0 746
Federal funds sold and other
short-term investments 4,083 220 5.4 (343) (53) (396) 10,527
--------- -------- ---------
Total investments 239,061 14,668 6.1 202,860
--------- -------- ---- ---------
Commercial loans 124,372 11,517 9.3 (6,162) 0 (6,162) 190,451
Real estate loans 363,050 31,494 8.7 5,914 586 6,500 292,751
Installment loans 61,190 5,277 8.6 674 (54) 620 53,702
Home equity loans 16,393 1,758 10.7 (219) (93) (312) 18,501
Municipal loans 29,827 1,938 6.5 101 (85) 16 28,415
--------- -------- ---------
Gross loans 594,832 51,984 8.7 583,820
-------- ----
Less: valuation allowance (9,582) (8,965)
--------- ---------
Net loans 585,250 574,855
--------- ---------
Property and equipment, net 16,436 14,857
Other assets 17,656 20,409
--------- ---------
Total assets $889,857 $844,032
--------- ---------
1995 1995/1994 1994
ASSETS:
Income/ Avg. Volume Rate Average Income/ Avg.
Expense Rate Change Change Total Balance Expense Rate
------- ---- ------ ------ ----- ------- ------- ----
Cash and due from banks $ 32,914
Time deposits with other banks $ 23 5.7 $ (89) $ (6) $ (95) 1,955 $ 118 6.0
U.S. Government obligations 10,446 6.0 2,763 1,278 4,041 127,836 6,405 5.0
Oblig. of states & political sub. 118 4.7 19 4 23 2,091 95 4.5
Other securities 976 6.6 (243) 295 52 18,447 924 5.0
Federal Reserve bank stock 45 6.0 1 (1) 0 742 44 6.1
Federal funds sold and other
short-term investments 616 5.9 (290) 245 (45) 15,293 661 4.3
---------- --------- -------
Total investments 12,201 6.0 164,409 8,130 4.9
---------- ---- --------- ------- ---
Commercial loans 17,679 9.3 (650) 2,549 1,899 196,065 15,780 8.0
Real estate loans 24,994 8.5 60 589 649 294,251 24,345 8.3
Installment loans 4,657 8.7 674 230 904 45,934 3,753 8.2
Home equity loans 2,070 11.2 (188) 342 154 20,105 1,916 9.5
Municipal loans 1,922 6.8 (107) 149 42 29,851 1,880 6.3
----------
Gross loans 51,322 8.8 586,206 47,674 8.1
---------- ---- ------- ---
Less: valuation reserve (8,660)
---------
Net loans 577,546
---------
Property, net 13,346
Other assets 19,426
---------
Total assets $809,596
---------
1996 1996/1995
Average Income/ Avg. Volume Rate Average
LIABILITIES: Balance Expense Rate Change Change Total Balance
--------- --------- ---- ------ ------ ----- -------
Demand deposits $107,993 $ 99,547
-------- ---------
Interest checking deposits 73,973 $ 997 1.3 $ 23 $ (292) $ (269) 72,886
Money market savings 63,849 1,823 2.9 (113) 0 (113) 67,858
Regular savings 126,118 3,132 2.5 53 0 53 125,419
Certificates of deposit 313,867 17,639 5.6 872 599 1,471 299,498
Time open & club accounts 39,576 1,983 5.0 444 (61) 383 30,576
--------- -------- ---------
Total time, int., and inv.
checking deposits 617,383 25,574 4.1 596,237
--------- -------- --- ---------
Total deposits 725,376 695,784
--------- ---------
Federal funds purchased 4,433 245 5.5 185 (7) 178 1,093
Loans & securities sold under
agreement to repurchase 44,001 1,448 3.3 212 (38) 174 37,760
Other borrowings 7,612 414 5.4 125 21 146 5,338
Subordinated notes - - 0.0 0 (305) (305) 2,986
--------- -------- --- ---------
Total borrowings 56,046 2,107 3.8 47,177
--------- -------- --- ---------
Accrued expenses & other liab. 14,939 15,979
--------- ---------
Total liabilities 796,361 758,940
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 19,636 15,727
Capital surplus 34,545 8,163
Retained earnings 39,315 61,202
--------- ---------
Total shareholders' equity 93,496 85,092
--------- ---------
Total liabilities and share-
holders' equity $889,857 $844,032
--------- ---------
Weighted avg. yield on interest-earning assets 8.0%
Weighted avg. rate paid on interest-bearing liab. 4.1%
Net yield 4.7%
1995 1995/1994 1994
Income/ Avg. Volume Rate Average Income/ Avg.
LIABILITIES: Expense Rate Change Change Total Balance Expense Rate
------- ---- ------ ------ ----- ------- ------- ----
Demand deposits $ 97,750
Interest checking deposits $ 1,266 1.7 $ 13 $ (73) $ (60) 73,160 $ 1.326 1.8
Money market savings 1,936 2.9 (495) 339 (156) 84,874 2,092 2.5
Regular savings 3,079 2.5 (74) 0 (74) 128,674 3,153 2.5
Certificates of deposit 16,168 5.4 1,453 2,448 3,901 271,994 12,267 4.5
Time open & club accounts 1,600 5.2 769 256 1,025 15,988 575 3.6
---------- --------- -------
Total time, int., and inv.
checking deposits 24,049 4.0 574,690 19,413 3.4
---------- --- --------- ------- ---
Total deposits 672,440
---------
Federal funds purchased 67 6.1 25 17 42 690 25 3.6
Loans & securities sold under
agreement to repurchase 1,274 3.4 22 222 244 37,047 1,030 2.8
Other borrowings 268 5.0 (16) 17 1 5,654 267 4.7
Subordinated notes 305 10.2 (228) (5) (233) 5,229 538 10.3
---------- --------- -------
Total borrowings 1,914 4.1 48,620 1,860 3.8
---------- ---- --------- ------- ---
Accrued expenses & other liab. 12,072
---------
Total liabilities 733,132
---------
SHAREHOLDERS' EQUITY:
Common stock 15,717
Capital surplus 8,090
Retained earnings 52,657
---------
Total shareholders' equity 76,464
---------
Total liabilities and share-
holders' equity $809,596
---------
Weighted avg. yield on interest-earning assets 8.2% 7.5%
Weighted avg. rate paid on interest-bearing liab. 4.0% 3.4%
Net yield 4.8% 4.6%
Note:(1) For rate calculation purposes, average loan categories include
unearned discount.
(2) Nonaccrual loans have been included in the average loan balances.
(3) Certain amounts have been reclassified to conform with the
current-year presentation.
(4) Included in interest income are loan fees of $1,364,000 for 1996,
$1,310,000 for 1995 and $1,766,000 for 1994.
(5) Table I has not been tax equated.
* The change due to the volume/rate variance and average volume and percent
roundings have been allocated to volume.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE II. INVESTMENT PORTFOLIO (BOOK VALUE)
(Thousands of Dollars)
CARRYING AMOUNT OF INVESTMENT SECURITIES
December 31, December 31, December 31,
1996 (a) 1995 (a) 1994 (a)
------------ ------------ ------------
U. S. Treasury, government corporations and agencies $213,360 $206,117 $183,580
State and political subdivisions 4,980 3,873 2,529
Mortgage-backed securities 18,529 9,256 10,843
Other 5,344 5,273 5,108
-------- -------- --------
Total $242,213 $224,519 $202,060
======== ======== ========
MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD
December 31, December 31, December 31, December 31, December 31, December 31,
1996 1996 1995 1995 1994 1994
Amount (a) Yield (b) Amount (a) Yield (b) Amount (a) Yield (b)
----------- ------------ ------------- ------------ ------------ ------------
1 Year or less $ 73,215 6.50% $ 52,749 5.85% $ 49,098 4.52%
1 Year - 5 Years 155,662 6.06% 159,807 6.19% 141,731 6.28%
5 Years - 10 Years 6,784 6.09% 5,315 5.65% 3,833 6.42%
After 10 Years 6,552 6.16% 6,648 6.44% 7,398 6.29%
-------- ---- -------- ---- -------- ----
Total $242,213 6.20% $224,519 6.10% $202,060 5.85%
======== ==== ======== ==== ======== ====
Refer to Note 3 to the consolidated financial statements.
a. Held to maturity and available for sale portfolios are combined.
b. Weighted average yield is calculated by dividing income, which has not been
tax equated on tax-exempt obligations, within each maturity range by
outstanding amount of the related investment.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE III. LOAN PORTFOLIO, PART A. TYPES OF LOANS
(Thousands of Dollars)
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Real estate Loans
Construction and land development $ 34,733 $ 54,840 $ 50,954 $ 60,437 $ 50,104
Secured by 1-4 family residential properties 217,631 216,180 221,098 200,018 165,313
Other real estate loans 178,644 157,925 160,234 164,304 174,333
Commercial and industrial loans 124,788 120,692 114,103 115,375 116,847
Loans to individuals 47,466 40,648 36,810 34,130 42,518
All other loans 5,821 4,084 5,639 4,402 2,918
-------- -------- -------- -------- --------
Total loans $609,083 $594,369 $588,838 $578,666 $552,033
======== ======== ======== ======== ========
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE III. LOAN PORTFOLIO, PART B.
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
(Thousands of Dollars)
The commercial mortgages and Industrial Development Authority mortgages
that are presently being written at both fixed and floating rates of interest
are written for a three (3) year term with a monthly payment based on a fifteen
(15) year amortization schedule. At each three-year anniversary date of the
mortgages, the interest rate is renegotiated and the term of the loan is
extended for an additional three years. At each three-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.
The residential mortgages are presently being written on a one (1) or three
(3) year rollover basis. The monthly payment on these mortgages is based on a
thirty (30) year amortization schedule, unless the borrower requests a shorter
payout period. These are included in the "Due in One to Five Years" category on
issue. Fixed rate residential mortgages are also being written for terms of 15
and 30 years and are included in the "Due in over Five Years" category.
As of December 31, 1996 Due in One Due in One Due in Over
Year or Less to Five Years Five Years Total
------------ ------------- ----------- -----
Real estate loans
Construction and land development $ 22,858 $ 9,690 $ 2,185 $ 34,733
Secured by 1-4 family residential properties 79,236 76,515 61,879 217,630
Other real estate loans 76,183 30,929 71,532 178,644
Commercial and industrial loans 92,170 23,488 9,130 124,788
Loans to individuals 19,262 21,824 6,380 47,466
All other loans 4,483 676 663 5,822
-------- -------- -------- --------
Total loans $294,192 $163,122 $151,769 $609,083
======== ======== ======== ========
Loans with a predetermined interest rate $ 72,702 $106,650 $150,784 $330,136
Loans with a floating or variable interest rate 221,490 56,472 985 278,947
-------- -------- -------- --------
$294,192 $163,122 $151,769 $609,083
======== ======== ======== ========
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE III. LOAN PORTFOLIO, PART C. RISK ELEMENTS
(Thousands of Dollars)
Nonaccrual, Past-Due and Restructured Loans and Other Assets
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 on what actions should be taken when determining the
collectibility of interest for accrual purposes.
Potential Problem Loans
When collectibility of interest and/or principal on a particular loan is
questionable, the loan is placed on nonaccrual status. If, at the time a
decision is made to cease accruing interest, it is determined that the
collection of previously accrued but unpaid interest is uncertain, the amount is
charged against current income. Conversly, if a loan on nonaccrual status is
paid in full, including interest, a credit is made to current income. The $4,952
of nonaccruing and restructured loans in 1996 includes $792 which although
nonaccruing is performing on current contractual status. If nonaccrual loans had
been performing in accordance with their contractual terms, additional income of
$275 would have been recorded in 1996. Interest income of $93 was recognized on
these loans. In management's evaluation of the loan portfolio risks, any
significant future increases in nonperforming loans are dependent to a large
extent on the economic environment, or specific industry problems.
