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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Period Ended JUNE 30, 2002 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From to .
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UNIVEST CORPORATION OF PENNSYLVANIA
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1886144
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
10 West Broad Street, Souderton, Pennsylvania 18964
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (215) 721-2400
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Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $5 Par Value 6,916,514
- -------------------------- ---------
(Title of Class) (Number of shares outstanding
at 6/30/02)
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2002 and 2001 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information: 19
Other Information
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (SEE NOTE)
June 30, 2002 December 31, 2001
----------------- -----------------
(In thousands)
ASSETS
CASH AND DUE FROM BANKS $ 58,201 $ 39,107
INTEREST BEARING DEPOSITS WITH OTHER BANKS 2,711 15,731
INVESTMENT SECURITIES HELD-TO-MATURITY 109,804 109,805
(MARKET VALUE $112,980 AT 6/30/02
AND $112,689 AT 12/31/01)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 244,613 238,053
FEDERAL FUNDS SOLD AND OTHER
SHORT TERM INVESTMENTS 198 64
LOANS 819,234 798,329
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (10,524) (10,294)
----------------- -----------------
NET LOANS 808,710 788,035
OTHER ASSETS 69,218 69,918
----------------- -----------------
TOTAL ASSETS $ 1,293,455 $ 1,260,713
================= =================
LIABILITIES
DEMAND DEPOSITS, NON INTEREST BEARING $ 170,930 $ 166,254
DEMAND DEPOSITS, INTEREST BEARING 328,322 322,245
SAVINGS DEPOSITS 159,769 139,449
TIME DEPOSITS 373,853 370,189
----------------- -----------------
TOTAL DEPOSITS 1,032,874 998,137
SHORT-TERM BORROWINGS 82,217 91,600
OTHER LIABILITIES 21,202 25,321
LONG-TERM DEBT 31,075 24,075
----------------- -----------------
TOTAL LIABILITIES 1,167,368 1,139,133
SHAREHOLDERS' EQUITY
COMMON STOCK 41,037 41,037
ADDITIONAL PAID-IN CAPITAL 20,912 20,912
RETAINED EARNINGS 96,401 89,688
ACCUMULATED OTHER COMPREHENSIVE INCOME 4,593 3,070
TREASURY STOCK (36,856) (33,127)
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 126,087 121,580
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,293,455 $ 1,260,713
================= =================
NOTE: THE CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2001 HAS BEEN
DERIVED FROM THE AUDITED FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE
ALL OF THE INFORMATION AND FOOTNOTES REQUIRED BY ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES.
1
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2002 2001 2002 2001
(in thousands, except per share data)
INTEREST INCOME
INTEREST AND FEES ON LOANS
TAXABLE INTEREST AND FEES ON LOANS $ 12,679 $ 13,862 $ 25,200 $ 27,959
EXEMPT FROM FEDERAL INCOME TAXES 805 822 1,628 1,645
--------- --------- --------- ---------
TOTAL INTEREST AND FEES ON LOANS 13,484 14,684 26,828 29,604
INTEREST AND DIVIDENDS ON
INVESTMENT SECURITIES 4,823 4,900 9,767 9,843
OTHER INTEREST INCOME 76 400 116 785
--------- --------- --------- ---------
TOTAL INTEREST INCOME 18,383 19,984 36,711 40,232
--------- --------- --------- ---------
INTEREST EXPENSE
INTEREST ON DEPOSITS 6,108 8,062 12,241 16,534
OTHER INTEREST EXPENSE 651 1,011 1,325 2,001
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 6,759 9,073 13,566 18,535
--------- --------- --------- ---------
NET INTEREST INCOME 11,624 10,911 23,145 21,697
PROVISION FOR LOAN LOSSES 391 216 782 231
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,233 10,695 22,363 21,466
NONINTEREST INCOME
TRUST 1,065 1,175 2,102 2,350
SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,367 1,264 2,754 2,451
COMMISSION INCOME 1,158 576 2,331 1,233
OTHER INCOME 1,503 1,664 3,031 2,870
--------- --------- --------- ---------
TOTAL NONINTEREST INCOME 5,093 4,679 10,218 8,904
NONINTEREST EXPENSE
SALARIES AND BENEFITS 5,478 4,691 10,993 10,073
NET OCCUPANCY 724 683 1,457 1,387
EQUIPMENT 375 351 760 740
OTHER EXPENSES 2,722 2,842 5,674 5,731
--------- --------- --------- ---------
TOTAL NONINTEREST EXPENSE 9,299 8,567 18,884 17,931
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 7,027 6,807 13,697 12,439
INCOME TAXES 1,872 1,793 3,679 3,264
--------- --------- --------- ---------
NET INCOME $ 5,155 $ 5,014 $ 10,018 $ 9,175
========= ========= ========= =========
PER COMMON SHARE DATA:
NET INCOME PER SHARE:
