Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
General
Univest Corporation of Pennsylvania ("Univest") is a Pennsylvania corporation organized in 1973 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956. It owns all of the capital stock of Union National Bank and Trust Company, Pennview Savings Bank, Univest Realty Corporation, Univest Leasing Corporation, Univest Mortgage Company, Univest Financial Planning Corporation, Univest Insurance Company, and Univest Electronic Services Corporation.
Union National Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers. Pennview Savings Bank is engaged in attracting deposits from the general public and investing such deposits primarily in loans secured by residential properties, consumer loans, and to a lesser extent, loans secured by commercial real estate and in commercial business loans. The Realty Corporation was established to obtain, hold and operate properties for the holding company and its subsidiaries. Both the Leasing Corporation and Univest Mortgage Company are inactive. Univest Insurance Company offers credit-related reinsurance plans. Univest Electronic Services Corporation was established to provide data processing services to Union National Bank in Souderton and other subsidiaries of Univest Corporation of Pennsylvania. Pennsylvania banking law allows a bank to merge or add branch offices within the county in which its head office located and in contiguous or co-contiguous counties.
Union National Bank and Trust Company, with its head office in Souderton, Montgomery County, serves the area through sixteen (16) banking offices, two off-premises automated teller machines and offices located in ten retirement homes. Eleven banking offices are in Montgomery County and five banking offices are in Bucks County. One off-premises automated teller machine is located in Bucks County and the other is located in Montgomery County.
Pennview Savings Bank conducts operations through five full-service offices located in Souderton, Hatfield, Franconia, Silverdale and Montgomeryville, Pennsylvania and offices located in two retirement homes.
As of January 31, 1995, Univest and its subsidiaries employed four hundred and three (403) persons.
Competition
Univest Corporation's service areas are characterized by intense competition for banking business among commercial banks, savings and loan associations, mutual savings banks and other financial institutions. Each of the Corporation's subsidiary banks actively compete with such banks and financial institutions for local retail and commercial accounts. Union National Bank and Pennview Savings Bank are also subject to competition from other local banks and financial institutions in Bucks and Montgomery Counties, as well as other financial institutions outside their primary service area.
In competing with other banks, savings and loan associations, and other financial institutions, Union National Bank and Pennview Savings Bank seek to provide personalized services through management's knowledge and awareness of their service area, customers and borrowers.
Management believes this knowledge and awareness provides a business advantage in serving the retail depositors and the small and mid-sized commercial borrowers that comprise Union National Bank's and Pennview Savings Bank's customer base.
Other competitors, including credit unions, consumer finance companies, insurance companies and mainly money market mutual fund compete with certain lending and deposit gathering services offered by Union National Bank and Pennview Savings Bank.
Supervision and Regulation
Union National Bank is subject to supervision and is regularly examined by the Office of the Comptroller of the Currency. Also, Union National Bank is subject to examination by the Federal Deposit Insurance Corporation and by the Federal Reserve System. Pennview Savings Bank is regulated by the Federal Deposit Insurance Corporation and by the Pennsylvania Department of Banking.
Univest is subject to the provisions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. The Act prohibits the acquisition by a bank holding company of a direct or indirect ownership of more than five percent of the voting shares of any bank within the United States without prior approval of the Board of Governors of the Federal Reserve System, and also prohibits the granting of such approval in respect to any bank within the United States located outside of the state where the bank holding company's principal operations are conducted, unless the acquisition is specifically authorized by the statutes of the state in which the bank is located. With certain exceptions, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank, and from engaging directly or indirectly in businesses unrelated to the business of banking, or managing, or controlling banks. Under the Bank Holding Company Act Amendments of 1970, which became effective on December 3, 1970, the Federal Reserve Board may approve the acquisition by bank holding companies of nonbank subsidiaries to engage in activities that are closely related to banking and are in the public interest. The amendments include a provision which prohibits banks, bank holding companies and subsidiaries from engaging in tie-in arrangements. Bank tie-ins involving a loan, discount, deposit, or trust service are specifically exempted, and the Federal Reserve Board is authorized to make exceptions by regulations.
As a bank holding company, Univest is subject to the reporting requirements of the Board of Governors of the Federal Reserve System, and Univest, together with its subsidiaries, is subject to examination by the Board. The Federal Reserve Act limits the amount of credit which a member bank may extend to its affiliates, and the amount of its funds which it may invest in or lend on the collateral of the securities of its affiliates. Under the Federal Deposit Insurance Act, insured banks are subject to the same limitations.
FDICIA
In December 1991, FDICIA was enacted, which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes.