Loan Concentrations
At December 31, 1996, there were no concentrations of loans exceeding 10%
of total loans other than disclosed in Table III, Part A.
Other Assets
At December 31, 1996, $553 in Other Real Estate Owned was classified as
nonperforming. This amount represents all of the Other Real Estate Owned.
1996 1995 1994 1993 1992
Principal Principal Principal Principal Principal
Balance Balance Balance Balance Balance
--------- --------- --------- --------- ---------
Nonaccruing loans $ 4,671 $ 5,855 5,149 $ 6,991 $14,969
------- ------- ----- ------- -------
Accruing loans 90 days or more past due:
Real estate loans
Construction and land development -- -- -- -- --
Secured by 1-4 family dwellings 373 234 76 87 108
Other real estate 12 93 172 36 259
Commercial and industrial loans 19 -- -- 67 345
Loans to individuals 180 174 247 108 177
All other loans -- -- -- -- --
------- ------- ------- ------- -------
Total loans, 90 days or more past due 584 501 495 298 889
------- ------- ------- ------- -------
Restructured loans, not included above 281 352 422 -- --
------- ------- ------- ------- -------
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE IV. SUMMARY OF LOAN LOSS EXPERIENCE
(Thousands of Dollars)
Management believes the allowance for loan losses is maintained at a
level which is adequate to absorb potential losses in the loan portfolio.
Management's methodology to determine the adequacy of and the provisions to the
allowance considers specific credit reviews, past loan loss experience, current
economic conditions and trends, and the volume, growth, and composition of the
loan portfolio.
The allowance for loan losses is determined through a quarterly
evaluation of reserve adequacy which takes into consideration the growth of the
loan portfolio, the status of past-due loans, current economic conditions,
various types of lending activity, policies, real estate and other loan
commitments, and significant 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 under FAS 114, which was adopted by the
Corporation effective January 1, 1995. Any of the above factors may cause the
provision to fluctuate.
As the accompanying table indicates, the amount of loan loss provision
charged to expense for 1996 was $1,045 compared to $1,895 in 1995 and $1,950 in
1994.
1996 1995
---- ----
Average amount of loans outstanding $590,144 $583,398
Loan loss reserve at beginning of period $ 8,854 $ 8,876
Charge-offs:
Real estate loans 990 1,842
Commercial and industrial loans 20 416
Loans to individuals 175 236
Home equity -- --
Other -- --
--------- ---------
Total charge-offs: 1,185 2,494
--------- ---------
Recoveries:
Real estate loans 458 316
Commercial and industrial loans 529 157
Loans to individuals 76 75
Home equity -- --
Other 24 29
--------- ---------
Total recoveries: 1,087 577
--------- ---------
Net charge-offs: 98 1,917
Additions to loan loss reserve 1,045 1,895
Loan loss reserve at end of period $ 9,801 $ 8,854
--------- ---------
Loan type Loan type
as % as %
Amount in reserve by category: of loans of loans
-------- --------
Real estate loans 70.8 $3,146 72.2 $ 817
Commercial and industrial loans 20.5 1,332 20.3 2,459
Loans to individuals 7.8 354 6.8 347
All other loans 0.9 11 0.7 11
Unallocated portion 4,958 5,220
--------- ---------
Total $9,801 $ 8,854
--------- ---------
Ratio-Net charge-offs versus average loans 0.0% 0.3%
1994 1993 1992
---- ---- ----
Average amount of loans outstanding $585,644 $563,678 $550,649
Loan loss reserve at beginning of period $ 7,198 $ 8,240 $ 6,735
Charge-offs:
Real estate loans 701 1,367 624
Commercial and industrial loans 615 2,270 871
Loans to individuals 127 215 265
Home equity -- -- --
Other -- -- 71
-------- -------- --------
Total charge-offs: 1,443 3,852 1,831
-------- -------- --------
Recoveries:
Real estate loans 146 139 52
Commercial and industrial loans 816 9 298
Loans to individuals 170 114 75
Home equity -- -- --
Other 39 68 59
-------- -------- --------
Total recoveries: 1,171 330 484
-------- -------- --------
Net charge-offs: 272 3,522 1,347
Additions to loan loss reserve 1,950 2,480 2,852
Loan loss reserve at end of period $ 8,876 $ 7,198 $ 8,240
-------- -------- --------
Loan type Loan type Loan type
as % as % as %
Amount in reserve by category: of loans of loans of loans
-------- -------- --------
Real estate loans 73.4 $2,999 73.4 $2,468 70.6 $3,705
Commercial and industrial loans 19.4 2,495 19.9 2,384 21.2 3,408
Loans to individuals 6.3 490 5.9 402 7.7 548
All other loans 1 15 0.8 538 0.5 124
Unallocated portion 2,876 1,406 455
-------- -------- --------
Total $8,875 $ 7,198 $8,240
-------- -------- --------
Ratio-Net charge-offs versus average loans 0.0% 0.6% 0.2%
Total cash-basis and nonaccrual loans of $4,671 at December 31, 1996, were
generally comprised of $1,502 in residential real estate loans and $3,169 in
commercial real estate loans.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE V. DEPOSITS
(Thousands of Dollars)
1996 1995 1994
-------- -------- --------
A. Average: Noninterest-bearing demand deposits $107,993 $ 99,547 $ 97,750
Interest checking 73,973 72,886 73,160
Money Market savings 63,849 67,858 84,874
Saving deposits 126,118 125,419 128,674
Time deposits 353,443 330,074 287,982
-------- -------- --------
Total $725,376 $695,784 $672,440
======== ======== ========
Due 3 months Due 3 - 6 Due 6 - 12 Due over
B. Year-end balance: ($100 or more) outstanding as of or less months months 12 months
December 31, 1996 ------------ --------- ---------- ----------
Certificates of deposit $ 4,822 $ 3,069 $ 2,953 $11,325
Other time deposits $23,114 $ 6,189 $ 1,107 $ 104
Note: Univest and its subsidiaries do not have any foreign offices or foreign
deposits
TABLE VI. RETURN ON EQUITY AND ASSETS (RATIOS)
(Shown as percentages)
1996 1995 1994
---- ---- ----
Return on assets 1.4 1.3 1.3
Return on equity 12.9 13.2 13.2
Dividend payout ratio 23.1 24.9 23.2
Equity to assets ratio 10.5 10.1 9.4
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INTEREST RATE SENSITIVITY ANALYSIS
(Thousands of dollars)
Within 1 - 5 Over
1 Year Years 5 Years
------ ----- -------
Rate Sensitive Interest Earnings Assets
Federal funds sold $ 69 $ -- $ --
Investment securities 92,907 145,344 4,391
Loans 345,155 214,558 48,465
Hedging instruments (20,000) 20,000 --
--------- --------- ---------
$ 418,131 $ 379,902 $ 52,856
Rate Sensitive Liabilities
Interest bearing deposits 317,441 286,081 1,189
Borrowed funds 67,708 -- --
Net non-interest bearing funds (a) -- -- 178,470
--------- --------- ---------
385,149 286,081 179,659
Excess interest-earning assets (liabilities) 32,982 93,821 (126,803)
Cumulative excess interest earning assets (liabilities) 32,982 126,803 --
========= ========= =========
Notes to interest sensitivity analysis:
(a) Net non-interest bearing funds is the sum of non-interest bearing
liabilities and shareholders; equity minus non-interest earning assets.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE VII. SHORT TERM BORROWINGS
(Thousands of Dollars)
LOANS AND SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
1996 1995 1994
---- ---- ----
Balance at December 31 $48,661 $45,657 $43,768
Weighted average interest rate at year end 3.3% 3.4% 3.3%
Maximum amount outstanding at any month's end $53,109 $45,657 $43,768
Average amount outstanding during the year $44,001 $37,760 $37,047
Weighted average interest rate during the year 3.3% 3.4% 2.8%
Item 2. Properties
Univest and its subsidiaries occupy twenty-eight properties in
Montgomery and Bucks Counties in Pennsylvania, which are used principally as
banking offices. Note 6, appearing on page 22 of the Annual Report to
Shareholders (Exhibit 13), is hereby incorporated in this item.
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, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Incorporated by reference from the 1996 Annual Report to Shareholders
(Exhibit 13), pages 41-42. Dividend and other restrictions are incorporated by
reference from Note 15 of the 1996 Annual Report to Shareholders (Exhibit 13),
pages 28 and 29. The approximate number of shareholders as of February 28, 1997,
was 1,880.
Item 6. Selected Financial Data
Incorporated by reference from the 1996 Annual Report to Shareholders
(Exhibit 13), page 34.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated by reference from the 1996 Annual Report to Shareholders
(Exhibit 13), pages 35 through 40. Dividend and other restrictions are
incorporated by reference from Note 15 of the 1996 Annual Report to Shareholders
(Exhibit 13), pages 28 and 29.
Item 8. Financial Statements and Supplementary Data
Consolidated balance sheets of the registrant at December 31, 1996 and
1995, and consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years ended December 31, 1996, and the
independent auditors' report thereon are incorporated by reference from the 1996
Annual Report to Shareholders (Exhibit 13), pages 13 through 34.
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, 1997.
Executive Officers
The names and ages of all executive officers of Univest are as follows:
Principal Occupation
Officer Title during past 5 years Age
------- ----- -------------------- ---
Merrill S. Moyer Chairman Chairman and President 63
of the Corporation and
Chairman of Union
National Bank
Norman L. Keller Executive Vice President of Pennview 59
President Savings Bank
Marvin A. Anders Vice Chairman Executive Vice President 57
and Senior Trust Officer
of Union National Bank
William S. Aichele Executive Vice Executive Vice President 46
President of the Corporation and
President and CEO of
Union National Bank
Wallace H. Bieler Senior Vice Senior Vice President 51
President and CFO of the Corporation
and Union National Bank
There is no family relationship among any of the executive officers of Univest.
Item 11. Executive Compensation
Incorporated herein by reference from the registrant's definitive proxy
statement for the annual meeting of shareholders on April 8, 1997.
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, 1997.
Item 13. Certain Relationships and Related Transactions
During 1996, the Corporation and its subsidiaries paid $293,204 to H.
Mininger & Son, Inc. for building expansion projects which were in the normal
course of business on substantially the same terms as available from others. H.
Ray Mininger, Alternate Director, is president of H. Mininger & Sons, Inc.
Part IV
Item 14. 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
1996.
(c) Exhibits - The response of this portion of item 14 is submitted as
a separate section.
(d) Financial Statement Schedules - none.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
[Item 14(a)]
Annual Report
to Shareholders*
----------------
Report of Independent Auditors 33
Consolidated balance sheets at 13
December 31, 1996 and 1995
Consolidated statements of income for each of the 14
three years in the period ended December 31, 1996
Consolidated statements of changes in shareholders' equity 15
for each of the three years in the period ended
December 31, 1996
Consolidated statements of cash flows for 16
each of the three years in the period ended
December 31, 1996
Notes to consolidated financial statements 17-32
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.
* Refers to page numbers in the Annual Report to Shareholders for 1996 (Exhibit
13) which is incorporated by references.
UNIVEST CORPORATION OF PENNSYLVANIA
AND SUBSIDIARIES
INDEX TO EXHIBITS
[Item 14(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 - Not Applicable.
(12) Statements Re Computation of Ratios - Not Applicable.
