-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NpavoOj0ZC30/txKGaAtbBR0TOWQ5+TlHPxc28XFcGXkOBfsEiPyQLTCKsuYBg5I bQXsR8uqAmHRBMUySy8N3g== 0000893220-06-000441.txt : 20060306 0000893220-06-000441.hdr.sgml : 20060306 20060306141332 ACCESSION NUMBER: 0000893220-06-000441 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060306 DATE AS OF CHANGE: 20060306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVEST CORP OF PENNSYLVANIA CENTRAL INDEX KEY: 0000102212 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 231886144 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07617 FILM NUMBER: 06666800 BUSINESS ADDRESS: STREET 1: 14 NORTH MAIN STREET STREET 2: P. O. BOX 64197 CITY: SOUDERTON STATE: PA ZIP: 18964 BUSINESS PHONE: 2157212400 MAIL ADDRESS: STREET 1: 14 NORTH MAIN STREET STREET 2: P. O. BOX 64197 CITY: SOUDERTON STATE: PA ZIP: 18964 10-K 1 w17921e10vk.htm FORM 10-K UNIVEST CORPORATION OF PENNSYLVANIA e10vk
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal Year Ended December 31, 2005
 
Commission File number 0-7617
 
Univest Corporation of Pennsylvania
(Exact name of registrant as specified in its charter)
 
     
Pennsylvania
  23-1886144
(State or other jurisdiction of
incorporation of organization) 		  (IRS Employer
Identification No.)
     
14 North Main Street
Souderton, Pennsylvania
(Address of principal executive offices) 		  18964
(Zip Code)
 
Registrant’s telephone number, including area code
(215) 721-2400
 
Securities registered pursuant to Section 12(g) of the Act:
 
     
Title of Class
 
Number of Shares Outstanding at 1/31/06
 
Common Stock, $5 par value
  12,948,390
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o     NO þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 ninety days.  YES þ     NO o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act)
Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES o     NO þ
 
The approximate aggregate market value of voting stock held by non-affiliates of the registrant is $284,448,428 as of January 31, 2006.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part I and Part III incorporate information by reference from the proxy statement for the annual meeting of shareholders on April 11, 2006.
 

 

 
UNIVEST CORPORATION OF PENNSYLVANIA
 
TABLE OF CONTENTS
 
             
  Business   2
  Risk Factors   4
  Unresolved Staff Comments   8
  Properties   8
  Legal Proceedings   8
  Submission of Matters to a Vote of Security Holders   8
 
  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   9
  Selected Financial Data   11
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   12
  Quantitative and Qualitative Disclosures About Market Risk   41
  Financial Statements and Supplementary Data   43
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   79
  Controls and Procedures   79
  Other Information   82
 
  Directors and Executive Officers of the Registrant   82
  Executive Compensation   82
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   82
  Certain Relationships and Related Transactions   82
  Principal Accountant Fees and Services   82
 
  Exhibits and Financial Statement Schedules   82
  85
 Subsidiaries of the Registrant
 Ernst & Young LLP - Consent of independent registered public accounting firm
 KPMG LLP KPMG LLP - Consent of independent registered public accounting firm
 Certification of William S. Aichele, Chairman, President and Chief Executive Officer
 Certification of Wallace H. Bieler, Senior Executive Vice President
 Certification of William S. Aichele, CEO, as enacted by Section 906
 Certification of Wallace H. Bieler, CFO, as enacted by Section 906


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PART I
 
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.
 
Item 1.   Business
 
General
 
Univest Corporation of Pennsylvania, (the “Corporation”), is a Pennsylvania corporation organized in 1973 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956. The Corporation elected to become a Financial Holding Company in 2000 as provided under Title I of the Gramm-Leach-Bliley Act. It owns all of the capital stock of Univest National Bank and Trust Co. (the “Bank”), Univest Realty Corporation, Univest Delaware, Inc., and Univest Reinsurance Corporation. The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries.
 
The 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 the Bank, is a passive investment holding company located in Delaware. Delview 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.
 
Univest Realty Corporation was established to obtain, hold and operate properties for the holding company and its subsidiaries.
 
Univest Reinsurance Corporation, as a reinsurer, offers life and disability insurance to individuals in connection with credit extended to them by the Bank.
 
Univest Delaware, Inc. is a passive investment holding company located in Delaware.
 