BASIC $ 0.74 $ 0.70 $ 1.44 $ 1.28
DILUTED $ 0.74 $ 0.70 $ 1.43 $ 1.27
CASH DIVIDENDS DECLARED PER SHARE $ 0.23 $ 0.21 $ 0.46 $ 0.40
2
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
(in thousands)
Cash flows from operating activities:
Net income $ 10,018 $ 9,175
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses in excess of net charge-offs 230 46
Depreciation of premises and equipment 1,003 1,281
Discount accretion on investment securities (135) (381)
Deferred tax benefit (403) (499)
Realized gains on investment securities (355) (102)
Realized gains on sales of mortgages (23) (40)
(Decrease) increase in net deferred loan fees (40) 302
Decrease in interest receivable and other assets 952 563
(Decrease) increase in accrued expenses and other liabilities (4,641) 4,063
------------- -------------
Net cash provided by operating activities 6,606 14,408
Cash flows from investing activities:
Proceeds from maturing securities held-to-maturity 12,058 106,249
Proceeds from maturing securities available-for-sale 27,930 28,758
Proceeds from sales of securities available-for-sale 15,347 5,661
Purchases of investment securities held-to-maturity (11,988) (73,202)
Purchases of investment securities available-for-sale (47,149) (58,494)
Decrease (increase) in interest-bearing deposits 13,020 (8,448)
Net (increase) decrease in federal funds sold and
other short-term investments (134) 16,091
Proceeds from sales of mortgages 3,147 4,352
Net increase in loans (23,989) (32,561)
Capital expenditures (1,182) (1,404)
------------- -------------
Net cash used in investing activities (12,940) (12,998)
Cash flows from financing activities:
Net increase in deposits 34,737 1,666
Net (decrease) increase in short-term borrowings (9,383) 8,225
Repayment of long-term debt - (7,000)
Proceeds from long-term debt 7,000 5,000
Purchases of treasury stock (4,932) (5,243)
Stock issued under dividend reinvestment and
employee stock purchase plans 621 594
Proceeds from exercise of stock options 475 207
Cash dividends (3,090) (2,757)
------------- -------------
Net cash provided by financing activities 25,428 692
Net increase in cash and due from banks 19,094 2,102
Cash and due from banks at beginning of period 39,107 40,517
------------- -------------
Cash and due from banks at end of period $ 58,201 $ 42,619
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,362 $ 17,999
3
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Financial Information
The accompanying condensed consolidated financial statements include the
accounts of Univest Corporation of Pennsylvania (Univest) and its wholly owned
subsidiaries, including Union National Bank and Trust Company (Union) and
Pennview Savings Bank (Pennview), collectively referred to herein as the
"Banks". The condensed consolidated financial statements included herein have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The accompanying condensed consolidated financial
statements reflect all adjustments which are of a normal recurring nature and
are, in the opinion of management, necessary to present a fair statement of the
results and condition for the interim periods presented. Operating results for
the six-month period ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the
registrant's Annual Report on Form 10-K for the year ended December 31, 2001,
which has been filed with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Note 2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
For the Three Months For the Six Months
Ended June 30 Ended June 30
2002 2001 2002 2001
---- ---- ----- ----
Numerator:
Net Income $5,155 $5,014 $10,018 $9,175
Numerator for basic and diluted earnings per
share - income available to common
shareholders 5,155 5,014 10,018 9,175
Denominator:
4
Denominator for basic earnings per share-
weighted-average shares outstanding 6,934 7,150 6,964 7,178
Effect of dilutive securities:
Employee stock options 67 33 66 37
---------------- -----------------
Denominator for diluted earnings per share
adjusted weighted-average shares
outstanding 7,001 7,183 7,030 7,215
================ =================
Basic earnings per share $ .74 $ .70 $1.44 $ 1.28
================ =================
Diluted earnings per share $ .74 $ .70 $1.43 $ 1.27
================ =================
Note 3. Accumulated Other Comprehensive Income
As of January 1, 2001, the Corporation adopted Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended.
The Statement requires the Corporation to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The fair value, net of income taxes, of the interest-rate swaps has been
included in other comprehensive income.