(13) Annual Report to Shareholders
(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.
UNIVEST CORPORATION OF PENNSYLVANIA
AND SUBSIDIARIES
EXHIBIT
[Item 14(c)]
Subsidiaries
------------
(1) Union National Bank and Trust Company is chartered in the Commonwealth
of Pennsylvania.
(2) Pennview Savings Bank is chartered in the Commonwealth of Pennsylvania.
(3) Univest Leasing Corporation is chartered in the Commonwealth of
Pennsylvania.
(4) Univest Realty Corporation is chartered in the Commonwealth of
Pennsylvania.
(5) Univest Mortgage Company is chartered in the Commonwealth of
Pennsylvania.
(6) Univest Financial Planning Company is chartered in the Commonwealth of
Pennsylvania.
(7) Univest Insurance Company is chartered in the State of Arizona.
(8) Univest Electronic Services Corporation is chartered in the
Commonwealth of Pennsylvania.
All the subsidiaries do business under the above names.
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/ Robert H. Schong
----------------------
Robert H. Schong
Secretary, March 26, 1997
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:
/s/ Merrill S. Moyer /s/ James L. Bergey
-------------------------------------- ---------------------------------
Merrill S. Moyer James L. Bergey
Chairman, President and Director, March 26, 1997 Director, March 26, 1997
/s/ Marvin A. Anders /s/ Harold M. Mininger
-------------------------------------- ----------------------------------
Marvin A. Anders Harold M. Mininger
Vice Chairman, March 26,1997 Director, March 26, 1997
/s/ Wallace H. Bieler /s/ Paul G. Shelly
-------------------------------------- ----------------------------------
Wallace H. Bieler Paul G. Shelly
Chief Financial Officer, March 26, 1997 Director, March 26, 1997
/s/ Thomas K. Leidy /s/ R. Lee Delp
---------------------------------- ----------------------------------
Thomas K. Leidy R. Lee Delp
Director, March 26, 1997 March 26, 1997
/s/ John U. Young /s/ Clair W. Clemens
-------------------------------------- ----------------------------------
John U. Young Clair W. Clemens
Director, March 26, 1997 Director, March 26, 1997
Consolidated Balance Sheets
(in thousands, except share data)
- -------------------------------------------------------------------------------
December 31,
1996 1995
------------------------
Assets
Cash and due from banks ................................................ $ 38,934 $ 30,901
Time deposits with other banks ......................................... 360 456
Investment securities held to maturity (market value $173,013 and
$170,665 at December 31, 1996 and 1995, respectively) ............... 172,785 168,439
Investment securities available for sale ............................... 69,428 56,080
Federal funds sold and other short-term investments .................... 69 16,527
Loans .................................................................. 607,069 585,971
Less: Reserve for possible loan losses ................................ (9,801) (8,854)
------------------------
Net loans ............................................................ 597,268 577,117
------------------------
Premises and equipment, net ............................................ 16,843 16,200
Accrued interest and other assets ...................................... 16,772 16,168
------------------------
Total assets ......................................................... $912,459 $881,888
========================
Liabilities
Demand deposits, noninterest bearing ................................... $122,087 $100,300
Demand deposits, interest bearing ...................................... 138,953 154,642
Savings deposits ....................................................... 125,483 122,683
Time deposits .......................................................... 347,245 347,402
------------------------
Total deposits ....................................................... 733,768 725,027
------------------------
Securities sold under agreements to repurchase ......................... 48,661 45,657
Other short-term borrowings ............................................ 12,055 1,155
Accrued expenses and other liabilities ................................. 13,633 16,628
Long-term debt ......................................................... 7,075 4,085
------------------------
Total liabilities .................................................... 815,192 792,552
------------------------
Shareholders' equity
Common stock, $5 par value; 12,000,000 shares authorized at December 31,
1996 and 1995 and 3,927,161 shares issued at December 31, 1996 and
1995 and 3,888,594 and 3,920,831 shares outstanding at December 31,
1996 and December 31, 1995, respectively* ........................... 19,636 19,638
Additional paid-in capital ............................................. 34,544 34,559
Retained earnings ...................................................... 44,260 35,028
Net unrealized securities gains ........................................ 18 261
Treasury stock, 38,567 shares at cost at December 31, 1996 and 6,330
shares at cost at December 31, 1995 ................................. (1,191) (150)
------------------------
Total shareholders' equity ........................................... 97,267 89,336
------------------------
Total liabilities and shareholders' equity ............................. $912,459 $881,888
========================
See accompanying notes to consolidated financial statements.
*The number of shares outstanding and all per share amounts give effect to a
twenty-five percent stock dividend declared on November 22, 1995 to
shareholders of record as of February 15, 1996, payable on March 1, 1996.
13
Consolidated Statements of Income
(in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
-------------------------------------
Interest income
Interest and fees on loans:
Taxable ....................................... $50,046 $49,400 $45,794
Exempt from federal income taxes .............. 1,938 1,922 1,880
-------------------------------------
Total interest and fees on loans ................. 51,984 51,322 47,674
Interest and dividends on investment securities:
U.S. Government obligations ................... 13,197 10,445 6,405
Obligations of state and political subdivisions 172 118 95
Other securities .............................. 1,079 1,021 968
Interest on time deposits with other banks ....... 30 23 118
Interest on federal funds sold ................... 220 616 661
-------------------------------------
Total interest income ....................... 66,682 63,545 55,921
-------------------------------------
Interest expense
Interest on demand deposits ...................... 2,820 3,202 3,418
Interest on savings deposits ..................... 3,132 3,078 3,152
Interest on time deposits ........................ 19,622 17,769 12,843
Interest on long-term debt ....................... 358 314 565
Interest--all other .............................. 1,749 1,600 1,295
-------------------------------------
Total interest expense ...................... 27,681 25,963 21,273
-------------------------------------
Net interest income ................................ 39,001 37,582 34,648
Provision for loan losses .......................... 1,045 1,895 1,950
-------------------------------------
Net interest income after provision for loan losses 37,956 35,687 32,698
-------------------------------------
Other income
Trust ............................................ 2,290 2,032 1,828
Service charges on demand deposits ............... 1,814 1,629 1,633
Losses on sales of securities .................... (9) (66) (27)
Gains (losses) on sales of mortgages ............. 43 101 (12)
Other ............................................ 2,091 2,399 2,150
-------------------------------------
Total other income .......................... 6,229 6,095 5,572
-------------------------------------
Other expenses
Salaries and benefits ............................ 14,461 13,320 12,403
Net occupancy .................................... 2,073 1,856 1,665
Equipment ........................................ 2,428 1,898 1,724
Other ............................................ 8,157 8,484 7,821
-------------------------------------
Total other expenses ........................ 27,119 25,558 23,613
-------------------------------------
Income before income taxes ......................... 17,066 16,224 14,657
Applicable income taxes ............................ 5,028 4,997 4,537
-------------------------------------
Net income ......................................... $12,038 $11,227 $10,120
=====================================
Net income per share* .............................. $ 3.08 $ 2.86 $ 2.58
=====================================
See accompanying notes to consolidated financial statements.
*The weighted average number of shares outstanding and all per share amounts
give effect to a twenty-five percent stock dividend declared on November 22,
1995 to shareholders of record as of February 15, 1996, payable on March 1,
1996.
14
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share data)
- ----------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Additional Securities
Common Paid-in Retained Gains Treasury
Stock Capital Earnings (Losses) Stock Total
-------------------------------------------------------------------------------
Balance at December 31, 1993 ...... $15,717 $ 8,090 $ 49,215 $ -- $ (150) $72,872
Adjustment to beginning balance
for change in accounting
method, net of income taxes of
$151 ......................... 293 293
Change in unrealized gains and
(losses) on investment
securities available for sale,
net of income taxes of ($399) (775) (775)
Net income for 1994 ............. 10,120 10,120
Cash dividends declared* ($.60
per share) ................... (2,352) (2,352)
-------------------------------------------------------------------------------
Balance at December 31, 1994 ...... 15,717 8,090 56,983 (482) (150) 80,158
Change in unrealized gains and
(losses) on investment
securities available for sale,
net of income taxes of $394 .. 743 743
Net income for 1995 ............. 11,227 11,227
Cash dividends declared* ($.71
per share) ................... (2,792) (2,792)
25% stock dividend payable
March 1, 1996, 784,254 shares
at fair market value ......... 3,921 26,469 (30,390) --
-------------------------------------------------------------------------------
Balance at December 31, 1995 ...... 19,638 34,559 35,028 261 (150) 89,336
Change in unrealized gains and
(losses) on investment
securities available for sale,
net of income taxes of ($135) (243) (243)
Cash dividends declared ($.71 per
share) ....................... (2,773) (2,773)
Cash paid in lieu of fractional
shares ....................... (2) (15) (17)
Stock issued under dividend
reinvestment and employee
stock purchase plans ......... (2) 249 247
Exercise of stock options ....... (31) 140 109
Acquisition of treasury stock ... (1,430) (1,430)
Net income for 1996 ............. 12,038 12,038
-------------------------------------------------------------------------------
Balance at December 31, 1996 ...... $19,636 $34,544 $ 44,260 $ 18 $(1,191) $97,267
===============================================================================
See accompanying notes to consolidated financial statements.
*Cash dividends per share give effect to a twenty-five percent stock dividend
declared on November 22, 1995 to shareholders of record as of February 15,
1996, payable on March 1, 1996.
15
Consolidated Statements of Cash Flows
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
-------------------------------------
Cash flows from operating activities
Net income ................................................................ $ 12,038 $ 11,227 $ 10,120
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses in excess of (less than) net charge-offs ..... 947 (22) 1,678
Depreciation of premises and equipment ................................. 2,239 1,725 1,527
(Discount accretion) premium amortization on investment securities and
time deposits ........................................................ (613) (346) 290
Deferred (benefit) income tax .......................................... (119) 353 139
Realized losses on investment securities ............................... 9 66 27
Realized (gains) losses on sales of mortgages .......................... (43) (101) 12
Decrease in net deferred loan fees ..................................... (116) (258) (552)
(Increase) decrease in interest receivable and other assets ............ (604) 1,115 (1,320)
(Decrease) increase in accrued expenses and other liabilities .......... (2,445) 2,069 5,000
-------------------------------------
Net cash provided by operating activities ............................ 11,293 15,828 16,921
Cash flows from investing activities
Proceeds from maturing time deposits ...................................... 96 45 2,798
Proceeds from maturing securities held to maturity ........................ 48,528 47,288 24,335
Proceeds from maturing securities available for sale ...................... 6,380 5,873 29,987
Proceeds from sales of securities available for sale ...................... 10,991 14,994 7,247
Purchases of investment securities held to maturity ....................... (52,329) (76,059) (108,784)
Purchases of investment securities available for sale ..................... (31,039) (13,138) (16,565)
Net decrease (increase) in federal funds sold and other
short-term investments................................................... 16,458 (9,679) 5,830
Net decrease in loans held for sale ....................................... -- -- 8,916
Proceeds from sales of mortgages .......................................... 10,356 8,276 14,918
Net increase in loans ..................................................... (31,295) (13,109) (24,374)
Capital expenditures ...................................................... (2,882) (3,976) (2,843)
-------------------------------------
Net cash used in investing activities ................................ (24,736) (39,485) (58,535)
Cash flows from financing activities
Assumption of deposits .................................................... -- 11,916 10,608
Net increase in deposits .................................................. 8,741 13,470 18,966
Net increase in short-term borrowings ..................................... 13,904 1,889 15,644
Proceeds from long-term debt .............................................. 7,000 -- --
Purchases of treasury stock ............................................... (1,430) -- --
Stock issued under dividend reinvestment and employee stock purchase plans. 249 -- --
Proceeds from exercise of stock options ................................... 109 -- --
Cash dividends ............................................................ (3,087) (2,541) (2,290)
Repayments of long-term debt .............................................. (4,010) (5,353) (839)
-------------------------------------
Net cash provided by financing activities ............................ 21,476 19,381 42,089
-------------------------------------
Net increase (decrease) in cash and due from banks ........................ 8,033 (4,276) 475
Cash and due from banks at beginning of year .............................. 30,901 35,177 34,702
-------------------------------------
Cash and due from banks at end of year .................................... $ 38,934 $ 30,901 $ 35,177
=====================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest .................................................................. $ 27,058 $ 23,899 $ 20,600
Income taxes .............................................................. $ 5,100 $ 4,290 $ 4,450
See accompanying notes to consolidated financial statements.