Univest Investments, Inc., Univest Insurance, Inc. and Univest Reinsurance Corporation were formed to enhance the traditional banking and trust services provided by the Bank. Univest Investments, Univest Insurance and Univest Reinsurance do not currently meet the quantitative thresholds for separate disclosure provided under Statement of Financial Accounting Standard (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Therefore, the Corporation currently has one reportable segment, “Community Banking,” and strategically is how the Corporation operates and has positioned itself in the marketplace. The Corporation’s activities are interrelated, each activity is dependent, and performance is assessed based on how each of these activities supports the others. Accordingly,


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significant operating decisions are based upon analysis of the Corporation as one Community Banking operating segment.
 
Employees
 
As of December 31, 2005, the Corporation and its subsidiaries employed five hundred seventeen (517) persons.
 
Competition
 
The Corporation’s service areas are characterized by intense competition for banking business among commercial banks, savings and loan associations, savings banks and other financial institutions. The Corporation’s subsidiary bank actively competes with such banks and financial institutions for local retail and commercial accounts, in Bucks, Montgomery, and Chester counties, as well as other financial institutions outside its primary service area.
 
In competing with other banks, savings and loan associations, and other financial institutions, the Bank seeks to provide personalized services through management’s knowledge and awareness of their service area, customers and borrowers.
 
Other competitors, including credit unions, consumer finance companies, insurance companies and mutual funds, compete with certain lending and deposit gathering services offered by the Bank and its subsidiaries, Univest Investments, Inc. and Univest Insurance, Inc.
 
Supervision and Regulation
 
The Bank is subject to supervision and is regularly examined by the Office of the Comptroller of the Currency. Also, the Bank is subject to examination by the Federal Deposit Insurance Corporation.
 
The Corporation is subject to the provisions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. The Corporation is subject to the reporting requirements of the Board of Governors of the Federal Reserve System (the “Board”); and the Corporation, together with its subsidiaries, is subject to examination by the Board. The Federal Reserve Act limits the amount of credit that a member bank may extend to its affiliates, and the amount of its funds that 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.
 
The Corporation elected to become a Financial Holding Company in 2000 as provided under Title I of the Gramm-Leach-Bliley Act. The Act provides a regulatory framework for regulation through the financial holding company, which has the Board as its umbrella regulator. The Gramm-Leach-Bliley Act requires “satisfactory” or higher Community Reinvestment Act compliance for insured depository institutions and their financial holding companies in order for them to engage in new financial activities. The Act provides a federal right to privacy of non-public personal information of individual customers.
 
The Corporation is subject to the Sarbanes-Oxley Act of 2002 (“SOX”). SOX was enacted to address corporate and accounting fraud. SOX adopts new standards of corporate governance and imposes additional requirements on the board and management of public companies. The law also requires that the chief executive officer and chief financial officer certify the accuracy of periodic reports filed with the Securities and Exchange Commission (“SEC”). Pursuant to Section 404 of SOX (“SOX 404”), the Corporation is required to furnish a report by its management on internal controls over financial reporting, identify any material weaknesses in its internal controls over financial reporting and assert that such internal controls are effective. The Corporation has implemented and completed an exhaustive process to achieve compliance with SOX 404 during 2004 and has continued to be in compliance during 2005. The Corporation must maintain effective internal controls which require an on-going commitment by management and the Corporation’s Audit Committee. The process has and will continue to require substantial resources in both financial costs and human capital.


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Credit and Monetary Policies
 
The Bank is affected by the fiscal and monetary policies of the federal government and its agencies, including the Board. An important function of the policies is to curb inflation and control recessions through control of the supply of money and credit. The Board 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 Board and other authorities cannot be predicted, nor can their effect on future bank earnings be predicted.
 
The Bank is a member of the Federal Home Loan Bank System (“FHLBanks”), which consists of 12 regional Federal Home Loan Banks, and is subject to supervision and regulation by the Federal Housing Finance Board. The FHLBanks provide a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), is required to acquire and hold shares of capital stock in the FHLB in an amount equal to: 1) not less than 4.5% and not more than 6.0% of its outstanding FHLB loans and 2) at least a certain percentage of its unused borrowing capacity, not to exceed 1.5%.
 