The following shows the accumulated comprehensive income, net of income taxes,
for the periods presented:
Three Months Six Months
Ended June 30 Ended June 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income $5,155 $5,014 $10,018 $9,175
Accumulated gain on cash flow hedge 188 (48) 48 145
Change in unrealized gain (loss) on available
for sale investment securities 2,634 (291) 1,475 1,143
----- --- ----- -----
Total comprehensive income $7,977 $4,675 $11,541 $10,463
====== ====== ======= =======
5
Note 4. Recent Accounting Pronouncements
On January 1, 2002, the Corporation adopted Statement No. 141, "Business
Combinations" (SFAS No. 141), and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). In accordance with the adoption provisions of
SFAS No. 142, the Corporation has completed the transitional impairment tests
and no impairment was noted. The Corporation will be required to perform
goodwill impairment tests at least on an annual basis. There can be no assurance
that future goodwill impairment tests will not result in a charge to earnings.
The Corporation has a covenant not to compete, intangible assets due to branch
acquisitions and mortgage servicing rights, which are not deemed to have an
indefinite life and therefore will continue to be amortized over their useful
life. The amortization for these intangible assets for the six months ended June
30, 2002 was $157. The Corporation also has costs in excess of net assets
acquired, which are deemed to be an indefinite intangible asset and will not be
amortized.
The estimated aggregate amortization expense for each of the five succeeding
fiscal years ending December 31, is:
Year Amount
---- ------
2002 $302
2003 $232
2004 $231
2005 $229
2006 $225
The following table reflects the components of intangible assets as of June 30,
2002 and December 31, 2001:
June 30, 2002 December 31, 2001
(in thousands)
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------- -----------------------------
Non-amortized intangible assets:
Goodwill $ 9,144 $ 2,845 $ 8,635 $ 2,845
Amortized intangible assets:
Covenants not to compete 200 23 200 3
Branch acquisitions 2,951 2,016 2,951 1,888
Mortgage servicing rights 763 50 719 41
6
The following table reflects the results of operations as if SFAS No. 142 had
been adopted as of January 1, 2001:
For the three months ended June 30 For the six months ended June 30
2002 2001 2002 2001
(In thousands, except per share data)
Net income, as reported $ 5,155 $ 5,014 $ 10,018 $ 9,175
Add back: Goodwill amortization, net of income
tax benefit of $6 and $11 respectively - 117 - 233
---- ---- ---- ---
Adjusted net income $ 5,155 $ 5,131 $ 10,018 $ 9,408
Per common share data:
Net income per share:
Basic as reported $ 0.74 $ 0.70 $ 1.44 $ 1.28
Goodwill amortization $ - $ 0.02 $ - $ 0.03
Adjusted basic earnings per share $ 0.74 $ 0.72 $ 1.44 $ 1.31
Diluted as reported $ 0.74 $ 0.70 $ 1.43 $ 1.27
Goodwill amortization $ - $ 0.01 $ - $ 0.04
Adjusted diluted earnings per share $ 0.74 $ 0.71 $ 1.43 $ 1.31
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NET INCOME
Net income increased 4.0% or $0.2 million from $5.0 million for the three
months ended June 30, 2001 to $5.2 million for the three months ended June 30,
2002. Net income for the six months ended June 30, 2002 increased 8.7% or $0.8
million from $9.2 million for the six months ended June 30, 2001 to $10.0
million for the six months ended June 30, 2002. The net income growth for the
three and six months ended June 30, 2002 was due to an increase in noninterest
income and a decrease in interest expense offset by increases in the loan loss
provision, operating expenses and income taxes.
NET INTEREST INCOME
Interest and fees on loans for the three months ended June 30, 2002
decreased $1.2 million from $14.7 million at June 30, 2001 to $13.5 million at
June 30, 2002. There was average loan volume growth in commercial loans that was
offset by a decrease in rate. Mortgage loans increased due to a purchase of
$12.2 million of jumbo mortgages. The prime rate, which is an important factor
of the Banks' loan interest income, averaged 4.75% for the second quarter 2002
compared to 7.1% for the second quarter 2001. For the six months ended June 30,
2002, interest and fees on loans decreased $2.8 million from $29.6 million at
June 30, 2001 to $26.8 million at June 30, 2002. There was growth in the average
commercial loan volume offset by a decrease in rate. Fixed rate consumer loans
increased in average volume and mortgage loans increased due to the purchase of
jumbo mortgages. Prime rate averaged 4.75% for the six months ended June 2002
compared to 7.8% for the six months ended June 2001.