16
Notes to Consolidated Financial Statements
(dollars 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 general domestic commercial
and retail banking services and provides a full range of banking and trust
services to its customers. Union and Pennview serve the Montgomery and Bucks
Counties of Pennsylvania through 28 banking offices and provide banking and
trust services to the residents and employees of 12 retirement communities.
PRINCIPLES OF CONSOLIDATION
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." All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles 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.
INVESTMENT SECURITIES
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Securities are classified as investments 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 investment or trading are
designated securities available for sale and carried at fair value. Unrealized
gains and losses, net of applicable income taxes, are reflected in shareholders'
equity. The accumulated net unrealized gains on available-for-sale securities
included in retained earnings was $18 at December 31, 1996 and $261 at December
31, 1995.
Gains and losses on sales of securities are generally computed on a specific
security basis.
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. Unearned discount on installment loans for
Pennview Savings Bank is recognized in income using the actuarial method, which
materially approximates the interest method. 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.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1997, the Corporation will adopt Statement of Financial
Accounting Standard ("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Statement 125 provides new
accounting and reporting standards for sales, securitizations, and servicing of
receivables and other financial assets, for certain secured borrowings, and
collateral transactions, and for extinguishments of liabilities. The adoption of
Statement 125 is not expected to have a material impact on the Corporation's
financial condition or results of operations.
17
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
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.
RESERVE FOR POSSIBLE 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 possible loan losses. This evaluation is inherently
subjective as it requires material 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.
The Corporation adopted Statement of Financial Accounting Standard ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," and Statement No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," effective January 1, 1995. As a result of applying the rules,
certain impaired loans are reported at the present value of expected future cash
flows using the loan's initial effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The adoption of these standards
did not have any impact on the Corporation's financial position or results of
operations.
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 for a fixed number of shares 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 Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required
by Statement 123, however, the effect of applying SFAS No. 123 to the
Corporation's stock-based awards results in net income and earnings per share
that are not materially different from amounts reported.
DIVIDEND REINVESTMENT AND EMPLOYEE STOCK PURCHASE PLANS
In April 1996, the shareholders approved the Univest Dividend Reinvestment
Plan (the "Reinvestment Plan") and the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). 250,000 shares of common stock are available for issuance
under each of the plans. 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 1996, 6,517 and 1,301 shares were issued to employees under the
Reinvestment Plan and the Purchase Plan, respectively. As of December 31, 1996,
243,483 and 248,699 shares were available for future purchase under the
Reinvestment Plan and the Purchase Plan, respectively.
NET INCOME PER SHARE
Earnings (net income) per common share are calculated on the basis of the
weighted average number of shares outstanding of 3,910, 3,921, and 3,921 for
years ended December 31, 1996, 1995, and 1994, respectively. All share and per
share amounts have been retroactively adjusted to give effect to a twenty-five
percent stock dividend declared November 22, 1995 to shareholders of record as
of February 15, 1996, payable on March 1, 1996. The assumed exercise of the
options under the Long-Term Incentive Plan did not have a materially dilutive
effect on the earnings per share in 1996.
18
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
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 purchase price of Pennview in excess of the fair value of the net assets
acquired was recorded as goodwill and is being amortized on a straight-line
basis over a 15-year period. At December 31, 1996, the unamortized balance is
approximately $1.5 million ($1.7 million at December 31, 1995), net of
accumulated amortization of approximately $1.2 million ($1 million at December
31, 1995).
RETIREMENT PLAN
Nearly 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 amount funded is not more than the maximum amount deductible for
federal income tax purposes. In addition, 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.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation provides certain postretirement health care 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 Union in a fiduciary or agency capacity for its customers are
not included in the consolidated financial statements since such items are not
assets of Union. Trust service income is reported on a cash basis. Reporting
such income on a cash basis instead of the accrual basis does not materially
affect net income or financial position.
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 for 1996 was $3.8 million and for
1995 was $4.8 million.
NOTE 3. INVESTMENT SECURITIES
Securities with a market value of $101.5 million and $92.4 million at
December 31, 1996 and 1995, respectively, were pledged to secure public deposits
and for other purposes as required by law. The following table shows the
amortized cost and approximate market value of the held-to-maturity securities
and available-for-sale securities at December 31, 1996 and 1995, by maturity
within each type:
19
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
December 31, 1996 December 31, 1995
------------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Held-to-Maturity Cost Gains Losses Value Cost Gains Losses Value
Securities ----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
U.S. Treasury, government
corporations and
agencies obligations:
Within 1 year .......... $ 58,448 $421 $ (2) $ 58,867 $ 40,472 $ 234 $ (76) $ 40,630
1 to 5 years ........... 95,510 234 (391) 95,353 119,794 2,015 (29) 121,780
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
153,958 655 (393) 154,220 160,266 2,249 (105) 162,410
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
State and political
subdivisions:
Within 1 year .......... 265 -- -- 265 1,180 -- -- 1,180
1 to 5 years ........... 4,715 29 (5) 4,739 1,335 25 -- 1,360
5 to 10 years .......... -- -- -- -- 1,358 -- (5) 1,353
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
4,980 29 (5) 5,004 3,873 25 (5) 3,893
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
Mortgage-backed
securities:
1 to 5 years ........... 9,337 30 (66) 9,301 2,724 62 (1) 2,785
5 to 10 years .......... 3,110 -- (28) 3,082 176 -- -- 176
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
12,447 30 (94) 12,383 2,900 62 (1) 2,961
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
Other:
1 to 5 years ........... 1,200 -- -- 1,200 1,200 -- (10) 1,190
5 to 10 years .......... 200 6 -- 206 200 11 -- 211
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
1,400 6 -- 1,406 1,400 11 (10) 1,401
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
Total .................... $172,785 $720 $ (492) $173,013 $168,439 $2,347 $ (121) $170,665
=========== ============ ============ ========== ========== =========== ============ ============
Securities Available for
Sale
U.S. Treasury, government
corporations and
agencies obligations:
Within 1 year .......... $ 14,489 $ 24 $ (11) $ 14,502 $ 10,997 $ 102 $ (2) $ 11,097
1 to 5 years ........... 44,824 166 (90) 44,900 34,337 480 (63) 34,754
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
59,313 190 (101) 59,402 45,334 582 (65) 45,851
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
Mortgage-backed
securities:
5 to 10 years .......... 3,516 -- (42) 3,474 3,654 -- (73) 3,581
Over 10 years .......... 2,627 -- (19) 2,608 2,813 -- (38) 2,775
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
6,143 -- (61) 6,082 6,467 -- (111) 6,356
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
Other:
Over 10 years .......... 3,944 -- -- 3,944 3,873 -- -- 3,873
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
3,944 -- -- 3,944 3,873 -- -- 3,873
----------- ------------ ------------ ---------- ---------- ----------- ------------ ------------
Total .................... $ 69,400 $190 $(162) $ 69,428 $ 55,674 $ 582 $(176) $ 56,080
=========== ============ ============ ========== ========== =========== ============ ============
20
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
During the year ended December 31, 1996, available-for-sale debt securities
with a fair value at the date of sale of $10,981 were sold ($14,994 in 1995).
Gross realized gains on such sales totaled $12 during 1996 ($0 in 1995 and $19
in 1994), and the gross realized losses totaled $21 during 1996 ($66 in 1995 and
$46 in 1994). The net adjustment to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of shareholders'
equity totaled $18 in 1996 and $261 in 1995.
Unrealized losses in investment securities at December 31, 1996 and 1995 do
not represent permanent impairments.
At December 31, 1996 and 1995, 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,
1996 1995
----------- -----------
Real estate--construction $ 34,733 $ 54,840
Real estate--commercial .. 178,644 157,925
Real estate--residential . 217,631 216,180
Commercial and industrial 124,788 120,692
Loans to individuals ..... 47,466 40,648
All other ................ 5,821 4,084
----------- -----------
Total loans .............. 609,083 594,369
Less: Unearned income .... (2,014) (8,398)
----------- -----------
$607,069 $585,971
=========== ===========
At December 31, 1996, loans to directors and executive officers of Univest
and companies in which directors have an interest aggregated $12,480. 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, 1996 Additions Collected December 31, 1996
--------------- ----------- ----------- -----------------
$10,502 $8,995 $7,017 $12,480
NOTE 5. RESERVE FOR POSSIBLE LOAN LOSSES
A summary of the transactions in the reserve for possible loan losses is
as follows:
1996 1995 1994
--------- --------- ---------
Balance at beginning of year ........... $ 8,854 $ 8,876 $ 7,198
Provision charged to operating expenses 1,045 1,895 1,950
Recoveries ............................. 1,087 577 1,171
Loans charged off ...................... (1,185) (2,494) (1,443)
--------- --------- ---------
Balance at end of year ................. $ 9,801 $ 8,854 $ 8,876
========= ========= =========
21
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standard No. 114, "Accounting by Creditors for Impairment of a
Loan," and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." Under SFAS No. 114, the allowance
for credit losses related to loans that are identified for evaluation in
accordance with SFAS No. 114 is based on discounted cash flows using the
loans' initial effective interest rate or the fair value of collateral for
certain collateral-dependent loans. Included in the total impaired loans is
$1,375 ($1,712 at December 31, 1995) against which $495 ($728 at December 31,
1995) of the allowance for loan losses is allocated. SFAS No. 118 amended
SFAS No. 114's income recognition policy and clarifies SFAS No. 114's
disclosure requirements. At December 31, 1996, the recorded investment in
loans that are considered to be impaired under SFAS No. 114 was $2,640, all
of which were on a nonaccrual basis, ($3,800 at December 31, 1995). The
average recorded investment in impaired loans during the year ended December
31, 1996 was approximately $2,823 ($3,700 at December 31, 1995). For the year
ended December 31, 1996, the Corporation recognized $93 in interest income on
those impaired loans ($34 at December 31, 1995).
At December 31, 1996, the total of nonaccrual and restructured loans was
$3,713 ($5,350 at December 31, 1995). If these loans had been performing in
accordance with their contractual terms, additional interest income of $275,
$530, and $567 would have been recorded in 1996, 1995, and 1994,
respectively. In addition, Pennview had first residential mortgage loans of
$1,239 at December 31, 1996 ($857 at December 31, 1995) which were over 90
days delinquent.
The total of the real estate owned at December 31, 1996 was $553 ($735 at
December 31, 1995). Other expenses for 1996 include costs of $225 associated
with the write-down of other real estate owned ($1,100 at December 31, 1995).