Statistical Disclosure
 
The Corporation was incorporated under Pennsylvania law in 1973 for the purpose of acquiring the stock of Union National Bank and Trust Company of Souderton and subsequently to engage in other business activities permitted under the Bank Holding Company Act. On September 28, 1973, pursuant to an exchange offer, the Corporation acquired the outstanding stock of Union National Bank and Trust Company of Souderton and on August 1, 1990 acquired the stock of Pennview Savings Bank. On January 18, 2003, Union National Bank and Trust Company of Souderton and Pennview Savings Bank combined to form Univest National Bank and Trust Company or the Bank, as previously defined. Two subsidiaries were incorporated on September 8, 1998 in the State of Delaware as passive investment companies: Univest Delaware, Inc. and Delview, Inc. Univest Delaware, Inc. is wholly owned by the Corporation; Delview, Inc. is wholly owned by the Bank. Univest Insurance, Inc. and Univest Investments, Inc. are wholly owned by Delview, Inc. Univest Insurance, Inc. acquired Gum Insurance on December 3, 2001 and Donald K. Martin & Company on December 13, 2004. The Bank acquired First County Bank on May 17, 2003 and Suburban Community Bank on October 4, 2003. Both First County Bank and Suburban Community Bank were merged into the Bank.
 
Securities and Exchange Commission Reports
 
The Corporation makes available free-of-charge its reports that are electronically filed with the Securities and Exchange Commission (“SEC”) on its website as a hyperlink to EDGAR. These reports are available as soon as reasonably practicable after the material is electronically filed. The Corporation’s website address is www.univest.net. The Corporation will provide at no charge a copy of the SEC Form 10-K annual report for the year 2005 to each shareholder who requests one in writing after March 31, 2006. Requests should be directed to: Wallace H. Bieler, Secretary, Univest Corporation of Pennsylvania, P.O. Box 64197, Souderton, PA 18964.
 
The Corporation’s filings are also available at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the hours of operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains the Corporation’s SEC filings electronically at www.sec.gov.
 
Item 1A.   Risk Factors
 
An investment in the Corporation’s common stock is subject to risks inherent to the Corporation’s business. Before making an investment, you should carefully consider the risks and uncertainties


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described below, together with all of the other information included or incorporated by reference in this report. This report is qualified in its entirety by these risk factors.
 
The Corporation is Subject to Interest Rate Risk
 
Our profitability is dependent to a large extent on our net interest income. Like most financial institutions, we are affected by changes in general interest rate levels and by other economic factors beyond our control. Although our management believes it has implemented strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial and prolonged change in market interest rates could adversely affect our operating results.
 
The Corporation is Subject to Lending Risk
 
Risks associated with lending activities include, among other things, the impact of changes in interest rates and economic conditions, which may adversely impact the ability of borrowers to repay outstanding loans, including an impact on the value of associated collateral. Various laws and regulations also affect our lending activities, and failure to comply with such applicable laws and regulations could subject the Corporation to enforcement actions and civil money penalties.
 
As of December 31, 2005, approximately 67.5% of our loan portfolio consisted of commercial, industrial, construction, and commercial real estate loans, which are generally perceived as having more risk of default than residential real estate and consumer loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses, and an increase in loan charge-offs, as described below.
 
The Corporation’s Allowance for Possible Loan Losses May be Insufficient
 
An allowance for possible loan losses, a reserve established through a provision for possible loan losses charged to expense, represents management’s best estimate of probable losses within the existing portfolio of loans. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, unidentified losses inherent in the current loan portfolio, and present economic, political and regulatory conditions. Although we evaluate every loan we make against our underwriting criteria, we may experience losses by factors beyond our control, which may result in our allowance for loan losses being insufficient to absorb actual loan losses.
 
The Corporation is Subject to Environmental Liability Risk Associated with Lending Activities
 
Our policies and procedures require environmental factors be considered during the loan application process. An environmental review is performed before initiating any commercial foreclosure action; these reviews may not be sufficient to detect all potential environmental hazards. Possible remediation costs and liabilities could have a material adverse effect on the Corporation’s financial condition.
 
The Corporation’s Profitability is Affected by Economic Conditions in the Commonwealth of Pennsylvania
 
Unlike larger national or other regional banks that operate in large geographies, the Corporation provides banking and financial services to customers primarily in Bucks, Montgomery, and Chester counties; however, we can be affected by a decline in general economic conditions, caused by inflation, recession, acts of terrorism, or other international or domestic occurrences that could impact local economic conditions, including changes in securities markets.
 