Interest on investment securities decreased $0.1 million from $4.9 million
for the three-month period ended June 30, 2001 to $4.8 million for the
three-month period ended June 30, 2002. Interest on investments remained
constant at $9.8 million for the six months ended June 30, 2001 and June 30,
2002.
Other interest income decreased $0.3 million for the three-month period
ended June 30, 2002 and decreased $0.7 million for the six-month period ended
June 30, 2002 This is due to the fluctuation in average volume of federal funds
sold and the decline in the federal funds rate.
Interest expense decreased $2.3 million from $9.1 million for the three
months ended June 30, 2001 to $6.8 million for the three-month period ended June
30, 2002.
8
Interest expense decreased $4.9 million from $18.5 million for the six
months ended June 30, 2001 to $13.6 million for the six-month period ended June
30, 2002. The decrease in both periods is primarily attributed to volume growth
in all of the deposit type of accounts offset by declines in the average rates.
The asset/liability management process continues with its goal of
providing stable reliable earnings through varying interest rate environments.
Net interest income is the amount by which interest income on earning assets
exceeds interest paid on interest-bearing liabilities. Changes in interest
rates, account balances or volume, and the mix of earning assets and interest
bearing liabilities affect the amount of net interest income. The six months
ended June 30, 2002 shows net interest income of $23.1 million, which is an
increase of $1.4 million compared to the $21.7 million recorded for the six
months ended June 30, 2001. Average interest earning assets increased by $54.2
million for the six months ended June 30, 2002 as compared to the six months
ended June 30, 2001. Average interest bearing liabilities increased $44.5
million for the six months ended June 30, 2002 as compared to the same period in
2001. Interest earning asset yields that decreased 1.0% compared to last year
along with a decrease of 1.3% paid on interest-bearing liabilities increased the
net interest spread to 3.5%. The net interest margin increased to 4.0%.
The following table demonstrates the aforementioned effects:
SIX MONTHS ENDED
6/30/02 6/30/01
------- -------
AVG. BALANCE RATE AVG. BALANCE RATE
----------------- -----------------
Interest Earnings Assets $1,160,014 6.3% $1,105,823 7.3%
Interest Bearing Liabilities 953,157 2.8% 908,679 4.1%
Net Interest Income 23,145 21,697
Net Interest Spread 3.5% 3.2%
Net Interest Margin 4.0% 3.9%
The Corporation uses interest-rate swap agreements that convert a portion
of its floating rate commercial loans to a fixed rate basis. In these swaps, the
Corporation agrees to exchange, at specified intervals, the difference between
fixed and floating-interest rates calculated on an agreed upon notional
principal amount. Interest rate swaps in which the Corporation pays a floating
rate and receives a fixed rate are used to reduce the impact of changes in
interest rates on the Corporation's net interest income.
9
At June 30, 2002, June 30, 2001 and December 31, 2001, the notional amount
of "Pay Floating, Receive Fixed" swaps outstanding were $30.0 million, $20.0
million and $30.0 million respectively. The net payable or receivable from
interest rate swap agreements is accrued as an adjustment to interest income.
The $30.0 million in notional amount interest rate swaps outstanding at June 30,
2002 expire as follows: $10.0 million in second quarter 2003, $10.0 million in
third quarter 2003 and $10.0 million in first quarter 2004. The impact of
interest rate swaps on net interest income for the quarter ended June 30, 2002
was a positive $170 thousand as compared to a positive $92 thousand for the
quarter ended June 30, 2001. For the six months ended June 30, 2002 the impact
was a positive $378 thousand as compared to a positive $99 thousand for the six
months ended June 30, 2001. The income of the swaps increased by the same amount
as the decrease in income on the floating loans being hedged. Both resulted from
a decline in the prime rate.
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 June
30, 2002, the market value of interest-rate swaps in a favorable position was
$539 thousand and there were no interest-rate swaps with a market value in an
unfavorable position. As of June 30, 2001, the market value of interest-rate
swaps in a favorable position was $222 thousand and there were no interest-rate
swaps with a market value in an unfavorable position. Credit risk exists when
the counterparty to a derivative contract with an unrealized gain fails to
perform according to the terms of the agreement.
