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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, 2004.

or

|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From ____________ to ____________ .

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. |X| Yes |_| No .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). |X| Yes |_| No .

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

UNIVEST CORPORATION OF PENNSYLVANIA

INDEX

Note: The condensed consolidated balance sheet at December 31, 2003 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. See accompanying notes to the unaudited consolidated financial statements.

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Note: See accompanying notes to the unaudited consolidated financial statements. 

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UNIVEST CORPORATION OF PENNSYLVANIA

Notes to Condensed Consolidated Financial Statements – (Unaudited)
(All dollar amounts presented are in thousands, except per share data)

     The accompanying condensed consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (Univest) and its wholly owned subsidiary, Univest National Bank and Trust Co., referred to herein as the “Bank”. 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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003, which has been filed with the Securities and Exchange Commission.

     Univest has one reportable segment, “Community Banking” with several operating units, including a broker/dealer and insurance agency that do not meet the quantitative thresholds requiring separate disclosure under SFAS No. 131.

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

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     The Corporation maintains a long-term incentive plan to grant stock options. When the exercise price of the Corporation’s stock options is greater than or equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Corporation's financial statements. Pro forma net income and earnings per share are presented to reflect the impact of the stock option plan assuming compensation expense had been recognized based on the fair value of the stock options granted under the plan.

     In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement encourages, but does not require, the adoption of fair-value accounting for stock-based compensation to employees. The Corporation, as permitted, has elected not to adopt the fair-value accounting provisions of SFAS No. 123, and has instead continued to apply APB Opinion No. 25 and related interpretations in accounting for the plans and to provide the required pro forma disclosures of SFAS No. 123; accordingly, no expense is recognized in the Consolidated Statement of Income.

     The following table represents the effect on net income and earnings per share had the Corporation applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

     The effects on pro forma net income and diluted earnings per share of applying the disclosure requirement of SFAS No. 123 in past years may not be representative of the future pro forma effects on net income and earnings per share due to the vesting provisions of the options and future awards that are available to be granted.

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     Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. They primarily are issued to support commercial paper, medium and long-term notes and debentures, including industrial revenue obligations. The approximate term is usually one year but some can be up to five years. Historically, substantially all standby letters of credit expire unfunded.

     The maximum potential amount of future payments under the guarantee is $42.3 million.

     The current carrying amount of the contingent obligation as of June 30, 2004, is $44 thousand.

     This arrangement has credit risk essentially the same as that involved in extending loans to customers and is subject to the Bank's normal credit policies. Collateral is obtained based on management's credit assessment of the customer.

      Univest previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute or make non-qualified payments of $406 thousand to its SERP and $80 thousand to its other postretirement benefit plan in 2004. As of June 30, 2004, $181 thousand and $42 thousand have been contributed to its SERP and postretirement plans, respectively. Univest presently anticipates contributing essentially equal payments for the third and fourth quarters to fund the SERP and postretirement plans. The Corporation presently anticipates contributing an additional $2.0 million to fund its pension plan in 2004 and may contribute more in order to maximize tax benefits.

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     In December 2003, the Financial Accounting Standards Board revised Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (the Interpretation). The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Previously, entities were generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. Application of this Interpretation is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. As a result of the adoption of FIN 46, the Corporation deconsolidated its Capital Trust in the first quarter of 2004. The result was an increase in the junior debt of $619 thousand.

     In December 2003, the Financial Accounting Standards Board issued a revision to SFAS No. 132, Employer’s Disclosures about Pension and Other Postretirement Benefits – an amendment to FASB Statements No. 87, 88, and 106. The SFAS revises employer’s disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, 88, and 106. This SFAS retains the disclosure requirements contained in SFAS 132, which it replaces. It requires additional disclosures to those in the original SFAS 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans.

     In December 2003 the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the yield that may be accreted to the excess of the investor's estimate of undiscounted expected principal, interest, and other cash flows over the investor's initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment.

     SOP 03-3 prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.

     SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. The Corporation has not yet determined the impact of SOP 03-3 on its consolidated earnings, financial condition, or equity.

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     The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words "believe," "anticipate," "estimate," "expect," "project," "target," "goal" and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below:

• Operating, legal and regulatory risks
• Economic, political and competitive forces impacting various lines of business
• The risk that our analysis of these risks and forces could be incorrect and/or that the strategiesdeveloped to address them could be unsuccessful
• Volatility in interest rates
• Other risks and uncertainties

     Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Corporation's expectations with regard to any change in events, conditions or circumstances on which any such statement is based.

     Univest Corporation of Pennsylvania, (the Corporation), is a Financial Holding Company. It owns all of the capital stock of Univest National Bank and Trust Co. (Univest National Bank), Univest Realty Corporation, Univest Delaware, Inc., and Univest Reinsurance Corporation.

     Univest National Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers. Delview, Inc., a wholly owned subsidiary of Univest National Bank, provides various financial services including financial planning, investment management, insurance products and brokerage services to individuals and businesses through its subsidiaries Univest Investments, Inc. and Univest Insurance, Inc.