NOTE 6. PREMISES AND EQUIPMENT
December 31,
1996 1995
---------- ----------
Land and land improvements .... $ 3,261 $ 3,261
Premises and improvements ..... 15,066 14,137
Furniture and equipment ....... 16,569 14,889
---------- ----------
34,896 32,287
Less: accumulated depreciation (18,053) (16,087)
---------- ----------
$ 16,843 $ 16,200
========== ==========
As of December 31, 1996, 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: 1997--$347; 1998--$335; 1999--$338;
2000--$349; 2001--$347. Rental expense charged to operations was $350, $232,
and $135 for 1996, 1995, and 1994, respectively.
22
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The assets and
liabilities giving rise to the Corporation's deferred tax liabilities and assets
as of December 31, 1996 and 1995 are as follows:
1996 1995
-------- --------
Deferred tax assets:
Loan loss .............. $3,119 $2,734
Deferred compensation .. 275 286
Deferred fee income .... 118 223
Postretirement benefits 385 355
-------- --------
3,897 3,598
Deferred tax liabilities:
Accretion .............. 406 225
Retirement plans ....... 188 216
Depreciation ........... 454 334
Intangible assets ...... 351 377
Mark-to-market
adjustment .......... 34 62
Other .................. 233 116
-------- --------
Net deferred tax assets .. $2,231 $2,268
======== ========
The provision for federal and state income taxes included in the accompanying
consolidated statements of income consists of the following:
1996 1995 1994
--------- --------- ---------
Currently payable $5,147 $4,644 $4,398
Deferred ......... (119) 353 139
--------- --------- ---------
$5,028 $4,997 $4,537
========= ========= =========
The effective tax rates are less than the statutory federal rate of 35%
because interest on loans and investment securities of state and political
subdivisions is exempt from income tax. Deferred federal income taxes (tax
benefits) arise from timing differences in the recognition of income and
expenses for tax and financial reporting purposes.
As a result of the provisions of the Small Business Jobs Protection Act of
1996 which repealed the tax reserve method for bad debts for thrift institutions
and the circumstances requiring bad debt recapture for large institutions,
Pennview must determine the tax deduction for bad debt based on actual
charge-offs. The Act retained the existing base year bad debt reserve and
requires recapture into taxable income in certain circumstances such as in the
case of certain excess distributions or complete redemptions. None of the
limited circumstances requiring recapture are anticipated by the Corporation.
At December 31, 1996, Pennview had approximately $2,596 in tax bed debt
reserves for which no deferred taxes have been provided due to the indefinite
nature of the recapture provisions.
23
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 8. RETIREMENT PLAN
Net pension expense recognized in 1996, 1995, and 1994 amounted to $360,
$185, and $193, respectively, and is summarized as follows:
1996 1995 1994
--------- --------- ---------
Service cost--benefits earned during the period $ 553 $ 364 $ 419
Interest cost on projected benefit obligation . 824 733 686
Actual return on plan assets .................. (1,513) (2,240) 189
Net amortization and deferral ................. 496 1,328 (1,101)
--------- --------- ---------
$ 360 $ 185 $ 193
========= ========= =========
The funded status is reconciled to prepaid pension expense recognized in the
financial statements at December 31, 1996 and 1995, as follows:
1996 1995
---------- ----------
Fair value of plan assets ....................................... $12,270 $11,174
Actuarial present value of benefit obligations:
Vested ........................................................ 8,874 8,506
Nonvested ..................................................... 473 442
---------- ----------
Accumulated benefit obligation .................................. 9,347 8,948
Effect of projected future salary increase ...................... 2,560 2,708
---------- ----------
Projected benefit obligation .................................... 11,907 11,656
---------- ----------
Plan assets in excess of (less than) projected benefit obligation 363 (482)
Unrecognized net asset at transition ............................ (504) (631)
Unrecognized prior service costs ................................ (685) (760)
Unrecognized net loss ........................................... 1,086 2,493
---------- ----------
Prepaid pension expense ......................................... $ 260 $ 620
========== ==========
Assumed discount rate for obligation ............................ 7.25% 6.75%
Assumed long-term rate of investment return ..................... 8.50% 8.50%
Assumed salary increase rate .................................... 5.60% 5.60%
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.
Pension expense for the 401(k) deferred salary savings plan for the years
ended December 31, 1996, 1995, and 1994 was $224, $203, and $196, respectively.
NOTE 9. OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation provides certain postretirement health care and life
insurance benefits for retired employees. The liability for these postretirement
benefits is unfunded. Statement of Financial Accounting Standard No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS
No. 106) establishes the accounting for postretirement benefits. SFAS No. 106
requires that employers accrue the costs associated with providing
postretirement benefits during the active service periods of employees.
24
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The liability for postretirement benefits included in other liabilities at
December 31, 1996 and 1995 was as follows:
1996 1995
--------- ----------
Accumulated postretirement benefit obligation:
Retirees ................................... $(705) $ (788)
Fully eligible active plan participants .... (35) (42)
Other active plan participants ............. (342) (250)
Unrecognized net loss ........................ 91 65
--------- ----------
Accrued postretirement benefit cost .......... $(991) $(1,015)
========= ==========
Net periodic postretirement benefit cost for the years ended December 31,
1996, 1995, and 1994 includes the following components:
1996 1995 1994
------ ------ ------
Service cost--benefits earned during the period ... $20 $13 $16
Interest cost on accumulated postretirement benefit
obligation ....................................... 73 68 68
Net amortization and deferral ..................... 3 -- --
------ ------ ------
$96 $81 $84
====== ====== ======
For measurement purposes, an 8.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed in 1996; the rate was
assumed to decrease gradually by 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, increasing the assumed health
care cost trend rates by 1 percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by $60 and
the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended by $7.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent and 6.75 percent, at December
31, 1996 and 1995, respectively, and the assumed salary increase rate was 5.60
percent at December 31, 1996 and 1995.
25
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
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 196,063 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. Options are exercisable as to 33 percent of the optioned shares
each year from the date of grant for a period not exceeding six years. 114,017
common shares were available for future options at December 31, 1996.
Transactions involving the plan are summarized as follows:
Shares Option Price
Under Option* Per Share*
--------------- ---------------
Outstanding at December 31, 1993 31,250 $27.20
Granted ........................ -- --
Exercised ...................... -- --
--------------- ---------------
Outstanding at December 31, 1994 31,250 27.20
Granted ........................ 54,813 31.00
Exercised ...................... -- --
--------------- ---------------
Outstanding at December 31, 1995 86,063 27.20 - 31.00
Granted ........................ -- --
Exercised ...................... (4,017) 27.20
--------------- ---------------
Outstanding at December 31, 1996 82,046 $27.20 - $31.00
=============== ===============
*The number of shares under option and option price have been restated to
give effect to a twenty-five percent stock dividend declared November 22, 1995
to shareholders of record as of February 15, 1996, payable March 1, 1996.
NOTE 11. TIME DEPOSITS
The aggregate amount of certificates of deposit in denominations of $100 or
more was $22,169 at December 31, 1996, and $20,976 at December 31, 1995, with
interest expense of $1,111 for 1996, and $1,143 for 1995. Other time deposits in
denominations of $100 or more were $30,514 at December 31, 1996, and $32,585 at
December 31, 1995, with interest expense of $1,740 for 1996, and $1,535 for
1995.
NOTE 12. LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt consisted of the following:
December 31, December 31,
Description 1996 1995 Interest Rate Maturity
------------------------------ -------------- -------------- --------------------- --------------
Federal Home Loan Bank Advance $ -- $4,000 4.82% through 2/20/96 --
Federal Home Loan Bank Advance 3,500 -- 5.35% (variable) May 2001
Federal Home Loan Bank Advance 3,500 -- 5.31% (variable) March 2001
Federal Home Loan Bank Advance 75 75 4.00% September 2006
Federal Home Loan Bank Advance -- 10 2.50% through 3/4/96 --
-------------- --------------
$7,075 $4,085
============== ==============
Advances from the Federal Home Loan Bank are collateralized by Federal Home
Loan Bank stock and substantially all first mortgage loans of Pennview. The
advances are subject to the payment of a prepayment fee in the event of
repayment of the advance in whole or in part prior to maturity.
26
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND COMMITMENTS
Loan commitments are made to accommodate the financial needs of the
Institutions' customers. Standby letters of credit commit the Institutions 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 Institutions' 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, but as of December 31, 1996, the Banks
have identified the due from banks' balance as a significant concentration of
credit risk because it contains a balance due from a single depository
institution in the amount of $19,417 which 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 .......................... $159,935
Standby letters of credit or commercial letters of
credit ............................................. 18,671
Interest rate swaps, notional principal amount ........ 30,000
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 floating-interest amounts
calculated on an agreed-upon notional principal amount. Because the
Corporation's interest-earning assets tend to be short-term floating rate
instruments while the Corporation's interest-bearing liabilities tend to be
longer-term fixed rate instruments, interest rate swaps in which the Corporation
pays a floating rate and receives a fixed rate are used to reduce the impact of
changes in interest rates on the Corporation's net interest income.
During 1996, $20.0 million of "Pay Floating, Receive Fixed" swaps were
entered into by the Corporation. The net payable or receivable from
interest-rate swap agreements is accrued as an adjustment to interest income. At
December 31, 1995, $10.0 million in notional amount interest rate swaps were
outstanding. These swaps are also "Pay Floating, Receive Fixed." The contracts
entered into by the Corporation in 1995 and 1996 expire as follows: $10 million
in notional principal amount in August 1997 and $20 million in notional
principal amount in March 1998. The impact of the interest rate swaps on net
interest income for the year ended December 31, 1996 was a positive $69 thousand
and for the year ended December 31, 1995 a positive $1 thousand.
The Corporation's current credit exposure on swaps is limited to the value of
interest-rate swaps that have become favorable to the Corporation. Credit risk
exists when the counterparty to a derivative contract with an unrealized gain
fails to perform according to the terms of the agreement. As of December 31,
1996, the market value of interest-rate swaps in a favorable value position was
$38 thousand, while the market value of interest-rate swaps in an unfavorable
position totaled $6 thousand. At December 31, 1995, the market value of
interest-rate swaps in a favorable position was $121 thousand.
27
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 14. 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 to not 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 significantly 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.
Estimated fair values have been determined by the Corporation using the best
available data, and an estimation methodology suitable for each category of
financial instruments. For those 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.
The following table represents the estimates of fair value of financial
instruments:
December 31, 1996 December 31, 1995
------------------------------- -------------------------------
Carrying or Carrying or
Notional/Contract Fair Notional/Contract Fair
Amount Value Amount Value
----------------- ---------- ----------------- ----------
Assets:
Cash and short-term assets ................. $ 39,363 $ 39,363 $ 47,884 $ 47,884
Investment securities ...................... 242,213 242,441 224,519 226,745
Net loans .................................. 597,268 596,729 577,117 568,533
Liabilities:
Demand deposits and savings deposits ....... 386,523 386,523 377,625 377,625
Time deposits .............................. 347,245 351,250 347,402 347,798
Short-term borrowings ...................... 60,716 60,716 46,812 46,812
Long-term debt ............................. 7,075 7,075 4,085 4,085
Off-Balance-Sheet:
Commitments to extend credit ............... 159,935 (219) 123,858 (158)
Letters of credit .......................... 18,671 (280) 20,100 (302)
Interest-rate swap, notional principal
amount .................................. 30,000 32 10,000 121
28
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
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: For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued interest
approximates its fair value.
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.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
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 discounted cash flow analyses, based
on the Corporation's current borrowing rates for similar types of borrowing
arrangements.
NOTE 15. 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, 1996, that the
Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, 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 institutions' category.