Among other things, FDICIA requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements in order to minimize losses to the FDIC. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized" and imposes significant restrictions on the operations of a bank that is not at least adequately capitalized. A depository institution's capital tier will depend upon where its capital levels are in relation to various relevant capital measures, which will include a risk-based capital measure, a leverage ratio capital measure and certain other factors.
Regulations promulgated under FDICIA also require that an institution monitor its capital levels closely and notify its appropriate federal banking regulators within 15 days of any material events that affect the capital position of the institution.
FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares (if feasible) and such other standards as the agency deems appropriate.
FDICIA also contains a variety of other provisions that affect the operations of the Corporation, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, certain restrictions on investments and activities of state- chartered insured banks and their subsidiaries and limitations on credit exposure between banks.
Finally, FDICIA limits the discretion of the FDIC with respect to deposit insurance coverage by requiring that, except in very limited circumstances, the FDIC's course of action in resolving a problem bank must constitute the "least costly resolution" for the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"), as the case may be. The FDIC has interpreted this standard as requiring it not to protect deposits exceeding the $100,000 insurance limit in more situations than was previously the case. In addition, FDICIA prohibits payments by the FDIC on uninsured deposits in foreign branches of U.S. banks and will severely limit the "too big to fail" doctrine under which the FDIC formerly protected deposits exceeding the $100,000 insurance limit in certain failed banking institutions.
Implementation of FDICIA has not had a material impact on the business or operations of the Corporation.
Credit and Monetary Policies
Union National Bank is affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve System. An important function of the policies is to curb inflation and control recessions through control of the supply of money and credit. The Federal Reserve System uses its powers to regulate reserve requirements of member banks, the discount rate on member-bank borrowings, interest rates on time and savings deposits of member banks, and to conduct open-market operations in United States Government securities to exercise control over the supply of money and credit. The policies have a direct effect on the amount of bank loans and deposits and on the interest rates charged on loans and paid on deposits, with the result that the policies have a material effect on bank earnings. Future policies of the Federal Reserve Bank System and other authorities cannot be predicted, nor can their effect on future bank earnings be predicted.
Pennview Savings Bank is a member of the Federal Home Loan Bank System which consists of 12 regional Federal Home Loan Banks, with each subject to supervision and regulation by the newly created Federal Housing Finance Board. The Federal Home Loan Banks provide a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank of Pittsburgh, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount equal to at least 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances (borrowings) from the Federal Home Loan Bank of Pittsburgh, whichever is greater.
Interstate Banking
Legislation was passed, and signed by President Clinton on September 29, 1994, which will eliminate many currently existing restrictions on interstate banking. The legislation will authorize interstate acquisition of banks by bank holding companies without geographic limitations one year after enactment. Beginning June 1, 1997, the legislation will allow interstate branching in states that have not passed legislation prohibiting interstate branching, except that de novo branching or acquisition of a branch in another state without acquisition of the entire bank will only be permitted if expressly permitted by the law of the state in which such branch would be located. Interstate branching prior to June 1, 1997 will be possible in states that pass laws affirmatively authorizing such interstate branching. The effect of this legislation on Univest cannot be predicted at this time.
Statistical Disclosure
Univest was incorporated under Pennsylvania law in 1973 for the purpose of acquiring the stock of Union National Bank and Trust Company (Union National) and subsequently to engage in other business activities permitted under the Bank Holding Company Act. On September 28, 1973, pursuant to an exchange offer, Univest acquired the outstanding stock of Union National. The following financial data appearing on pages 7 through 18 reflects consolidated information. Where averages are reported, daily information has been used for all subsidiaries.
Note: (1) For rate calculation purposes, average loan categories include unearned discount.
(2) Nonaccrual loans have been included in the average loan balances.
(3) Certain amounts have been reclassified to conform with the current-year presentation.
(4) Included in interest income is loan fees of $1,766,000 for 1994, $1,897,000 for 1993 and $1,715,000 for 1992.
*The change due to the volume/rate variance and average volume and percent roundings have been allocated to volume.
Refer to Note 3 to the consolidated financial statements.
Weighted average yield is calculated by dividing income within each maturity range by outstanding amount of the related investment, and has not been tax equated on tax-exempt obligations.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE III. LOAN PORTFOLIO, PART B. MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATE (Thousands of Dollars)
