Back to GetFilings.com
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For The Period Ended September 30, 2002
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to .
UNIVEST CORPORATION OF PENNSYLVANIA
-----------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1886144
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
10 West Broad Street, Souderton, Pennsylvania 18964
---------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (215) 721-2400
--------------
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $5 par value 6,855,753
- -------------------------- ---------
(Title of Class) (Number of shares outstanding
at 9/30/02)
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2002 and 2001 2
Consolidated Statements of Cash Flows
Nine Months Ended September 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)
September 30, 2002 December 31, 2001
------------------ -----------------
(In thousands)
ASSETS
CASH AND DUE FROM BANKS $ 43,613 $ 39,107
INTEREST BEARING DEPOSITS WITH OTHER BANKS 870 15,731
INVESTMENT SECURITIES HELD-TO-MATURITY 86,873 109,805
(MARKET VALUE $90,034 AT 9/30/02
AND $112,689 AT 12/31/01)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 288,361 238,053
FEDERAL FUNDS SOLD AND OTHER
SHORT TERM INVESTMENTS 27,035 64
LOANS 817,511 798,329
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (10,718) (10,294)
--------------- ---------------
NET LOANS 806,793 788,035
OTHER ASSETS 68,424 69,918
--------------- ---------------
TOTAL ASSETS $ 1,321,969 $ 1,260,713
=============== ===============
LIABILITIES
DEMAND DEPOSITS, NON INTEREST BEARING $ 174,402 $ 166,254
DEMAND DEPOSITS, INTEREST BEARING 350,371 322,245
SAVINGS DEPOSITS 155,300 139,449
TIME DEPOSITS 374,634 370,189
--------------- ---------------
TOTAL DEPOSITS 1,054,707 998,137
SHORT-TERM BORROWINGS 83,775 91,600
OTHER LIABILITIES 22,558 25,321
LONG-TERM DEBT 31,075 24,075
--------------- ---------------
TOTAL LIABILITIES 1,192,115 1,139,133
SHAREHOLDERS' EQUITY
COMMON STOCK 41,037 41,037
ADDITIONAL PAID-IN CAPITAL 20,912 20,912
RETAINED EARNINGS 100,088 89,688
ACCUMULATED OTHER COMPREHENSIVE INCOME 7,003 3,070
TREASURY STOCK (39,186) (33,127)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 129,854 121,580
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,321,969 $ 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 NINE MONTHS
ENDED SEPT 30 ENDED SEPT 30
2002 2001 2002 2001
(in thousands, except per share data)
INTEREST INCOME
INTEREST AND FEES ON LOANS
TAXABLE INTEREST AND FEES ON LOANS $ 12,673 $ 13,914 $ 37,873 $ 41,873
EXEMPT FROM FEDERAL INCOME TAXES 794 831 2,422 2,476
-------- -------- -------- --------
TOTAL INTEREST AND FEES ON LOANS 13,467 14,745 40,295 44,349
INTEREST AND DIVIDENDS ON
INVESTMENT SECURITIES 4,798 4,981 14,565 14,824
OTHER INTEREST INCOME 121 212 237 997
-------- -------- -------- --------
TOTAL INTEREST INCOME 18,386 19,938 55,097 60,170
-------- -------- -------- --------
INTEREST EXPENSE
INTEREST ON DEPOSITS 5,711 7,533 17,952 24,067
OTHER INTEREST EXPENSE 690 937 2,015 2,938
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 6,401 8,470 19,967 27,005
-------- -------- -------- --------
NET INTEREST INCOME 11,985 11,468 35,130 33,165
PROVISION FOR LOAN LOSSES 391 216 1,173 447
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,594 11,252 33,957 32,718
NONINTEREST INCOME
TRUST 965 1,175 3,067 3,525
SERVICE CHARGES ON DEPOSIT ACCOUNTS 1,372 1,296 4,126 3,747
COMMISSION INCOME 1,092 635 3,423 1,868
OTHER INCOME 1,518 1,082 4,549 3,952
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 4,947 4,188 15,165 13,092
NONINTEREST EXPENSE
SALARIES AND BENEFITS 5,462 4,923 16,455 14,996
NET OCCUPANCY 759 677 2,216 2,064
EQUIPMENT 390 357 1,150 1,097
OTHER EXPENSES 2,742 2,671 8,416 8,402
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSE 9,353 8,628 28,237 26,559
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 7,188 6,812 20,885 19,251
INCOME TAXES 1,866 1,913 5,545 5,177
-------- -------- -------- --------
NET INCOME $ 5,322 $ 4,899 $ 15,340 $ 14,074
======== ======== ======== ========