29
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The Banks' actual capital amounts and ratios are also presented in the table.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------- ------------------- --------------------
As of December 31, 1996:
Total Capital (to Risk-Weighted
Assets):
Consolidated $102,200 15.5% $52,870 8.0% $66,088 10.0%
Union National Bank 80,858 14.1% 45,750 8.0% 57,188 10.0%
Pennview Savings Bank 14,769 17.9% 6,599 8.0% 8,248 10.0%
Tier I Capital (to Risk-Weighted
Assets):
Consolidated $ 94,765 14.3% $26,435 4.0% $39,653 6.0%
Union National Bank 74,533 13.0% 22,875 4.0% 34,313 6.0%
Pennview Savings Bank 13,856 16.8% 3,299 4.0% 4,949 6.0%
Tier I Capital (to Average Assets):
Consolidated $ 94,765 10.7% $35,487 4.0% $44,359 5.0%
Union National Bank 74,533 10.1% 29,536 4.0% 36,920 5.0%
Pennview Savings Bank 13,856 9.8% 5,667 4.0% 7,084 5.0%
As of December 31, 1995:
Total Capital (to Risk-Weighted
Assets):
Consolidated $ 94,050 15.0% $50,100 8.0% $62,626 10.0%
Union National Bank 72,696 13.6% 42,701 8.0% 53,377 10.0%
Pennview Savings Bank 14,624 17.0% 6,872 8.0% 8,591 10.0%
Tier I Capital (to Risk-Weighted
Assets):
Consolidated $ 86,222 13.8% $25,050 4.0% $37,575 6.0%
Union National Bank 66,533 12.5% 21,351 4.0% 32,026 6.0%
Pennview Savings Bank 13,744 16.0% 3,436 4.0% 5,154 6.0%
Tier I Capital (to Average Assets):
Consolidated $ 86,222 10.2% $33,647 4.0% $42,059 5.0%
Union National Bank 66,533 9.7% 27,328 4.0% 34,160 5.0%
Pennview Savings Bank 13,744 9.7% 5,660 4.0% 7,075 5.0%
The approval of the 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 1997 without approval of the Comptroller of the
Currency of approximately $14,063 plus an additional amount equal to the Bank's
net profits for 1997 up to the date of any such dividend declaration.
The Federal Reserve Act requires that extension of credit by the Bank 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
the Bank'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.
30
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of Univest, Parent Company only, follow:
BALANCE SHEETS
December 31,
1996 1995
---------- ----------
Assets:
Deposits with bank subsidiary ........................... $ 27 $ 72
Loan to non-bank subsidiary ............................. 275 275
Investments in U.S. Government obligations held to
maturity ............................................. 2,638 1,999
Investments in subsidiaries, at equity in net assets:
Banks ................................................ 90,891 83,391
Non-banks ............................................ 5,423 5,392
Other assets ............................................ 2,332 1,725
---------- ----------
Total assets ....................................... $101,586 $92,854
========== ==========
Liabilities:
Dividends payable ....................................... $ 895 $ 1,192
Other liabilities ....................................... 3,424 2,326
---------- ----------
Total liabilities .................................. 4,319 3,518
---------- ----------
Shareholders' equity ...................................... 97,267 89,336
---------- ----------
Total liabilities and shareholders' equity ......... $101,586 $92,854
========== ==========
STATEMENTS OF INCOME
Year ended December 31,
1996 1995 1994
---------- ---------- ----------
Dividends from banks ....................................... $ 4,723 $ 5,251 $ 5,626
Other income ............................................... 6,973 6,479 6,358
---------- ---------- ----------
Total operating income ................................... 11,696 11,730 11,984
Operating expenses ......................................... 7,566 6,675 6,479
---------- ---------- ----------
Income before income tax benefit and equity in undistributed
income of subsidiaries ................................... 4,130 5,055 5,505
Applicable income tax (benefit) expense .................... (133) (27) 1
---------- ---------- ----------
Income before equity in undistributed income of subsidiaries 4,263 5,082 5,504
Equity in undistributed income (loss) of subsidiaries:
Banks .................................................... 7,744 6,205 4,656
Non-banks ................................................ 31 (60) (40)
---------- ---------- ----------
Net income ................................................. $12,038 $11,227 $10,120
========== ========== ==========
31
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities
Net income ............................................. $12,038 $11,227 $10,120
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (7,775) (6,145) (4,616)
Increase in other assets .......................... (1,000) (750) (338)
Depreciation of premises and equipment ............ 392 253 268
Increase in other liabilities ..................... 1,098 338 430
---------- ---------- ----------
Net cash provided by operating activities ...... 4,753 4,923 5,864
Cash flows from investing activities
Proceeds from maturities of securities held to maturity 1,999 5,838 1,899
Purchases of investment securities held to maturity .... (2,638) (1,999) (4,835)
Investment in non-bank subsidiaries .................... -- (1,160) (600)
---------- ---------- ----------
Net cash (used in) provided by investing
activities ................................... (639) 2,679 (3,536)
Cash flows from financing activities
Purchases of treasury stock ............................ (1,430) -- --
Stock issued under dividend reinvestment and employee
stock purchase plans ................................ 249 -- --
Proceeds from exercise of stock options ................ 109 -- --
Repayment of subordinated note ......................... -- (5,000) (750)
Cash dividends ......................................... (3,087) (2,541) (2,290)
---------- ---------- ----------
Net cash used in financing activities .......... (4,159) (7,541) (3,040)
---------- ---------- ----------
Net (decrease) increase in deposits with bank subsidiary (45) 61 (712)
Deposits with bank subsidiary at beginning of year ..... 72 11 723
---------- ---------- ----------
Deposits with bank subsidiary at end of year ........... $ 27 $ 72 $ 11
========== ========== ==========
During 1996, 1995, and 1994, the parent company made income tax payments of
$5,100, $4,250, and $4,150, respectively, and made interest payments of $0,
$305, and $538, respectively.
32
Notes to Consolidated Financial Statements [Cont.]
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 17. QUARTERLY DATA (UNAUDITED)
The unaudited results of operations for the quarters for the years ended
December 31, 1996 and 1995 were as follows:
1996 QUARTERLY FINANCIAL DATA
December 31 September 30 June 30 March 31
------------- -------------- --------- ----------
Interest income .................... $16,985 $16,849 $16,526 $16,322
Interest expense ................... 7,050 7,005 6,833 6,793
------- ------- ------- -------
Net interest income ........... 9,935 9,844 9,693 9,529
Provision for loan losses .......... 200 315 215 315
------- ------- ------- -------
Net interest income after
provision for loan losses .. 9,735 9,529 9,478 9,214
Other income ....................... 1,648 1,452 1,500 1,629
Other expenses ..................... 6,858 7,157 6,572 6,532
------- ------- ------- -------
Income before income taxes ......... 4,525 3,824 4,406 4,311
Applicable income taxes ............ 1,406 936 1,359 1,327
------- ------- ------- -------
Net income .................... $ 3,119 $ 2,888 $ 3,047 $ 2,984
======= ======= ======= =======
Per share data:
Net earnings per share .......... $ .80 $ .74 $ .78 $ .76
======= ======= ======= =======
Dividends per share ............. $ .23 $ .16 $ .16 $ .16
======= ======= ======= =======
1995 QUARTERLY FINANCIAL DATA
December 31 September 30 June 30 March 31
------------- -------------- --------- ----------
Interest income .................... $16,350 $16,051 $15,687 $15,457
Interest expense ................... 6,784 6,601 6,524 6,054
------- ------- ------- -------
Net interest income ........... 9,566 9,450 9,163 9,403
Provision for loan losses .......... 550 500 423 422
------- ------- ------- -------
Net interest income after
provision for loan losses .. 9,016 8,950 8,740 8,981
Other income ....................... 1,577 1,407 1,638 1,473
Other expenses ..................... 6,968 5,867 6,294 6,429
------- ------- ------- -------
Income before income taxes ......... 3,625 4,490 4,084 4,025
Applicable income taxes ............ 1,080 1,418 1,267 1,232
------- ------- ------- -------
Net income .................... $ 2,545 $ 3,072 $ 2,817 $ 2,793
======= ======= ======= =======
Per share data:*
Net earnings per share .......... $ .65 $ .78 $ .72 $ .71
======= ======= ======= =======
Dividends per share ............. $ .304 $ .136 $ .136 $ .136
======= ======= ======= =======
*Per share data gives effect to a twenty-five percent stock dividend declared
on November 22, 1995 to shareholders of record as of February 15, 1996,
payable on March 1, 1996.
33
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, 1996 and 1995, 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, 1996.
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 generally accepted auditing
standards. 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, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Company
changed its method of accounting for certain investments in debt and equity
securities.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 21, 1997
34
Five-Year Performance Highlights
- --------------------------------------------------------------------------------
GRAPHS
- ----------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(In Thousands, except per share data)
Year ended December 31,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Total assets ................ $912,459 $881,888 $847,154 $789,887 $791,335
Long-term obligations ....... 7,075 4,085 9,438 10,277 7,585
Interest income ............. 66,682 63,545 55,921 54,402 58,612
Net interest income ......... 39,001 37,582 34,648 31,633 29,835
Provision for loan losses ... 1,045 1,895 1,950 2,480 2,852
Net income .................. 12,038 11,227 10,120 8,787 8,414
Net income per share* ....... $ 3.08 $ 2.86 $ 2.58 $ 2.24 $ 2.15
Dividends declared per share* 0.71 0.71 0.60 0.56 0.50
*Per share data gives effect to a twenty-five percent stock dividend,
declared on November 22, 1995 to shareholders of record as of February 15,
1996, payable on March 1, 1996.
35
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Univest Corporation of Pennsylvania's consolidated net income (in thousands)
and earnings per share for 1996, 1995, and 1994 were as follows:
1996 1995 1994
Net income $12,038 $11,227 $10,120
Earnings per share $ 3.08 $ 2.86 $ 2.58
The prior-period per share amounts have been restated to reflect the
twenty-five percent stock dividend declared on November 22, 1995 to shareholders
of record as of February 15, 1996, payable on March 1, 1996.
1996 VERSUS 1995
The 1996 results compared to 1995 include the following significant pretax
components:
- Net interest income rose $1.4 million or 3.8% due to a 4.8% increase in
average earning assets offset by a 2.1% decrease in the net interest
margin.
- The provision for loan losses decreased $850 thousand or 44.9% due to
an improvement in asset quality.
- Salaries and benefits increased $1.1 million or 9.0% due to staff
additions directly tied to the opening of new branch locations, and
normal salary increases.
- Net occupancy expense increased $217 thousand or 11.7% due to the
addition of several branch locations in 1995 and 1996.
- Equipment expense rose $530 thousand or 27.9% also due to new branch
locations and installation of a new computer system.
- Other expense decreased $327 thousand or 3.9% mainly due to decrease in
costs associated with the disposition of real estate owned offset by an
$800 thousand one-time special assessment paid by Pennview Savings Bank
to recapitalize the Savings Association Insurance Fund (SAIF).
1995 VERSUS 1994
The 1995 results compared to 1994 include the following significant pretax
components:
- Net interest income rose $2.9 million or 8.5% due to a 4.6% increase in
average earning assets and a 4.3% increase in the net interest margin.
- Salaries and benefits expense increased 7.3% or $900 thousand due to
staff additions in response to the opening of new branch locations, and
normal salary increases.
- Net occupancy expense increased $191 thousand or 11.5% due to the
addition of several branch locations in 1994 and 1995.
- Other expenses increased $662 thousand or 8.5% due to costs associated
with the disposition of other real estate owned, less reduction of
deposit insurance during 1995.