ASSET QUALITY
The reserve for possible 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 estimates including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change. Additions to the reserve arise from the
provision for loan losses charged to operations or from the recovery of amounts
previously charged off. Loan charge-offs reduce the reserve. Loans are charged
off when there has been permanent impairment or when in the opinion of
management the full amount of the loan, in the case of non-collateral dependent
borrowings, will not be realized. Certain impaired loans are reported at the
present value of expected future cash 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 reserve for possible loan losses consists of two elements:
1- an allocated reserve, which is comprised of reserves established on
specific loans, and class reserves based on historical loan loss experience
and current trends.
2- unallocated reserves based on both general economic conditions and other
risk factors in the Corporation's individual markets and portfolios, and to
account for a level of imprecision in management's estimation process.
10
The specific reserve element is based on a regular analysis of impaired
commercial and real estate loans. The specific reserves established for these
loans are based on a careful analysis of related collateral value, cash flow
considerations and, if applicable, guarantor capacity.
The class reserve element is determined by an internal loan grading
process in conjunction with associated allowance factors. The Corporation
revises the class allowance factors whenever necessary in order to address
improving or deteriorating credit quality trends or specific risks associated
with a given loan pool classification.
The Corporation maintains an unallocated reserve to recognize the
existence of credit exposures that are probable within the loan portfolio
although currently are undetected. There are many factors considered such as the
inherent delay in obtaining information regarding a customer's financial
condition or changes in their business condition, the judgmental nature of loan
evaluations, the delay in the interpretation of economic trends and the
judgmental nature of collateral assessments.
Management believes the reserve for possible loan losses is maintained at
a level that is adequate to absorb potential losses inherent in the loan
portfolio. Management's methodology to determine the adequacy of and the
provisions to the reserve considers specific credit reviews, past loan loss
experience, current economic conditions and trends, and the volume, growth and
composition of the loan portfolio.
The reserve for possible loan losses is determined through a periodic
evaluation that takes into consideration the growth of the loan portfolio, the
status of past-due loans, current economic conditions, various types of lending
activity, policies, real estate and other loan commitments, and significant
changes in the charge-off activity. Loans are also reviewed for impairment based
on discounted cash flows using the loans' initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans as provided
for under SFAS No.114. Any of the above criteria may cause the provision to
fluctuate. The provisions for possible loan losses for the three months ended
June 30, 2002, were $0.4 million and for the six months ended June 30, 2002 were
$0.8 million. For both the three and six months ended June 30, 2001, the
provisions were $0.2 million. The provisions for possible loan losses were
increased due to the growth of the loan portfolio and current economic
conditions.
At June 30, 2002, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $3.2 million, all of which were on a
non-accrual basis. The related reserve for credit losses for those loans was
$0.7 million. At June 30, 2001, the recorded investment in loans considered to
be impaired was $3.0 million, all of which were on a non-accrual basis. The
related reserve for credit losses for these loans was $1.3 million.
11
When a loan, including a loan impaired under SFAS No. 114, is classified
as non-accrual, the accrual of interest on such loan is discontinued. A loan is
classified as nonaccrual when the contractual payment of principal or interest
has become 90 days past due or management has serious doubts about the further
collectibility of principal or interest, even though the loan is currently
performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed on
non-accrual status, unpaid interest credited to income in the current year is
reversed and unpaid interest accrued in prior years are charged against "other
expense." Interest received on nonaccrual loans is either applied against
principal or reported as interest income, according to management's judgment as
to the collectibility of principal.
Loans are usually restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt. Cash basis,
non-accrual and restructured loans at June 30, 2002 total $3.3 million and
consist mainly of commercial loans and real estate related commercial loans and
$0.1 million of first residential mortgage loans that are over 90 days
delinquent. The total of cash basis, non-accrual and restructured loans at June
30, 2001 were $3.1 million. At June 30, 2002, non-accrual loans resulted in lost
interest income of $111 thousand as compared to $139 thousand at June 30, 2001.
At June 30, 2002, the Corporation had no commitments to lend additional funds
with respect to nonperforming loans. In management's evaluation of the loan
portfolio risks, any significant future increases in nonperforming loans are
dependent to a large extent on the economic environment, or specific industry
problems.
At June 30, 2002 and December 31, 2001, the reserve for possible loan
losses was 1.3% of total loans. For more information on the reserve, please
refer to the Registrant's Annual Report on Form 10-K for the period ended
December 31, 2001.
At June 30, 2002 and December 31, 2001, the Corporation had no Other Real
Estate Owned ("OREO"). This amount is recorded in "Other Assets" at the lower of
cost or fair market value, less estimated costs to sell, in the accompanying
condensed consolidated balance sheets.