The Corporation Operates in a Highly Competitive Industry and Market Area
 
We face substantial competition in all phases of our operations from a variety of different financial services competitors, including non-bank competitors. Our future growth and ability to develop and


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maintain long-term customer relationships is contingent upon our ability to continually develop high levels of customer satisfaction based on our strategic initiatives to provide top quality service in a highly ethical and safe and sound environment. Failure to successfully manage risks associated with the development and implementation of new lines of business or new products or services could have a material adverse effect on the Corporation’s business operations and financial condition.
 
The Corporation is Subject to Extensive Government Regulation and Supervision
 
Univest and its subsidiaries are subject to extensive state and federal supervision and regulation which could result in violations or sanctions from regulatory agencies. While we have policies and procedures in place designed to prevent such violations, there can be no assurance such violations will not occur. Any substantial changes to applicable laws or regulations could also subject the Corporation to additional costs, limit the types of financial services and products we may offer, and inhibit our ability to compete effectively with other financial services providers.
 
The Corporation’s Controls and Procedures May Fail or be Circumvented
 
Management diligently reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. This system is designed to provide reasonable, not absolute, assurances that the objectives comply with appropriate regulatory guidance; any undetected circumvention of these controls could have a material adverse impact on the Corporation’s financial condition and results of operations.
 
The Corporation Relies on Dividends from its Subsidiaries for Most of its Business
 
The Corporation is a financial holding company and its operations are conducted by its subsidiaries from which the Corporation receives dividends. The ability of its subsidiaries to pay dividends is subject to legal and regulatory limitations, profitability, financial condition, capital expenditures and other cash flow requirements. There is no assurance future dividend payments will be generated from the subsidiaries or that the Corporation will have adequate cash flow to pay dividends in the future.
 
Potential Acquisitions May Disrupt the Corporation’s Business and Dilute Stockholder Value
 
The Corporation may use its common stock and cash or other liquid assets or incur debt to acquire other companies that are culturally similar or make investments in banks and other complementary businesses in the future. The Corporation regularly evaluates acquisition opportunities. Future acquisition could be material to the Corporation; the degree of success achieved in such transactions could have a material effect on the value of the Corporation’s common stock.
 
The Corporation May Not be Able to Attract and Retain Skilled People
 
Attracting and retaining key people is critical to the Corporation’s success, and difficulty finding qualified people could have a significant impact on the Corporation’s business due to the lack of required skill sets and years of industry experience. Management is cognizant of these risks and succession planning is built into the long-range strategic planning process. The Corporation does not currently have employment agreements or non-competition agreements with any of its senior officers.
 
The Corporation’s Information Systems May Experience an Interruption or Breach in Security
 
While the Corporation has policies and procedures designed to prevent or limit the effect of any failure, interruption, or breach in our security systems, there can be no assurance that any such failures will not occur and, if they do occur, that they will be adequately addressed. As a result, the occurrence of any such failures, interruptions, or breaches in security could expose the Corporation to reputation risk, civil litigation, regulatory scrutiny, and possible financial liability which could have a material adverse effect on our financial condition.


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The Corporation Continually Encounters Technological Change
 
The Corporation’s future success depends, in part, on our ability to effectively embrace technology efficiencies to better serve customers and reduce costs. Failure to keep pace with technological change could potentially have an adverse effect on the Corporation’s business operations and financial condition.
 
The Corporation is Subject to Claims and Litigation Pertaining to Fiduciary Responsibility
 
Any financial or reputation damage due to customer claims and other legal action, whether founded or unfounded, could have a material adverse effect on the Corporation’s financial condition and results of operation if such claims are not resolved in a favorable manner.
 
The Long-term Economic Effects of External Events Could Impact the Corporation
 
Natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Corporation’s ability to conduct business. Management has established disaster recovery policies and procedures which are expected to mitigate events related to natural or man-made disasters; however, the impact of an overall economic decline could have a material adverse effect on the Corporation’s financial condition.
 