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans,
investments and other earning assets and interest paid on deposits and other
interest-bearing liabilities. Net interest income is the principal source of the
Corporation's revenues. The following table demonstrates a trend of increasing
amounts for 1994 through 1996. Sensitivities associated with the mix of assets
and liabilities are numerous and very complex, thus the Corporation commits
significant time to managing the net interest margin. The Asset/Liability
Management and Investment Committees, along with the Funds Management
Department, work to implement strategies with the intent and effort to at least
maintain or improve the net interest margin.
The investment portfolio is and has been primarily short-term in nature,
resulting in frequent repricing opportunities for Univest over the three (3)
year period analyzed in this report. Investments maturing during the year
1996 were replaced with purchases at similar or higher yields. It is
important to again underscore the complexities associated with
asset/liability pricing noting the competition within the marketplace that
can dramatically impact the margin results. For this reason, as we look to
the future, it must be understood that an improving or increasing net
interest income is not certain. As discussed later in this section, Univest
maintains a short-term positive gap resulting from a large floating-rate loan
portfolio.
36
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations (Cont.)
- --------------------------------------------------------------------------------
The following table 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, 1996, 1995, and 1994:
1996 1995 1994
------------------------------- -------------------------------- -------------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------- -------------------------------- -------------------------------------
Interest-earning assets:
Investments $239,649 $14,698 6.1% $203,266 $12,223 6.0% $166,364 $ 8,247 4.9%
Loans 594,832 51,984 8.7% 583,820 51,322 8.8% 586,206 47,674 8.1%
-------- --------- -------- -------- --------- --------- -------- ---------- ---------
Total interest-earning
assets 834,481 66,682 8.0% 787,086 63,545 8.1% 752,570 55,921 7.4%
Noninterest-earning assets 55,376 56,946 57,026
-------- -------- --------
Total assets $889,857 $844,032 $809,596
======== ======== ========
Interest-bearing
liabilities:
Deposits $617,383 25,574 4.1% $596,237 24,049 4.0% $574,690 19,413 3.4%
Borrowings 56,046 2,107 3.8% 47,177 1,914 4.1% 48,620 1,860 3.8%
-------- --------- -------- -------- --------- --------- -------- ---------- ---------
Total interest-bearing
liabilities 673,429 27,681 4.1% 643,414 25,963 4.0% 623,310 21,273 3.4%
Noninterest-bearing
liabilities 122,932 115,526 109,822
-------- -------- --------
Total liabilities 796,361 758,940 733,132
Shareholders' equity 93,496 85,092 76,464
-------- -------- --------
Total liabilities and
shareholders' equity $889,857 $844,032 $809,596
======== --------- ======== --------- ======== --------
Net interest income $39,001 $37,582 $34,648
========= ========= ========
Interest-rate spread 3.9% 4.1% 4.0%
======== ========= =========
Net interest margin on
weighted average
interest-earning assets 4.7% 4.8% 4.6%
======== ========= =========
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 123.9% 122.3% 120.7%
======== ========= =========
37
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations (Cont.)
- --------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans increased 1.4% or $700 thousand from the $51.3
million recorded for the year ended December 31, 1995, as compared to the
$52.0 million for the year ended December 31, 1996. The increase was due to
increased volume offset by a prime rate decrease. The prime rate decreased
from 8.5% at January 1, 1996 to 8.25% in February 1996. Interest and fees on
loans increased $3.6 million or 7.6% when comparing the $51.3 million for
1995 to the $47.7 for 1994. This increase was due to the positive impact of
prime rate increases from 8.5% at January 1, 1995 to 9.0% on February 1, 1995
until July 7, 1995 when it decreased to 8.75% and then decreased back to 8.5%
on December 20, 1995. Repricing of adjustable rate residential real estate
loans also contributed to the increase in both periods.
Tax-free interest remained constant at $1.9 million when comparing
December 31, 1996 to December 31, 1995 and December 31, 1995 to December 31,
1994.
Interest on U.S. Government obligations increased from $10.4 million for
the year ended December 31, 1995 to $13.2 million at December 31, 1996. The
increase was due mostly to volume. Interest on government obligations also
increased from $6.4 million for the year ended December 31, 1994 to $10.4
million at December 31, 1995. This increase was due to increased yields and
volume. Investments maturing during 1996 were replaced with purchases at
similar or higher yields.
Interest and dividends on state and political subdivisions remains
constant, increasing from $95 thousand in 1994 to $118 thousand in 1995 and
to $172 thousand in 1996. Volumes increased in each of the periods.
The other securities category consists mainly of U.S. Government Agency
obligations. Income on other securities remained stable at $1.0 million for
both years ended December 31, 1994 and 1995. Interest income on other
securities rose slightly to $1.1 million for the year ended December 31,
1996. The increase in 1996 was due to volume.
Interest on federal funds sold is the resulting daily investment activity
that can be volatile in both interest rate and volume. Interest on federal
funds sold decreased from $616 thousand in 1995 to $220 thousand in 1996 due
to decreased volume. Income also decreased from $661 thousand in 1994 to $616
thousand in 1995 due to decreased volume offset by increased yield.
INTEREST EXPENSE
Interest expense on demand deposits decreased 12.5% or $400 thousand from
$3.2 million in 1995 to $2.8 million in 1996. Interest expense on demand
deposits decreased 5.9% or $200 thousand from $3.4 million in 1994 to $3.2
million in 1995. The decrease in both periods was due to lower volume.
Interest expense on savings deposits remained stable at $3.1 million when
comparing years ended December 31, 1994, 1995, and 1996.
Interest expense on time deposits for the year ended December 31, 1996 was
$19.6 million which is 10.1% or $1.8 million more than the $17.8 million paid
in 1995. This increase was due to both increased yields and volume. Interest
expense on time deposits increased from $12.8 million in 1994 to $17.8
million in 1995, an increase of $5.0 million. The increase was also due to
higher volume and increased yields.
Interest expense - all other, consists of interest paid on short-term
borrowings such as federal funds purchased, the corporate line of credit,
repurchase agreements and treasury tax and loan deposit. In addition, Union
National Bank offers an automated cash management checking account that
sweeps funds daily into a repurchase agreements account. Interest expense
increased to $1.7 million in 1996 from $1.6 million in 1995 and $1.3 million
in 1994. Increases were due to higher volumes and yields on short-term
purchased funds.
LONG-TERM DEBT
Interest on long-term debt increased from $314 thousand at December 31,
1995 to $358 thousand at December 31, 1996. This increase was due to an
increase of $3.0 million borrowed from the Federal Home Loan Bank of
Pittsburgh by Union National. Interest on long-term debt decreased from $565
thousand in 1994 to $314 thousand in 1995 due to the redemption, during 1995,
of $5.0 million of subordinated debt which was incurred by the Corporation in
1990 to partially finance the acquisition of Pennview Savings Bank.
38
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations (Cont.)
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Management believes the allowance for loan losses is maintained at a level
which is adequate to absorb potential losses in the loan portfolio.
Management's methodology to determine the adequacy of and the provisions to
the allowance considers specific credit reviews, past loan loss experience,
current economic conditions and trends, and the volume, growth, and
composition of the loan portfolio.
The allowance for loan losses is determined through a quarterly evaluation
of reserve adequacy which takes into consideration the growth of the loan
portfolio, the status of past-due loans, current economic conditions, various
types of lending activity, policies, real estate and other loan commitments,
and significant 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 FAS 114, which was adopted
by the Corporation effective January 1, 1995. Any of the above-factors may
cause the provision to fluctuate. The provision for loan losses for the year
ended December 31, 1996 was $1.0 million as compared to $1.9 million for 1995
and $2.0 million for 1994. The decrease for 1996 was due to improved asset
quality and significant recoveries.
Effective January 1, 1995, the Corporation adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of
a Loan." Under the new standard, the 1996 and 1995 allowance for credit
losses related to loans that are identified as impaired in accordance with
Statement 114 is based on discounted cash flows using the loans' initial
effective rate or the fair value of collateral for certain
collateral-dependent loans. At December 31, 1996, the recorded investment in
loans that are considered to be impaired under Statement 114 was $2.6 million
(all of which were on a nonaccrual basis); the related allowance for credit
losses for those loans was $495 thousand. At December 31, 1995, the recorded
investment in loans considered to be impaired was $3.8 million and the
related allowance for credit losses for those loans was $728 thousand.
Generally, a loan (including a loan impaired under Statement 114) is
classified as nonaccrual and the accrual of interest on such loan is
discontinued when the contractual payment of principal or interest has become
90 days past due or management has serious doubts about the future
collectibility of principal or interest, even though the loan is currently
performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well-secured. When a loan is placed on
nonaccrual status, unpaid interest credited to income in the current year is
reversed and unpaid interest accrued in prior years is charged against "other
expense." Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income, according to management's
judgement as to the collectibility of principal.
Generally, loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt. Total cash basis,
restructured and nonaccrual loans at December 31, 1996 total $5.0 million
(versus $6.3 million at December 31, 1995 and $5.6 million at December 31,
1994) and consist mainly of real estate-related commercial loans. For the
year ended December 31, 1996, nonaccrual loans resulted in lost interest
income of $275 thousand as compared to $530 thousand in 1995 and $567
thousand in 1994. In management's evaluation of the loan portfolio risks, any
significant future increases in nonperforming loans are dependent to a large
extent on the economic environment, or specific industry problems. The ratio
of the allowance for loan losses to total loans at December 31, 1996 was 1.6%
as compared to 1.5% at December 31, 1995. The Corporation's ratio of
nonperforming assets to total loans was .91% as of December 31, 1996 and 1.1%
as of December 31, 1995.
During the first quarter of 1996, the Office of the Comptroller of the
Currency completed a safety and soundness examination at Union National Bank,
the Corporation's subsidiary commercial bank and during the second quarter of
1996, a similar examination was completed by the Federal Deposit Insurance
Corporation (FDIC) at Pennview Savings Bank. The dollar value of identified
potential problem loans was not revised significantly as a result of either
examination. Examination procedures require individual judgements about the
borrower's ability to repay loans, sufficiency of collateral values, and the
effects of changing economic circumstances. The procedures are similar to
those employed by the Corporation in determining the adequacy of the
allowance for loan losses and in classifying loans. Judgements made by
regulatory examiners may differ from those made by management.
At December 31, 1996, the Corporation has $553 thousand of Other Real
Estate Owned ("OREO") consisting of one commercial property ($400 thousand)
and two single family residences ($153 thousand). This amount is recorded in
"Other Assets" at the lower of cost or fair market value in the accompanying
consolidated balance sheets. Included in other operating expense in the
consolidated statements of income for the year ended December 31, 1996 were
adjustments of $225 thousand to the carrying value of the commercial property
to approximate net realizable value. At December 31, 1995, the Corporation
had approximately $735 thousand in OREO, and included in other expense in the
consolidated statements of income for the year ended December 31, 1995 was
$1.1 million due to the write-off of OREO which was necessitated by the
disposal of two commercial properties.
39
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations (Cont.)
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NONINTEREST INCOME
Trust income continues to be a major source of noninterest income,
generating fee income for the year ended December 31, 1996 of $2.3 million
which was $300 thousand or 15.0% more than the $2.0 million reported for year
end December 31, 1995 versus an increase of 11.1% or $200 thousand from 1994
to 1995. The increases result from increases in the market value of assets
under management, and increases in the volume of trust accounts.