PER COMMON SHARE DATA:
NET INCOME PER SHARE:
BASIC $ 0.77 $ 0.69 $ 2.21 $ 1.97
DILUTED $ 0.76 $ 0.68 $ 2.19 $ 1.96
CASH DIVIDENDS DECLARED PER SHARE $ 0.23 $ 0.21 $ 0.69 $ 0.61
2
Univest Corporation of Pennsylvania and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
Sept 30, 2002 Sept 30, 2001
------------- -------------
(in thousands)
Cash flows from operating activities:
Net income $ 15,340 $ 14,074
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses in excess of net charge-offs 424 160
Depreciation of premises and equipment 1,547 1,891
Discount accretion on investment securities (181) (595)
Deferred tax benefit (384) (368)
Realized gains on investment securities (668) (112)
Realized gains on sales of mortgages (54) (72)
(Decrease) increase in net deferred loan fees (14) 293
Decrease (increase) in interest receivable and other assets 1,273 (1,105)
(Decrease) increase in accrued expenses and other liabilities (4,589) 848
------------- -------------
Net cash provided by operating activities 12,694 15,014
Cash flows from investing activities:
Proceeds from maturing securities held-to-maturity 45,022 121,142
Proceeds from maturing securities available-for-sale 42,656 88,208
Proceeds from sales of securities available-for-sale 23,685 13,855
Purchases of investment securities held-to-maturity (21,976) (105,198)
Purchases of investment securities available-for-sale (110,038) (112,963)
Decrease (increase) in interest-bearing deposits 14,861 (4,041)
Net (increase) decrease in federal funds sold and
other short-term investments (26,971) 8,113
Proceeds from sales of mortgages 5,460 6,708
Net increase in loans (24,574) (42,115)
Capital expenditures (1,157) (1,826)
------------- -------------
Net cash used in investing activities (53,032) (28,117)
Cash flows from financing activities:
Net increase in deposits 56,570 5,904
Net (decrease) increase in short-term borrowings (7,825) 18,910
Repayment of long-term debt - (7,000)
Proceeds from long-term debt 7,000 5,000
Purchases of treasury stock (7,759) (6,853)
Stock issued under dividend reinvestment and
employee stock purchase plans 978 922
Proceeds from exercise of stock options 564 297
Cash dividends (4,684) (4,258)
------------- -------------
Net cash provided by financing activities 44,844 12,922
Net increase in cash and due from banks 4,506 (181)
Cash and due from banks at beginning of period 39,107 40,517
------------- -------------
Cash and due from banks at end of period $ 43,613 $ 40,336
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $20,575 $27,421
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 nine-month period ended September 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 Nine Months
Ended September 30 Ended September 30
2002 2001 2002 2001
---- ---- ----- ----
Numerator:
Net Income $5,322 $4,899 $15,340 $14,074
Numerator for basic and diluted earnings per
share - income available to common
shareholders 5,322 4,899 15,340 14,074
4
Denominator:
Denominator for basic earnings per share-
weighted-average shares outstanding 6,889 7,122 6,939 7,159
Effect of dilutive securities:
Employee stock options 72 50 68 34
---------------- -------------------
Denominator for diluted earnings per share
adjusted weighted-average shares
outstanding 6,961 7,172 7,007 7,193
================ ===================
Basic earnings per share $ .77 $ .69 $ 2.21 $ 1.97
================ ===================
Diluted earnings per share $ .76 $ .68 $ 2.19 $ 1.96
================ ===================
Note 3. Accumulated Other Comprehensive Income
The following shows the accumulated comprehensive income, net of income taxes,
for the periods presented:
Three Months Nine Months
Ended September 30 Ended September 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income $5,322 $4,899 $15,340 $14,074
Accumulated gain on cash flow hedge 62 222 110 367
Change in unrealized gain (loss) on available
for sale investment securities 2,348 2,317 3,823 3,460
----- ----- ----- -----
Total comprehensive income $7,732 $7,438 $19,273 $17,901
====== ====== ======= =======
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.