The Corporation’s Stock Price Can be Volatile
 
The Corporation’s stock price can fluctuate in response to a variety of factors, including, but not limited to, general market fluctuations, industry factors, interest rate changes or credit loss trends, and general economic and political conditions, such as economic slowdowns or recessions. These factors could cause the Corporation’s stock price to decrease regardless of operating results. The Corporation’s common stock is listed for trading in the NASDAQ National Market under the symbol “UVSP”; the trading volume is less than that of other larger financial service companies.
 
An Investment in the Corporation’s Common Stock is Not an Insured Deposit
 
The Corporation’s common stock is not a bank deposit, is not insured by the Federal Deposit Insurance Corporation or any other deposit insurance fund, and is subject to investment risk, including the loss of some or all of your investment. The Corporation’s common stock is subject to the same market forces that affect the price of common stock in any company.
 
Anti-takeover Effect of the Corporation’s Articles of Incorporation, Bylaws, and Shareholders Rights Plan
 
Certain provisions in the Corporation’s Articles of Incorporation, the Bylaws, and the Stock Purchase Rights Plan, including federal banking laws and regulatory approval requirements, could make it more difficult for a third party to acquire the Corporation, even if doing so would be perceived to be beneficial to the Corporation’s shareholders.
 
Future Changes in Laws and Regulations
 
The Corporation is subject to changes in federal and state tax laws, as well as changes in banking and credit regulations, accounting principles, and governmental economic and monetary policies. We cannot predict whether any of these changes or other supervisory actions may adversely and materially affect the Corporation’s business and profitability.
 
Earnings Effect from General Business and Economic Conditions
 
Our operations and profitability are impacted by general business and economic conditions; these conditions include long- and short-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and


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finance, and the strength of the U.S. economy and the local economies in which the Corporation operates, all of which are beyond the Corporation’s control.
 
Dependence on the Accuracy and Completeness of Information about Customers and Counterparties
 
The Corporation may rely on information furnished by or on behalf of customers and counterparties in determining whether to enter into credit-related or other transactions. Reliance on any inaccurate or misleading financial information could potentially have an adverse impact on the Corporation’s business and financial condition.
 
Consumers May Decide Not to Use Banks to Complete Their Financial Transactions
 
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams could have an adverse effect on the Corporation’s financial condition and results of operation.
 
Item 1B.   Unresolved Staff Comments
 
The Corporation has not received any written comments from the Securities and Exchange Commission.
 
Item 2.   Properties
 
The Corporation and its subsidiaries occupy thirty-seven properties in Montgomery, Bucks, and Chester counties in Pennsylvania, which are used principally as banking offices. Business locations and hours are available on the Corporation’s website at www.univest.net.
 
The Corporation owns its corporate headquarters building, which is shared with the Bank and Univest Investments, Inc., in Souderton, Montgomery County. Univest Insurance, Inc. occupies an owned location in Montgomery County and one leased location in Chester County. The Bank serves the area through its twenty-nine traditional offices and five supermarket branches that offer traditional community banking and trust services. Sixteen banking offices are located in Montgomery County, of which eleven are owned, two are leased and three are buildings owned on leased land; eighteen banking offices are located in Bucks County, of which five are owned, twelve are leased and one is a building owned on leased land.
 
Additionally, the Bank provides banking and trust services for the residents and employees of twelve retirement home communities, offers a payroll check cashing service at one work site office, offers merchants an express banking center located in the Montgomery Mall, and has six off-premise automated teller machines. The work site office and the express banking center are located in Montgomery County. Four off-premise automated teller machines are located in Montgomery County and two are located in Bucks County.
 
Item 3.   Legal Proceedings
 
Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation. In addition, there are no material proceedings pending or known to be threatened or contemplated against the Corporation or the Bank by government authorities.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
Not applicable.


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PART II
 
Item 5.   Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The Corporation’s common stock is listed on NASDAQ: UVSP. The Corporation’s shares were approved for NASDAQ listing and began trading on the NASDAQ National Market, effective August 15, 2003. At December 31, 2005, Univest had 2,484 stockholders.
 
StockTrans, Inc. serves as the Corporation’s transfer agent to assist shareholders in managing their stock. StockTrans, Inc. is located at 44 West Lancaster Avenue, Ardmore, PA. Shareholders can contact a representative by calling 610-649-7300.
 
Range of Market Prices
 
The following table shows the range of market values of the Corporation’s stock. The prices shown on this page represent transactions between dealers and do not include retail markups, markdowns, or commissions.
 