NONINTEREST INCOME
Noninterest income consists mainly of trust department fee income, service
charge income, commission income and other miscellaneous types of income. It
also includes various types of service charges, such as ATM fees and increases
in the cash surrender value of bank-owned life insurance (BOLI). Total
noninterest income increased $0.4 million or 8.5% from $4.7 million for the
three months ended June 30, 2001 to $5.1 million for the three months ended June
30, 2002. For the six months ended June 30, 2002, total noninterest income
increased $1.3 million or 14.6% from $8.9 million for the six months ended June
30, 2001 to $10.2 million. The growth in both periods is primarily
12
attributed to increases in commission income and increases in service charges on
deposit accounts as described below.
Trust income for the three months ended June 30, 2002 of $1.1 million was
$0.1 million less than the $1.2 million reported for the three months ended June
30, 2001. Trust income for the six months ended June 30, 2002 of $2.1 million
was $0.3 million less than the $2.4 million reported for the six months ended
June 30, 2001. Growth in the number of trust accounts was partly offset by a
decline in the market value of assets under management. This had an adverse
effect on trust management fees.
Service charges on deposit accounts grew $0.1 million from $1.3 million
for the three months ended June 30, 2001 to $1.4 million for the three months
ended June 30, 2002. Service charges on deposit accounts grew $0.3 million from
$2.5 million for the six months ended June 30, 2001 to $2.8 million for the six
months ended June 30, 2002. Due to declining balances in commercial accounts,
service charges increased and nonsufficient funds fees increased.
Commission income is the primary source of income for Univest Investments,
Inc. and Univest Insurance, Inc. Commission income for the three months ended
June 30, 2002 of $1.2 million was $0.6 million or 100.0% more than the $0.6
million reported for the three months ended June 30, 2001. Commission income for
the six months ended June 30, 2002 of $2.3 million was $1.1 million or 91.7%
more than the $1.2 million reported for the six months ended June 30, 2001. The
growth is primarily due to the acquisition of the Gum Insurance Agency in
December 2001.
Other income decreased $0.2 million from $1.7 million for the three months
ended June 30, 2001 to $1.5 million for the three months ended June 30, 2002.
There were gains on the sales of securities that were offset by the decline in
the cash surrender value of certain bank owned life insurance policies. For the
six-month period, other income grew $0.1 million from $2.9 million at June 30,
2001 to $3.0 million at June 30, 2002. The growth is attributed to gains on the
sales of securities offset by a decline in the cash surrender values of certain
bank owned life insurance policies. Also contributing to the growth is an
increase in debit card usage that generated additional fees from the card
origination system.
NONINTEREST EXPENSE
The operating costs of the Corporation include but are not limited to,
salaries and benefits, equipment expense, and occupancy costs. This category is
usually referred to as noninterest expense and receives ongoing management
attention in an attempt to contain and minimize the growth of the various
expense categories, while encouraging technological innovation in conjunction
with the expansion of the Corporation. Total noninterest expense increased from
$8.6 million for the three months ended June 30, 2001 to $9.3 million for the
three months ended June 30, 2002. Total noninterest
13
expense increased from $17.9 million for the six months ended June 30, 2001 to
$18.9 million for the six months ended June 30, 2002. Salaries and benefits,
which include commission expense generated by Univest Investments, Inc. and
Univest Insurance, Inc. increased. Loan processing fee expenses increased due to
the consumer loan promotions that waived these pass-through fees. Other expenses
such as MAC fees, printing, and contributions also increased while goodwill
expense decreased due to the Corporation's adoption of Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS
No. 142) on January 1, 2002.
TAX PROVISION
The provision for income taxes was $1.9 million for the quarter ended June
30, 2002 and $1.8 million for the quarter ended June 30, 2001. The effective tax
rates were 26.6% and 26.3% respectively. For the six months ended June 30, 2002
the provision was $3.7 million as compared to $3.3 million for the six months
ended June 30, 2001. The effective tax rates were 26.9% and 26.2% respectively.
The effective tax rates reflect the benefits of tax credits generated from
investments in low-income housing projects and tax-free income from investment
in municipal securities, loans and bank-owned life insurance. The increase in
the effective tax rate is primarily the result of the tax-exempt income on the
Corporation's loans, investments and bank-owned life insurance growing more
slowly than the Corporation's pre-tax income.