5
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 nine months ended
September 30, 2002 was $235. 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 September
30, 2002 and December 31, 2001:
September 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 33 200 3
Branch acquisitions 2,951 2,080 2,951 1,888
Mortgage servicing rights, net 369 54 567 41
The following table reflects the results of operations as if SFAS No. 142 had
been adopted as of January 1, 2001:
6
For the three months ended For the nine months ended
September 30 September 30
2002 2001 2002 2001
(In thousands, except per share data)
Net income, as reported 5,322 4,899 15,340 14,074
Add back: Goodwill amortization, net of income
tax benefit of $6 and $16 respectively - 117 - 350
------- ------- ------- -------
Adjusted net income 5,322 5,016 15,340 14,424
Per common share data:
Net income per share:
Basic as reported $ 0.77 $ 0.69 $ 2.21 $ 1.97
Goodwill amortization $ - $ 0.02 $ - $ 0.05
Adjusted basic earnings per share $ 0.77 $ 0.71 $ 2.21 $ 2.02
Diluted as reported $ 0.76 $ 0.68 $ 2.19 $ 1.96
Goodwill amortization $ - $ 0.02 $ - $ 0.05
Adjusted diluted earnings per share $ 0.76 $ 0.70 $ 2.19 $ 2.01
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND
--------------------------
RESULTS OF OPERATIONS
---------------------
Net Income
- ----------
Net income increased 8.2% or $0.4 million from $4.9 million for the three
months ended September 30, 2001 to $5.3 million for the three months ended
September 30, 2002. Net income for the nine months ended September 30, 2002
increased 8.5% or $1.2 million from $14.1 million for the nine months ended
September 30, 2001 to $15.3 million for the nine months ended September 30,
2002. The net income growth for the three and nine months ended September 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 September 30, 2002
decreased $1.2 million from $14.7 million at September 30, 2001 to $13.5 million
at September 30, 2002. There was average loan volume growth in commercial loans
that was offset by a decrease in rate. Mortgage loans and consumer loans also
increased in average volume offset by a decrease in rate. The prime rate, which
is an important factor of the Banks' loan interest income, averaged 4.8% for the
third quarter 2002 compared to 6.4% for the third quarter 2001. For the nine
months ended September 30, 2002, interest and fees on loans decreased $4.0
million from $44.3 million at September 30, 2001 to $40.3 million at September
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 partly due to the purchase of jumbo mortgages. Prime
rate averaged 4.8% for the nine months ended September 2002 compared to 7.3% for
the nine months ended September 2001.
Interest on investment securities decreased $0.2 million from $5.0 million
for the three-month period ended September 30, 2001 to $4.8 million for the
three-month period ended September 30, 2002. Interest on investments decreased
$0.2 million from $14.8 million for the nine months ended September 30, 2001 to
$14.6 million for the nine months ended September 30, 2002.
Other interest income decreased $0.1 million for the three-month period
ended September 30, 2002 and decreased $0.8 million for the nine-month period
ended September 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 $2.1 million from $8.5 million for the three
months ended September 30, 2001 to $6.4 million for the three-month period ended
September 30, 2002. Interest expense decreased $7.0 million from $27.0 million
for the nine months
8
ended September 30, 2001 to $20.0 million for the nine-month period ended
September 30, 2002. The decrease in both periods is primarily attributed to
volume growth in most 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 interest earning assets and interest
bearing liabilities affect the amount of net interest income. The nine months
ended September 30, 2002 shows net interest income of $35.1 million, which is an
increase of $1.9 million compared to the $33.2 million recorded for the nine
months ended September 30, 2001. Average interest earning assets increased by
$59.5 million for the nine months ended September 30, 2002 as compared to the
nine months ended September 30, 2001. Average interest bearing liabilities
increased $49.7 million for the nine months ended September 30, 2002 as compared
to the same period in 2001. Interest earning asset yields decreased 0.9%
compared to last year along with a decrease of 1.1% paid on interest-bearing
liabilities increased the net interest spread to 3.5%. The net interest margin
remained constant at 4.0%.
The following table demonstrates the aforementioned effects:
NINE MONTHS ENDED
-----------------
9/30/02 9/30/01
------- -------
AVG. BALANCE RATE AVG. BALANCE RATE
----------------- -----------------
Interest Earnings Assets $1,174,159 6.3% $1,114,637 7.2%
Interest Bearing Liabilities 964,418 2.8% 914,758 3.9%
Net Interest Income 35,130 33,165
Net Interest Spread 3.5% 3.3%
Net Interest Margin 4.0% 4.0%
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.