Market Price*
 
                 
    High     Low  
 
2005
               
January — March
  $ 31.00     $ 26.33  
April — June
    30.72       22.52  
July — September
    31.50       24.81  
October — December
    28.39       24.25  
         
2004
               
January — March
  $ 36.60     $ 27.67  
April — June
    35.67       30.67  
July — September
    34.11       25.53  
October — December
    32.28       26.53  
 
Cash Dividends Paid Per Share*
 
         
2005
       
January 3
  $ 0.167  
April 1
    0.167  
July 1
    0.170  
October 3
    0.190  
         
For the year 2005
  $ 0.694  
         
2004
       
January 2
  $ 0.133  
April 1
    0.167  
July 1
    0.167  
October 1
    0.167  
         
For the year 2004
  $ 0.634  
         
 
* Per share data has been restated to give effect to a three-for-two stock split in the form of a dividend declared on March 23, 2005 which was distributed on April 29, 2005.


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Equity Compensation Plan Information
 
The following table sets forth information regarding outstanding options and shares under the equity compensation plans as of December 31, 2005:
 
                         
                (c)
 		 
                Number of
 		 
                Securities
 		 
    (a)
 		          Remaining
 		 
    Number of
 		    (b)
 		    Available for
 		 
    Securities to be
 		    Weighted-
 		    Future Issuance
 		 
    Issued Upon
 		    Average
 		    Under Equity
 		 
    Exercise of
 		    Exercise Price
 		    Compensation
 		 
    Outstanding
 		    of Outstanding
 		    Plans (Excluding
 		 
    Options,
 		    Options,
 		    Securities
 		 
    Warrants and
 		    Warrants and
 		    Reflected in
 		 
Plan Category
  Rights     Rights     Column (a)  
 
Equity compensation plans approved by security holders*
    589,223     $ 21.57       1,263,651  
Equity compensation plans not approved by security holders
    —       —       —  
                         
Total
    589,223     $ 21.57       1,263,651  
                         
 
* Two shareholder approved plans “Univest 1993 Long-term Incentive Plan” and “Univest 2003 Long-term Incentive Plan.”
 
The following table provides information on repurchases by the Corporation of its common stock during the fourth quarter of 2005:
 
Issuer Purchases of Equity Securities
 
                                 
                Total Number
 		       
                of Shares
 		    Maximum
 		 
                Purchased
 		    Number of
 		 
                as Part of
 		    Shares that
 		 
                Publicly
 		    May Yet Be
 		 
    Total Number of
 		    Average
 		    Announced
 		    Purchased Under
 		 
    Shares
 		    Price Paid
 		    Plans or
 		    the Plans or
 		 
Period
  Purchased     per Share     Programs     Programs  
 
Oct. 1, 2005 - Oct. 31, 2005
    23,499     $ 26.69       23,499       427,950  
Nov. 1, 2005 - Nov. 30, 2005
    4,708       26.87       4,708       450,314  
Dec. 1, 2005 - Dec. 31, 2005
    24,062       25.26       24,062       452,399  
                                 
Total
    52,269               52,269          
                                 
 
 
1. Transactions are reported as of settlement dates.
 
2. The Corporation’s current stock repurchase program was approved by its Board of Directors and announced on 12/31/2001. The repurchased shares limit is net of normal Treasury activity such as purchases to fund the Dividend Reinvestment Program, Employee Stock Purchase Program and the equity compensation plan.
 
3. The number of shares approved for repurchase under the Corporation’s current stock repurchase program is 526,571.
 
4. The Corporation’s current stock repurchase program does not have an expiration date.
 
5. No stock repurchase plan or program of the Corporation expired during the period covered by the table.
 
6. The Corporation has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases. The plans are restricted during certain blackout periods in conformance with the Corporation’s Insider Trading Policy.