CRITICAL ACCOUNTING POLICIES
Management, in order to prepare Univest's financial statements in
conformity with Generally Accepted Accounting Principles, is required to make
estimates and assumptions that effect the amounts reported in the Corporation's
financial statements. There are uncertainties inherent in making these estimates
and assumptions. Certain critical accounting policies, discussed below, could
materially effect the results of operations and financial position of the
Corporation should changes in circumstances require a change in related
estimates or assumptions.
Reserves for possible loan losses uses techniques that specifically
identify projected losses on impaired loans, estimate probable losses on pools
of homogeneous loans, and estimate the amount of unallocated reserve necessary
to account for probable losses that are present in the loan portfolio but not
yet currently identifiable. The adequacy of these reserves are sensitive to
changes in current economic conditions that may affect the ability of borrowers
to make contractual payments as well as the value of the collateral committed to
secure such payments. Rapid or sustained downturns in the economy may require
increases in reserves that may negatively impact the Corporation's results of
operation and statements of financial condition in the periods requiring
additional reserves.
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The Corporation accounts for its interest-rate swap contracts, in
compliance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, by establishing and documenting the effectiveness of
the instrument in offsetting the change in cash flows of certain
prime-rate-based loans held by the bank. When the effectiveness of the hedge can
be established and adequately documented, the change in market value of the swap
is recorded on the balance sheet of the company but only the accrued payments
due under the contract for the current period are passed through the statement
of operations. Should the Corporation be unable to document the effectiveness of
all or part of the cash flow hedge, the change in market value of the
ineffective part of the instrument will need to be marked-to-market through the
statement of operations, potentially causing material fluctuations in reported
earnings in the period of the change relative to comparable periods.
Intangible assets have been recorded on the books of the Corporation in
connection with its acquisitions of Pennview Savings Bank, Univest Investments,
Univest Insurance, and several bank branches. These assets, both identifiable
and unidentifiable, are subject to tests for impairment. Changes in the useful
life or economic value of acquired assets may require a reduction in the asset
value carried on the financial statements of the Corporation and a related
charge in the statement of operations. Such changes in fair value could result
from a change in market demand for the products or services offered by an
acquired business or by reductions in the expected profit margins that can be
obtained through the future delivery of the acquired product or service line.
They could also result from changes in the time value of money or risk premiums
that the expected cash flows of the business are discounted by. SFAS No. 142,
which took effect January 1, 2002, defines the methods that are acceptable for
determining whether intangible asset values are sustainable.
Univest designates its investment securities as held-to-maturity,
available-for-sale or trading in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Each of these designations
affords different treatment in the statement of operations and statement of
financial condition for market value changes effecting securities that are
otherwise identical. Should evidence emerge that indicates that management's
intent or ability to manage the securities as originally asserted is not
supportable, securities in the held-to-maturity or available-for-sale
designations may be re-categorized so that either statement of financial
position or statement of operations adjustments may be required.
Univest accounts for mortgage servicing rights for mortgages it originated
but subsequently sold in accordance with SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishing of Liabilities." This means
the value of the rights is recognized as a separate asset when the related
mortgages are sold. The value of the mortgage servicing rights is the estimated
present value of the cash flows that will be received from the current owner of
the mortgage over its entire future term. The term of a servicing right can be
reasonably estimated using prepayment assumptions of comparable assets priced in
the secondary market. When mortgage rates being offered to
15
the public decrease, the life of mortgage servicing rights tends to shorten, as
borrowers have increased incentive to refinance. Shortened loan servicing lives
require a change in the value of the servicing rights that have already been
recorded to be marked down in the statement of operations of the servicing
company. This may cause a material change in reported operations for the
Corporation depending on the size of the servicing portfolio and the degree of
change in the prepayment speed of the type and coupon of loans being serviced.
The Corporation has a retirement plan and supplemental retirement plans
that it provides as a benefit to employees and former employees. Determining the
adequacy of the funding of these plans may require estimates of future salary
rate increases, of long-term rates of investment return, and the use of an
appropriate discount rate for the obligation. Changes in these estimates and
assumptions due to changes in the economic environment or financial markets may
result in material changes in the Corporation's report of operation or statement
of financial condition.
Readers of the Corporation's financial statements should be aware that the
estimates and assumptions used in the Corporation's current financial statements
may need to be updated in future financial presentations for changes in
circumstances, business or economic conditions in order to fairly represent the
condition of the Corporation at that time.
FINANCIAL CONDITION
Total assets increased $32.8 million or 2.6% from $1,260.7 million at
December 31, 2001 to $1,293.5 million at June 30, 2002 primarily due to
increases in loans, investments and in cash and due from banks.