At September 30, 2002, September 30, 2001 and December 31, 2001, the
notional amount of "Pay Floating, Receive Fixed" swaps outstanding was $30.0
million. 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
9
September 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
September 30, 2002 was a positive $172 thousand as compared to a positive $114
thousand for the quarter ended September 30, 2001. For the nine months ended
September 30, 2002 the impact was a positive $551 thousand as compared to a
positive $213 thousand for the nine months ended September 30, 2001. The income
on 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
September 30, 2002, the market value of interest-rate swaps in a favorable
position was $634 thousand and there were no interest-rate swaps with a market
value in an unfavorable position. As of September 30, 2001, the market value of
interest-rate swaps in a favorable position was $564 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 an allocated reserve, which is
comprised of reserves established on specific loans, and class reserves based on
historical loan loss experience and current trends and an unallocated reserve
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.
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.
10
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
September 30, 2002, were $0.4 million and for the nine months ended September
30, 2002 were $1.2 million. For the three and nine months ended September 30,
2001, the provisions were $0.2 million and $0.4 million, respectively. The
provisions for possible loan losses were increased to build up the reserve to
levels required by the previously mentioned reserve analysis.
At September 30, 2002, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $3.1 million, all of which were on a
non-accrual basis. The related reserve for credit losses for those loans was
$0.5 million. At September 30, 2001, the recorded investment in loans considered
to be impaired was $2.0 million, all of which were on a non-accrual basis. The
related reserve for credit losses for these loans was $0.7 million.
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
11
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 September 30, 2002 total $3.1 million and consist mainly
of commercial loans and real estate related commercial loans and $0.02 million
of first residential mortgage loans that are over 90 days delinquent. The total
of cash basis, non-accrual and restructured loans at September 30, 2001 were
$2.0 million. At September 30, 2002, non-accrual loans resulted in lost interest
income of $152 thousand as compared to $140 thousand at September 30, 2001. At
September 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 September 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 September 30, 2002, the Corporation had $37 thousand in 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 $0.7 million or 16.7% from $4.2 million for the
three months ended September 30, 2001 to $4.9 million for the three months ended
September 30, 2002. For the nine months ended September 30, 2002, total
noninterest income increased $2.1 million or 16.0% from $13.1 million for the
nine months ended September 30, 2001 to $15.2 million. The growth in both
periods is primarily attributed to increases in commission income and increases
in other income as described below.
Trust income for the three months ended September 30, 2002 of $1.0 million
was $0.2 million less than the $1.2 million reported for the three months ended
September 30, 2001. Trust income for the nine months ended September 30, 2002 of
$3.1 million was $0.4 million less than the $3.5 million reported for the nine
months ended September 30,
12
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 September 30, 2001 to $1.4 million for the three months
ended September 30, 2002. Service charges on deposit accounts grew $0.4 million
from $3.7 million for the nine months ended September 30, 2001 to $4.1 million
for the nine months ended September 30, 2002. Due to declining earnings credit
rates in commercial accounts, service charges increased. Nonsufficient funds
fees also increased. These increases were partially offset by a decrease in ATM
fees.
Commission income is the primary source of income for Univest Investments,
Inc. and Univest Insurance, Inc. Commission income for the three months ended
September 30, 2002 of $1.1 million was $0.5 million or 83.3% more than the $0.6
million reported for the three months ended September 30, 2001. Commission
income for the nine months ended September 30, 2002 of $3.4 million was $1.5
million or 78.9% more than the $1.9 million reported for the nine months ended
September 30, 2001. The growth is primarily due to the acquisition of the Gum
Insurance Agency in December 2001.
Other income increased $0.4 million from $1.1 million for the three months
ended September 30, 2001 to $1.5 million for the three months ended September
30, 2002. For the nine-month period, other income grew $0.5 million from $4.0
million at September 30, 2001 to $4.5 million at September 30, 2002. The growth
in both periods is attributed to gains on the sales of securities and a gain on
the sale of a property located next to a Union branch. These gains were offset
by a decline in the value of mortgage servicing rights and the cash surrender
value of certain annuities. 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 September 30, 2001 to $9.4 million for
the three months ended September 30, 2002. Total noninterest expense increased
from $26.6 million for the nine months ended September 30, 2001 to $28.2 million
for the nine months ended September 30, 2002. Salaries and benefits, which
include commission expense generated by Univest Investments, Inc. and Univest
Insurance, Inc. increased. Other expenses such as marketing, advertising, ATM
fees, consulting, insurance and contributions also increased while goodwill
expense decreased due to the Corporation's adoption of Financial Accounting
Standards Board
13
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 quarters ended
September 30, 2002 and September 30, 2001. The effective tax rates were 26.0%
and 28.1% respectively. For the nine months ended September 30, 2002 the
provision was $5.5 million as compared to $5.2 million for the nine months ended
September 30, 2001. The effective tax rates were 26.6% and 26.9% 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 decrease 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 accounting principles generally accepted in the United States,
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.
