United States

SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

UNIVEST CORPORATION OF PENNSYLVANIA

14 North Main Street, Souderton, Pennsylvania 18964

Registrant’s telephone number, including area code (215) 721-2400

Not applicable

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 [  ].

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

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

UNIVEST CORPORATION OF PENNSYLVANIA

INDEX

UNIVEST CORPORATION OF PENNSYLVANIA

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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UNIVEST CORPORATION OF PENNSYLVANIA

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

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UNIVEST CORPORATION OF PENNSYLVANIA

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

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UNIVEST CORPORATION OF PENNSYLVANIA

Note 1. Financial Information

     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 three-month period ended March 31, 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.

Note 2. Earnings Per Share

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

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Note 3. Accumulated Other Comprehensive Income

     The following shows the accumulated comprehensive income, net of income taxes, for the periods presented:

Note 4. Stock-Based Compensation – SFAS 148

     The Corporation maintains stock option plans for officers, employees, and directors. 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 Operations.

     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:

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     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.

Note 5.

FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

     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 $45.0 million.

     The current carrying amount of the contingent obligation as of March 31, 2004, is $45 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.

Note 6. Pensions and other postretirement benefits

     Components of net periodic benefit cost:

     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 March 31, 2004, $81 thousand and $23 thousand have been contributed to its SERP and postretirement plans, respectively. Univest presently anticipates contributing essentially equal payments for the quarters to fund the SERP and postretirement plans. The Corporation presently anticipates contributing an additional $890 thousand to fund its pension plan in 2004 and may contribute more in order to maximize tax benefits.

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Note 7. Recent Accounting Pronouncements

     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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

     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 strategies developed 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.

General

     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 first quarter of 2004 of $5.5 million, a 7.9% increase over the 2003 first quarter results. Basic net income per share increased 8.5% while diluted net income per share increased 6.9%.

     Average earning assets and average deposits grew by 24.1% and 20.3% respectively when comparing the first quarter of 2004 to the first quarter of 2003. This resulted in a 19.2% increase in net interest income. These increases in earning assets, deposits, and net interest income, between the first quarter 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.

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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 quarter comparisons of loan, deposit, and net interest income growth will be reduced as the acquisitions become reflected in the comparison quarter.

     In the first quarter of 2004 approximately $42.4 million of debt securities were sold for a net gain of $.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. Future quarter gains on investments and investment interest income categories may compare unfavorably to the first quarter of 2004 as a result of this portfolio adjustment.

     Salary and benefits, and net occupancy increased by 17.4% and 19.4% respectively between the first quarter of 2003 and 2004. The seven additional branch locations being operated as a result of the 2003 bank acquisitions plus the addition of a de nova branch in Skippack in the first quarter of 2004, contributed significantly to the increase in costs. Other expense increased by 28.6% which reflect a substantial increase in marketing and advertising, Pennsylvania Bank Capital Shares Tax, and amortization of intangible expenses, all of which are a function of the acquisitions. Future quarter comparisons of these expense categories will appear more favorable as the costs related to the additional branches become reflected in the comparison quarter.

     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 current business environment can be characterized as a low inflation, low interest rate environment. GDP growth is solid but employment growth is lagging. This environment has tended to cause interest margin compression on banks. Should 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 our customers are understood and satisfied.

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Results of Operations

     (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 quarter ended March 31, 2004 and the quarter ended March 31, 2003 were as follows:

     The first quarter 2004 results compared to the first quarter 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 noninterest expense.
	•		Net interest income increased due to growth in commercial loans and a decline in deposits. The net interest margin declined from 3.9% to 3.7% due to the increase in long-term debt from additional borrowed funds, Trust Preferred Securities and Subordinated Capital Notes.
	•		Total noninterest income increased by $0.4 million or 6.9% due primarily to gains on the sales of securities.
	•		Total noninterest expense increased $1.9 million or 19.6% largely due to increases in salaries and benefits expense. The mergers with First County Bank and Suburban Community Bank in May and October 2003, respectively, contributed to this increase.
	•		Univest announced a dividend increase from $.20 per share to $.25 per share, an increase of 25.0%. This represents an additional payout of $0.4 million.

Net Interest Income

     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 condensed summary of Univest’s average balances; the yields earned on average assets, and the cost of average liabilities for the quarters ended March 31, 2004 and March 31, 2003. 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 March 31, 2003 to March 31,

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2004. The net interest margin, which is net interest income as a percentage of average assets, declined from 3.9% at March 31, 2003 to 3.7% at March 31, 2004.

Interest Income

     The following table presents interest income for the periods indicated:

     The growth in interest and fees on loans is due primarily to the growth in commercial real estate loans and commercial business loans. The average interest yield on the portfolio decreased from 6.0% at March 31, 2003 to 5.3% at March 31, 2004 as a result of market conditions. This decrease in yield however, was more than offset by the increase in average loan balances outstanding.

     There was average loan volume growth in tax-exempt loans that was offset by a decrease in rates. The decrease in rate is a result of market conditions.

     Interest on investment securities consists mainly of interest on U.S. Government obligations, state and political subdivisions and U.S. Government Agency mortgage-backed securities. During the quarter ended March 31, 2004, approximately $42.4 million of investment securities were sold. This is the primary reason for the decrease of $0.5 million. A decrease in the yield offset the increases in the average volume of the portfolio.

     Interest on federal funds sold is the resulting daily investment activity that can be volatile in both rate and volume. Interest on federal funds sold decreased due to continued decreases in both average volume and the federal funds rate.

Interest Expense

     The average rates paid on deposits continue to decline during 2004 throughout the banking industry. The Corporation’s average cost of deposits declined 90 basis points from 2.2% for the quarter ended March 31, 2003 to 1.3% for the quarter ended March 31, 2004. All deposits grew in average volume for the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003 but were offset by a decrease in the average interest rate for that category. The

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explanation for rate/volume changes differs from the balance sheet presentation that shows a decline in deposit balances as compared to December 31, 2003.

     The following table presents interest expense for the periods indicated:

     The increase in interest on long-term debt is mainly due to the additional borrowings secured since last year’s first quarter. Interest on long-term debt is the interest on $87.4 million of debt as of March 31, 2004. This includes Subordinated Capital Notes, Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Junior Subordinated Debentures of Univest (“Trust Preferred Securities”) and borrowings from the Federal Home Loan Bank of Pittsburgh. In April 2003, Univest issued $15.0 million in subordinated capital notes. In August 2003 the Corporation issued $20.0 million of trust preferred securities. During the first quarter, the Corporation deconsolidated its Capital Trust subsidiary in accordance with FIN 46. This increased the consolidated debt from $20.0 million to $20.6 million.

Provision For Loan Losses

     The reserve for 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 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 provision for the quarters ended March 31, 2004 and 2003 was $0.7 million and $0.4 million, respectively. Continued growing loan volumes, current economic conditions and a movement of credit risk assessments towards weaker loan grades indicated the need for another increase to the reserve in 2004. In addition, the bank’s primary regulators, as an integral part of their examination process, may requi