Total liabilities increased $28.3 million or 2.5% from $1,139.1 million at
December 31, 2001 to $1,167.4 million at June 30, 2002. Total deposits increased
from $998.1 million at December 31, 2001 to $1,032.9 million at June 30, 2002.
There was growth in all types of accounts. Short-term borrowings decreased $9.4
million from $91.6 million at December 31, 2001 to $82.2 million at June 30,
2002 due to a decline in the corporate sweep accounts. Other liabilities
decreased $4.1 million because there were no purchases of securities that will
settle in July 2002 compared to securities of $4.1 million purchased in December
2001 that settled in January 2002.
Shareholders' equity grew to $126.1 million at June 30, 2002 from $121.6
million at December 31, 2001. Treasury stock increased to $36.9 million at June
30, 2002 from $33.1 million at December 31, 2001. On December 31, 2001, the
Board of Directors approved the continuation of the Buyback Program for another
two years. This approval allows the Corporation to buy back up to 5% or
approximately 351,047 shares of its outstanding common stock in open market or
negotiated transactions. The net number of
16
shares purchased since December 31, 2001 is 104,430. Book value per share
increased from $17.32 at December 31, 2001 to $18.23 at June 30, 2002, an
increase of $0.91 per share or 5.3%.
Debt securities that the Corporation has both the positive intent and
ability to hold to maturity are carried at amortized cost. All other debt
securities and all marketable equity securities are classified as
available-for-sale or trading and carried at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are carried net
of taxes and included in Accumulated Other Comprehensive Income. Unrealized
holding gains and losses on securities classified as trading are reported in
earnings. The accumulated other comprehensive income, related to debt
securities, of $4.2 million, net of taxes, has been included in shareholders'
equity as of June 30, 2002. At December 31, 2001, the accumulated other
comprehensive income, related to debt securities, included in shareholders'
equity was $2.8 million, net of taxes.
As of January 1, 2001, the Corporation adopted SFAS No. 133, as amended.
The Statement requires the Corporation to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The accumulated other comprehensive income, related to interest-rate swaps, of
$0.4 million, net of taxes, has been included in shareholders' equity as of June
30, 2002. The accumulated other comprehensive income, related to interest-rate
swaps, of $0.3 million, net of taxes, has been included in shareholders' equity
as of December 31, 2001.
MARKET RISK
No material changes in the Corporation's market risk or market strategy
occurred during the current period. A detailed discussion of market risk is
provided in the Registrant's Annual Report on Form 10-K for the period ended
December 31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Corporation adopted Statement No. 141, "Business
Combinations" (SFAS No. 141), and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). In accordance with the adoption provisions of
SFAS No. 142, the Corporation has completed the transitional impairment tests
and no impairment was noted. The Corporation will be required to perform
goodwill impairment tests at least on
17
an annual basis. There can be no assurance that future goodwill impairment tests
will not result in a charge to earnings.
The following table reflects the results of operations as if SFAS No. 142
had been adopted as of January 1, 2001:
For the three months ended June 30 For the six months ended June 30
2002 2001 2002 2001
(In thousands, except per share data)
Net income, as reported $ 5,155 $ 5,014 $ 10,018 $ 9,175
Add back: Goodwill amortization, net of income
tax benefit of $6 and $11 respectively - 117 - 233
---- ---- ---- ---
Adjusted net income $ 5,155 $ 5,131 $ 10,018 $ 9,408
Per common share data:
Net income per share:
Basic as reported $ 0.74 $ 0.70 $ 1.44 $ 1.28
Goodwill amortization $ - $ 0.02 $ - $ 0.03
Adjusted basic earnings per share $ 0.74 $ 0.72 $ 1.44 $ 1.31
Diluted as reported $ 0.74 $ 0.70 $ 1.43 $ 1.27
Goodwill amortization $ - $ 0.01 $ - $ 0.04
Adjusted diluted earnings per share $ 0.74 $ 0.71 $ 1.43 $ 1.31
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings--None
Item 2. Changes in Securities--None
Item 3. Defaults upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--Not applicable
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVEST CORPORATION OF PENNSYLVANIA
-----------------------------------
(Registrant)
Date: 7/24/02 /s/ William S. Aichele
------- --------------------------------
William S. Aichele, President
and Chief Executive Officer
Date: 7/24/02 /s/ Wallace H. Bieler
------- ---------------------------------
Wallace H. Bieler, Executive Vice President
and Chief Financial Officer
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