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
14
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 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
15
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 statements of operation or
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.
Controls and Procedures
- -----------------------
As of September 30, 2002, an evaluation was performed under the supervision
and with the participation of the Corporation's management, including the CEO
and CFO, of the effectiveness of the design and operation of the Corporation's
disclosure controls and procedures. Based on that evaluation, the Corporation's
management, including the CEO and CFO, concluded that the Corporation's
disclosure controls and procedures were effective as of September 30, 2002.
There have been no significant changes in the Corporation's internal controls or
in other factors that could significantly affect internal controls subsequent to
September 30, 2002.
Financial Condition
- -------------------
Total assets increased $61.3 million or 4.9% from $1,260.7 million at
December 31, 2001 to $1,322.0 million at September 30, 2002 primarily due to
increases in loans, investments, federal funds sold and in cash and due from
banks.
Total liabilities increased $53.0 million or 4.7% from $1,139.1 million at
December 31, 2001 to $1,192.1 million at September 30, 2002. Total deposits
increased from $998.1 million at December 31, 2001 to $1,054.7 million at
September 30, 2002. There was growth in all types of accounts. Short-term
borrowings decreased $7.8 million from $91.6 million at December 31, 2001 to
$83.8 million at September 30, 2002 due to a decline in federal funds purchased
of $16.7 million offset by an increase in corporate sweep accounts of $8.9
million. Other liabilities decreased $2.8 million primarily because there were
$0.7 million in purchases of securities and $0.2 million of treasury
16
stock purchases that will settle in October 2002 compared to securities of $4.1
million purchased in December 2001 that settled in January 2002.
Shareholders' equity grew to $129.9 million at September 30, 2002 from
$121.6 million at December 31, 2001. Treasury stock increased to $39.2 million
at September 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 shares purchased since December
31, 2001 is 165,191. Book value per share increased from $17.32 at December 31,
2001 to $18.94 at September 30, 2002, an increase of $1.62 per share or 9.4%.
The accumulated other comprehensive income, related to debt securities, of
$6.6 million, net of taxes, has been included in shareholders' equity as of
September 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.
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
September 30, 2002. The accumulated other comprehensive income, related to
interest-rate swaps, of $0.3 million, net of taxes, was 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 an annual basis. There can be no assurance
that future goodwill impairment tests will not result in a charge to earnings.
17
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 For the nine months ended
September 30 September 30
2002 2001 2002 2001
(In thousands, except per share data)
Net income, as reported $ 5,322 $ 4,899 $15,340 $14,074
Add back: Goodwill amortization, net of income
tax benefit of $6 and $16 respectively - 117 - 350
------- ------- ------- -------
Adjusted net income $ 5,322 $ 5,016 $15,340 $14,424
Per common share data:
Net income per share:
Basic as reported $ 0.77 $ 0.69 $ 2.21 $ 1.97
Goodwill amortization $ - $ 0.02 $ - $ 0.05
Adjusted basic earnings per share $ 0.77 $ 0.71 $ 2.21 $ 2.02
Diluted as reported $ 0.76 $ 0.68 $ 2.19 $ 1.96
Goodwill amortization $ - $ 0.02 $ - $ 0.05
Adjusted diluted earnings per share $ 0.76 $ 0.70 $ 2.19 $ 2.01
18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings--None
Item 2. Changes in Securities--None
Item 3. Defaults upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--Not applicable
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K during the quarter ended September 30, 2002
Date of Report Item Description
-------------- ---- -----------
August 13, 2002 5 Notification of a correspondence
sent to SEC containing the
certifications Pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Univest Corporation of Pennsylvania
(Registrant)
Date: 10/23/02 /s/ William S. Aichele
-------- -----------------------------
William S. Aichele, President
and Chief Executive Officer
Date: 10/23/02 /s/ Wallace H. Bieler
-------- -----------------------------
Wallace H. Bieler, Executive Vice President
and Chief Financial Officer
20
CERTIFICATIONS
I, William S. Aichele, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Univest
Corporation of Pennsylvania;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 10/23/02
--------
/s/ William S. Aichele
- ---------------------------------
William S. Aichele, President
and Chief Executive Officer
CERTIFICATIONS
I, Wallace H. Bieler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Univest
Corporation of Pennsylvania;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: 10/23/02
--------
/s/ Wallace H. Bieler
- -------------------------------------
Wallace H. Bieler, Execute Vice President
and Chief Financial Officer