Executive Overview

     Univest Corporation of Pennsylvania recorded net income for the six months ended June 30, 2004 of $11.0 million, a 4.6% increase over the June 30, 2003 period. Basic net income per share increased 4.0% while diluted net income per share increased 3.3% .

     Average earning assets and average interest-bearing liabilities grew by 19.3% and 23.3% respectively when comparing the six month period ended June 30, 2004 to June 30, 2003. This resulted in a 16.4% increase in net interest income. These increases in earning assets, interest-bearing liabilities, and net interest income, between the first half of 2003 and 2004, were primarily a result of First County Bank and Suburban Community Bank acquisitions in the second and fourth quarters of 2003. Approximately $180 million in deposits and $160 million in loans were added to the Corporation’s balance sheet as a result of these acquisitions. Future comparisons of loan, deposit, and net interest income growth will be reduced as the acquisitions become reflected in the comparison time period.

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     In the first quarter of 2004 approximately $42.4 million of debt securities were sold for a net gain of $0.6 million. These securities were primarily mortgage-backed securities and were sold to shorten the duration of the investment portfolio to position it for a possible rise in market interest rates. No securities were sold during the second quarter. Future gains on investments and investment interest income categories may continue to compare unfavorably to the first quarter of 2004 as a result of this portfolio adjustment.

     Salary and benefits, net occupancy and equipment expenses increased by 12.6%, 20.0% and 12.5% respectively between the first half of 2003 and 2004. The seven additional branch locations being operated as a result of the 2003 bank acquisitions plus the addition of a branch in Skippack in the first quarter of 2004, contributed significantly to the increase in costs. Other expense increased by 30.7% which reflect a substantial increase in marketing and advertising, Pennsylvania Bank Capital Shares Tax, and amortization expense of intangible assets, all of which are a function of the acquisitions. Future comparisons of these expense categories will appear more favorable as the costs related to the additional branches become reflected in the comparison time period.

     Univest earns its revenues primarily from the margins and fees it generates from the loan and depository services it provides as well as from trust fees and insurance and investment commissions. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board approved levels. The Federal Reserve has begun to increase interest rates and is signaling that it will raise rates at a measured pace to a more neutral level. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value while the margin impact will vary from bank to bank based upon the structure of its balance sheet. Univest maintains a relatively low interest rate risk profile and does not anticipate that an increase in interest rates would be adverse to its net interest margin.

     Univest seeks to establish itself as the financial provider of choice in the markets it serves. It plans to achieve this goal by offering a broad range of high quality financial products and services and by increasing market awareness of its brand and the benefits that can be derived from its products. The Corporation operates in an attractive market for financial services but also is in intense competition with domestic and international banking organizations and other insurance and investment providers for the financial services business. The Corporation has taken initiatives to achieve its business objective by acquiring banks and other financial service providers in strategic markets, by increasing its marketing, public relations and advertising budgets, by establishing standards of service excellence for its customers, and by using technology to ensure that the needs of its customers are understood and satisfied.

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

     Univest Corporation of Pennsylvania consolidated net income and earnings per share for the six months ended June 30, 2004 and the six months ended June 30, 2003 were as follows:

     The first six months of 2004 results compared to the first six months of 2003 include the following significant components:

• Net income increased due to growth in interest income on loans and a decrease in interest expense on deposits that was offset by an increase in non interest expense.
• Net interest income increased due to growth in commercial loans and a decline in deposits. The net interest margin remained the same at 3.8% even though there was an increase in long-term debt from additional borrowed funds, Trust Preferred Securities and Subordinated Capital Notes.
• Total non interest income improved by $0.4 million or 3.9% due primarily to increases in trust fees and fees on deposit accounts.
• Total non interest expense grew $3.5 million or 17.8% largely due to increases in salaries and benefits and other expenses. The mergers with First County Bank and Suburban Community Bank in May and October 2003, respectively, contributed to these increases.
• Univest announced a quarterly dividend increase from $.20 per share to $.25 per share, an increase of 25.0%. This represents an additional year to date payout of $0.9 million.

     Net interest income is the difference between interest earned on loans, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation's revenue. The following table presents a summary of Univest's average balances; the yields earned on average assets, and the cost of average liabilities for the six months ended June 30, 2004 and June 30, 2003. One month of averages for the acquired First County Bank are included in the June 30, 2003 average balances and no balances for Suburban Community Bank, because it was not acquired until October 2003. That is the reason for a significant portion of the increases in averages for the periods ending June 30, 2004. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Asset/ Liability Management and Investment Committees work to maintain an adequate and reliable net interest margin for the Corporation.

     The impact of lower market rates is reflected in the following table. The average rate for every major category of interest-earning asset, with the exception of Federal Reserve Bank Stock, and for every major category of interest-bearing liability has declined from June 30, 2003 to June 30, 2004. The net interest margin, which is net interest income as a percentage of average assets, remained the same at 3.8% at June 30, 2003 and at June 30, 2004.

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