The commercial mortgages and Industrial Development Authority mortgages that are presently being written at both fixed and floating rates of interest are written for a three (3) year term with a monthly payment based on a fifteen (15) year amortization schedule. At each three-year anniversary date of the mortgages, the interest rate is renegotiated and the term of the loan is extended for an additional three years. At each three-year anniversary date of the mortgages, the Bank also has the right to require payment in full. These are included in the "Due in One to Five Years" category on issue. The borrower has the right to prepay the loan at any time.
The residential mortgages are presently being written on a one (1) or three (3) year rollover basis. The monthly payment on these mortgages is based on a thirty (30) year amortization schedule, unless the borrower requests a shorter payout period. These are included in the "Due in One to Five Years" category on issue. Fixed rate residential mortgages are also being written for terms of 15 and 30 years and are included in the "Due in Over Five Years" category.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE III. LOAN PORTFOLIO, PART C RISK ELEMENTS (Thousands of Dollars)
Nonaccrual, Past-Due and Restructured Loans and Other Assets ------------------------------------------------------------ Performance of the entire loan portfolio is reviewed on a regular basis by bank management and loan officers. A number of factors regarding the borrower, such as overall financial strength, collateral values, and repayment ability, are considered in deciding on what actions should be taken when determining the collectibility of interest for accrual purposes.
Potential Problem Loans When collectibility of interest and/or principal on a particular loan is questionable, the loan is placed on nonaccrual status. If, at the time a decision is made to cease accruing interest, it is determined that the collection of previously accrued but unpaid interest is uncertain, a stipulated amount is charged against current income. Conversely, if a loan on nonaccrual status is paid in full, including interest, a credit is made to current income. The $5,571 of nonaccruing and restructured loans in 1994 includes $994 which although nonaccruing is performing on current contractual status. If nonaccrual loans had been performing in accordance with their contractual terms, additional interest income of $575 would have been recorded in 1994. Interest income of $164 was recognized on these loans. The decrease in nonaccrual loans from 1993 to 1994 was mainly due to economic conditions. It should be noted that loans classified as substandard internally are, at this point, not known as a potential problem but, if the economy continues to slow, could move into this problem loan category. It is not possible to fairly estimate a dollar figure that would be added to this problem loan category.
Loan Concentrations At December 31, 1994, there were no concentrations of loans exceeding 10% of total loans other than disclosed in Table III, Part A.
Other Assets At December 31, 1994, $1,786 in Other Real Estate Owned was classified as nonperforming. This amount represents all the Other Real Estate Owned.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
TABLE IV. SUMMARY OF LOAN LOSS EXPERIENCE (Thousands of Dollars)
The loan loss reserve is established at a level which management believes is adequate to absorb potential loan losses on the current portfolio. Loans which are currently performing that may pose collectibility problems in the future are considered in the determination of the loan loss reserve as described in Table IV. For financial reporting purposes, the provision for loan losses charged to operating expenses is based upon several factors, including:
1. A continuing review by management and the Bank's Loan Review Committee of the loan portfolio. Loans are reviewed on an individual basis with special attention given to those loans which are believed to possess the possibility of loss exposure, with regard to either principal or interest.
2. The analysis of historical loan loss experience in relation to various types of outstanding loans, particularly in the consumer loan portfolio.
3. Requirements of the Federal Regulatory examinations, at which time certain loans are required to be charged against reserve for loan losses.
If, after applying these factors, it is management's opinion that reserves must be increased, additional amounts are provided through a charge to operating expenses.
As the accompanying table indicates, the amount of loan loss provision charged to expense for 1994 was $1,950 compared to $2,480 in 1993 and $2,852 in 1992.
Total cash-basis and nonaccrual loans of $5,149,273 at December 31, 1994, were generally comprised of $2,633,442 in residential real estate loans, $456,367 in commercial and industrial loans, and $2,059,464 in commercial real estate loans.
Note: Univest and its subsidiaries do not have foreign offices or foreign deposits.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES INTEREST RATE SENSITIVITY GAPS
(Millions of dollars)
Interest rate sensitivity varies with different types of interest- earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans which are tied to the prime rate differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits over $100,000 and money market certificates are much more interest sensitive than passbook savings accounts and long-term capital notes. The shorter term interest rate sensitivities are key to measuring the interest sensitivity gap, or excess interest-sensitive earnings assets over interest-bearing liabilities.
The following table shows the interest sensitivity gaps for five different time intervals as of December 31, 1994. Univest, as a financial institution, is made up of assets and liabilities that are primarily monetary, which are thus affected by inflation as well as interest rate changes. A positive gap continued during 0-30 day periods mainly as a result of a large floating-rate portfolio held by the commercial bank subsidiary. The floating loans are tied to prime, and fall into the one- month gap category, causing a positive gap position on a dynamic or rolling basis.
Item 2.