Service charges on demand deposits increased $200 thousand from $1.6 million
at December 31, 1995 to $1.8 million at December 31, 1996. The increase was due
mainly to increased collection of fees. Service charges for the year ended
December 31, 1995 remained constant at $1.6 million when compared to the year
ended December 31, 1994.
Other income which is noninterest related consists mainly of general fee
income and other miscellaneous nonrecurring types of income. It also includes
various types of service charges, such as ATM fees and safe deposit box rent.
Other noninterest income of $2.1 million for 1996 is 12.5% or $300 less than
the $2.4 million shown for 1995. The 1995 income of $2.4 million is 9.1% or
$200 thousand more than the $2.2 million shown for 1994. The decrease in 1996
and the increase in 1995 are the result of a nonrecurring interest recovery
on a previously charged-off loan in 1995.
ASSET SALES
Sales of mortgage loans during the year ended December 31, 1996 resulted
in a pretax gain of $43 thousand as compared to a gain of $101 thousand for
the year ended December 31, 1995. The decrease resulted from increasing
long-term rates during 1996. The Corporation currently sells all long-term
fixed rate residential mortgage loans with terms in excess of fifteen (15)
years. For the year ended December 31, 1995, sales of mortgage loans provided
a pretax gain of $101 thousand as compared to a loss of $12 thousand for the
year ended December 31, 1994. The increase was due to decreased long-term
rates during 1995.
During 1996, U.S. Treasury notes totaling approximately $11 million were
sold from the available-for-sale portfolio at a net loss of $9 thousand.
These securities were sold to provide future yield enhancement and extend
maturities. In 1995 and 1994, securities totaling approximately $15 million
and $7.2 million, respectively, were sold from the available-for-sale account
at a net loss of $66 thousand and $27 thousand, respectively. The securities
sold during 1995 and 1994 were sold to provide yield enhancement and extend
maturities. The total of debt and equity securities held in the
available-for-sale account as of December 31, 1996 is $69 million versus $56
million at December 31, 1995. The cumulative unrealized gain of $18 thousand,
net of taxes, has been credited to shareholders' equity as of December 31,
1996.
NONINTEREST EXPENSE
The operating costs of the Corporation are known as other 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 $1.1
million or 9.0% from $13.3 million in 1995 to $14.5 million in 1996. Salaries
and benefits also increased 7.3% or $900 thousand from $12.4 million in 1994 to
$13.3 million in 1995. The increases were due to normal salary and staff
increases and the opening of three additional offices during 1996 and four in
1995.
Net occupancy expense increased by 10.5% or $200 thousand from $1.9 million
for the year ended December 31, 1995 to $2.1 million for the year ended December
31, 1996. Net occupancy also increased 11.8% or $200 thousand when comparing the
years ended 1995 and 1994. The increases were due to the opening of three
additional branches in 1996 and four in 1995. Equipment expense increased 26.3%
from $1.9 million in 1995 to $2.4 million in 1996, an increase of $500 thousand.
Equipment also increased $200 thousand or 11.8% from $1.7 million in 1994 to
$1.9 million in 1995. Both increases were due to the new branch locations and
additionally, in 1996, to costs associated with the conversion to a new computer
system.
Other expenses of $8.2 million decreased $300 thousand or 3.5% for the year
ended December 31, 1996 as compared to $8.5 million expense for 1995. The
decrease is due mainly to a reduction in the write-down of other real estate
owned from $1.1 million in 1995 to $225 thousand for 1996. This decrease was
offset by Pennview Savings Bank's payment of a one-time special assessment of
65.7 basis points for insured deposits at March 31, 1995. This assessment came
as a result of President Clinton signing into law a bill containing provisions
to recapitalize the Savings Insurance Fund (SAIF) portion of the Federal Deposit
Insurance Corporation (FDIC). The assessment resulted in a one-time pretax
charge to Pennview of $800 thousand, which is included in other expense for the
year ended December 31, 1996. This charge will result in a lower insurance
premium to be paid by Pennview. Beginning in January 1997, Pennview will pay a
premium of 6.4 basis points and Union National Bank will pay a premium of 1.3
basis points to reduce the Financing Corporation (FICO) bonds. Pennview
previously paid 23 basis points and Union National Bank paid a minimum annual
deposit premium of $2 thousand. Union National's federal insurance premium
decreased $650 from 1995 to 1996 because the Bank Insurance Fund (BIF) reached
its 1.25% reserve requirement in 1995. This decrease was offset by increases in
advertising and stationery and printing due to the new branch offices and
computer conversion.
40
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations (Cont.)
- --------------------------------------------------------------------------------
Other expenses of $8.5 million increased $700 thousand or 9.0% for the
year ended December 31, 1995 as compared to $7.8 million expense for 1994.
The increase was due to the write-down of other real estate owned of $1.1
million. Increases in consulting and student loan processing fees added to
the increase. The increase was offset in part by a decrease of approximately
$550 thousand due to the reduction of Federal Deposit Insurance Corporation
(FDIC) premiums paid by Union National Bank because the Bank Insurance Fund
(BIF) reached its 1.25% reserve requirement for well-capitalized members such
as Union National, members of the BIF began paying premiums of 4 basis points
on insured deposits during third and fourth quarters of 1995. Previously,
Union paid 23 basis points. Other expense includes but is not limited to
items such as data processing, goodwill amortization, marketing, audit, exam,
legal and other fees, other taxes, along with insurance, printing,
stationery, supplies and contributions, any of which can fluctuate up or down
in a given year.
TAX PROVISION
The provision for income taxes was $5.0 million for the years ended December
31, 1996 and 1995, while the provision for the year ended December 31, 1994 was
$4.5 million. The provision for income taxes for 1996, 1995, and 1994 was at
effective rates of 29.4%, 30.8%, and 31.0%, respectively. The effective tax rate
for the year ended December 31, 1996 reflects the recognition of $200 thousand
of tax benefits for a tax refund received by Pennview Savings Bank. In addition,
the effective tax rate reflects the benefits of tax credits generated from
investments in low-income housing tax projects. The impact on the overall tax
liability was not material for the year ended December 31, 1996.
As of December 31, 1996, the Corporation's net deferred tax asset was $2.2
million. Realization of this asset over time is dependent in part upon the
Corporation generating earnings in future periods. In determining that the
realization of the deferred tax asset was "more likely than not," the
Corporation gave consideration to a number of factors, including its recent
earnings history and its expectations for earnings in the future and concluded
that no valuation allowance was necessary at December 31, 1996. The Corporation
will continue to review the tax criteria of "more likely than not" for the
recognition of the deferred tax asset on a quarterly basis.
FINANCIAL CONDITION
During 1996, total assets increased to $912.5 million, an increase of $30.6
million or 3.5% over the $881.9 million in 1995. Investment securities increased
$17.7 million to $242.2 million as compared to the $224.5 million at December
31, 1995. Federal funds sold decreased from $16.5 million at December 31, 1995
to $69 thousand at December 31, 1996.
Total loans increased by $21.1 million from $586.0 million at December 31,
1995 to $607.1 million at December 31, 1996.
Total deposits grew from $725.0 million at December 31, 1995 to $733.8
million at December 31, 1996, an increase of $8.8 million.
Both short-term borrowings (Federal Funds Purchased) and long-term borrowings
increased by $10.9 million and $3.0 million, respectively, when comparing 1996
to 1995. The additional borrowings were for liquidity purposes.
Shareholders' equity increased $8.0 million or 9.0% to $97.3 million at
December 31, 1996 compared to $89.3 million at December 31, 1995.
ASSET/LIABILITY MANAGEMENT, LIQUIDITY
The primary functions of Asset/Liability Management are to assure adequate
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. 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 analyzes its position by the use of Gap analysis, flow of funds reports,
and a simulation model. More emphasis continues to be placed on the simulations
which show the impact of different rate environments and their respective
projected results relative to the current and projected balance sheet makeup.
Univest focuses on the management of the one-year interest rate sensitivity
gap. The one-year cumulative gap, which reflects the Corporation's interest
sensitivity over that period of time was positive at December 31, 1996. This
positive or asset-sensitive gap will generally benefit the Corporation's net
interest rate margin in a rising interest rate environment while falling
interest rates will negatively impact the Corporation. The Corporation remains
asset sensitive mainly as a result of a large floating rate portfolio held by
the commercial bank subsidiary. The floating loans mentioned here are tied to
prime, and fall into the one-month gap category causing the asset-sensitive
position.
The Corporation is permitted to use interest-rate swap agreements which
convert a portion of its floating rate commercial loans to a fixed rate basis,
thus reducing the impact of interest changes on future income. In these swaps,
the Corporation agrees to exchange, at specified intervals, the difference
between fixed and floating-interest amounts calculated on an agreed-upon
notional principal amount. Because the Corporation's interest-earning assets
tend to be short-term floating rate instruments while the Corporation's
interest-bearing liabilities tend to be longer-term fixed rate instruments,
interest rate swaps in which the Corporation pays a floating rate and receives a
fixed rate are used to reduce the impact of changes in interest rates on the
Corporation's net interest income.
41
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations (Cont.)
- --------------------------------------------------------------------------------
During 1996, $20.0 million of "Pay Floating, Receive Fixed" swaps were
entered into by the Corporation. The net payable or receivable from
interest-rate swap agreements is accrued as an adjustment to interest income. At
December 31, 1995, $10.0 million in notional amount interest rate swaps were
outstanding. These swaps are also "Pay Floating, Receive Fixed." The contracts
entered into by the Corporation in 1995 and 1996 expire as follows: $10 million
in notional principal amount in August 1997 and $20 million in notional
principal amount in March 1998. The impact of the interest rate swaps on net
interest income for the year ended December 31, 1996 was a positive $69 thousand
and for the year ended December 31, 1995 a positive $1 thousand.
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, 1996, the market value of interest-rate swaps in a favorable value
position was $38 thousand, while the market value of interest-rate swaps in an
unfavorable position totaled $6 thousand. At December 31, 1995, the market value
of interest-rate swaps in a favorable position was $121 thousand. 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.
CAPITAL ADEQUACY
Shareholders' equity at December 31, 1996 was $97.3 million or 10.7% of total
assets compared to shareholders' equity of $89.3 million or 10.1% as of December
31, 1995. December 31, 1996 shareholders' equity includes a positive adjustment
of $18 thousand related to the unrealized security gains, net of taxes on
investment securities available for sale, while shareholders' equity at December
31, 1995 includes net unrealized securities gains of $261 thousand.
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, which is composed of total
shareholders' equity, excluding the adjustment for the unrealized securities
gains and losses, and also excluding any goodwill, Tier II, also includes the
applicable portion of the allowance for possible loan losses and applicable
adjustment for subordinated debt. Minimum required Tier II total risk-based
capital is 8.0%. Under the requirements, Univest has Tier I capital ratios of
14.3% and 13.8%, and total risk-based capital ratios of 15.5% and 15.0% at
December 31, 1996 and 1995, respectively. These ratios place Univest in the
"well-capitalized" category under regulatory standards. (See note 15 for
details)
In November 1995, the Corporation's Board of Directors approved the
repurchase of 5% (approximately 200,000 shares) of its outstanding common stock
in open market or negotiated transactions. At December 31, 1996, a total of
44,091 shares have been repurchased at an aggregate cost of $1.4 million.
FASB NO. 125
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Statement 125 provides new accounting and
reporting standards for sales, securitizations, and servicing of receivables and
other financial assets, for certain secured borrowings and collateral
transactions, and for extinguishments of liabilities. The provisions of the
Statement are to be applied to transactions occurring after December 31, 1996.
Management does not believe this Statement will have a material impact on the
Corporation's financial condition or results of operations.
42