Item 2. Properties
Univest and its subsidiaries own and occupy twenty-one properties in Montgomery and Bucks Counties in Pennsylvania, which are used principally as banking offices. Note 6, appearing on page 21 of the Annual Report to Shareholders (Exhibit 13), is hereby incorporated in this item.
Item 3.

Item 3. Legal Proceedings
None
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 11, 1995.
Executive Officers
The names and ages of all executive officers of Univest are as follows:
There is no family relationship among any of the executive officers of Univest.
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Incorporated by reference from the 1994 Annual Report to Shareholders (Exhibit 13), pages 39-40. Dividend and other restrictions are incorporated by reference from Note 15 of the 1994 Annual Report to Shareholders (Exhibit 13), pages 27 and 28. The approximate number of shareholders as of February 28, 1995, was 1,725.
Item 6.

Item 6. Selected Financial Data
Incorporated by reference from the 1994 Annual Report to Shareholders (Exhibit 13), page 31.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Incorporated by reference from the 1994 Annual Report to Shareholders (Exhibit 13), pages 32 through 38. Dividend and other restrictions are incorporated by reference from Note 15 of the 1994 Annual Report to Shareholders (Exhibit 13), pages 27 and 28.
Item 8.


Item 8. Financial Statements and Supplementary Data
Consolidated balance sheets of the registrant at December 31, 1994 and 1993, and consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1994, 1993 and 1992, and the independent auditors' report thereon are incorporated by reference from the 1994 Annual Report to Shareholders (Exhibit 13), pages 13 through 31.
Item 9.

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosures
Not Applicable
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 11, 1995. The executive officers are listed in Part I of this Form 10-K.
Item 11.

Item 11. Executive Compensation
Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 11, 1995.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the registrant's definitive proxy statement for the annual meeting of shareholders on April 11, 1995.
Item 13.

Item 13. Certain Relationships and Related Transactions
The law firm of Brunner, Conver and Conver, in which Neil L. Conver, a director of Pennview Savings Bank, is a partner. performs legal services for Pennview Savings Bank, in the ordinary course of business. For the year ended December 31, 1994, fees received by Brunner, Conver, and Conver for services performed for Pennview Savings Bank, amounted to less than 5% of the firm's gross revenues.
PART IV
Item 14.

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) 1. & 2. Financial Statements and Schedules The financial statements listed in the accompanying index to financial statements are filed as part of this annual report. 3. Listing of Exhibits The exhibits listed on the accompanying index to exhibits are filed as part of this annual report. (b) There were no reports on Form 8-K filed in the fourth quarter of 1994. (c) Exhibits - The response of this portion of item 14 is submitted as a separate section. (d) Financial Statement Schedules - none.
UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
[Item 14(a)]