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Item 6.   Selected Financial Data
 
                                         
    Years Ended December 31,  
    2005     2004     2003***     2002     2001  
    (In thousands, except per share date)  
 
Earnings
                                       
Interest income
  $ 85,502     $ 74,789     $ 71,965     $ 73,040     $ 79,208  
Interest expense
    26,264       18,948       21,150       25,814       34,441  
                                         
Net interest income
    59,238       55,841       50,815       47,226       44,767  
Provision for loan losses
    2,109       1,622       1,000       1,303       763  
                                         
Net interest income after provision for loan losses
    57,129       54,219       49,815       45,923       44,004  
Noninterest income
    22,444       22,603       23,480       20,593       17,966  
Noninterest expense
    45,796       44,920       42,023       37,790       35,789  
                                         
Net income before income taxes
    33,777       31,902       31,272       28,726       26,181  
Applicable income taxes
    8,910       8,311       8,190       7,620       6,971  
                                         
Net income*
  $ 24,867     $ 23,591     $ 23,082     $ 21,106     $ 19,210  
                                         
Financial Condition at Year End
                                       
Cash, interest-earning deposits and federal funds sold
  $ 59,439     $ 37,745     $ 52,710     $ 45,520     $ 54,902  
Investment securities
    343,259       343,502       423,259       395,079       347,858  
Net loans
    1,236,289       1,161,081       1,049,594       814,860       788,035  
Assets
    1,769,309       1,666,957       1,657,168       1,326,631       1,261,479  
Deposits
    1,366,715       1,270,884       1,270,268       1,043,106       998,137  
Long-term obligations
    88,449       90,418       87,306       31,075       24,075  
Shareholders’ equity
    173,080       160,393       145,752       134,219       122,346  
Per Common Share Data**
                                       
Average shares outstanding
    12,867       12,841       12,811       12,938       13,269  
Income before income taxes
  $ 2.63     $ 2.48     $ 2.44     $ 2.22     $ 1.97  
Applicable income taxes
    0.70       0.64       0.64       0.59       0.52  
Earnings per share — basic
    1.93       1.84       1.80       1.63       1.45  
Earnings per share — diluted
    1.91       1.80       1.78       1.61       1.44  
Dividends declared per share
    0.717       0.667       0.533       0.491       0.437  
Book value
    13.37       12.47       11.37       10.47       9.34  
Dividend payout ratio
    37.54 %     37.06 %     29.94 %     30.50 %     30.35 %
Profitability Ratios
                                       
Return on average assets
    1.46 %     1.44 %     1.57 %     1.65 %     1.59 %
Return on average equity
    14.87 %     15.46 %     16.58 %     16.60 %     16.01 %
Average equity to average assets
    9.83 %     9.33 %     9.49 %     9.96 %     9.90 %
 
* The Corporation adopted Financial Accounting Standards Board Opinion No. 142 on January 1, 2002 and ceased amortizing goodwill.
 
** Common Stock data has been restated to give effect to a three-for-two stock split in the form of a dividend declared on March 23, 2005 and distributed on April 29, 2005.
 
*** The Corporation acquired First County Bank on May 17, 2003 and Suburban Community Bank on October 4, 2003.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
(All dollar amounts presented within tables are in thousands, except per share data. Common stock data has been restated to give effect to a three-for-two stock split in the form of a dividend declared on March 23, 2005 to shareholders of record as of April 6, 2005, distributed on April 29, 2005. All share and per share amounts have been retroactively adjusted to give effect to the stock split.)
 
Results of Operations — Overview
 
Univest Corporation of Pennsylvania (the “Corporation”) earns its revenues primarily, through its subsidiaries, 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 of Directors approved levels. Growth is pursued through expansion of current customer relationships and development of additional relationships with new offices and strategic related acquisitions. The Corporation has also taken steps in recent years to reduce its dependence on net interest income by intensifying its focus on fee based income from trust, insurance, and investment services to customers.
 
The principal component of earnings for the Corporation is net interest income, which is the difference between the yield on interest-earning assets and the cost on interest-bearing liabilities. The net interest margin, which is the ratio of net interest income to average earning assets, is affected by several factors including market interest rates, economic conditions, loan demand, and deposit activity. The Board of Governors of the Federal Reserve System has increased the Bank Prime Rate eight times between December 31, 2004 and December 31, 2005 from 5.25% to 7.25%. The Corporation maintains a relatively low interest rate risk profile and does not anticipate that an increase in interest rates would be materially adverse to its net interest margin. The Corporation seeks to maintain a steady net interest margin and consistent growth of net interest income.
 
On May 17, 2003, the Corporation completed a merger of First County Bank with and into Univest National Bank and Trust Co. (the “Bank”) in a cash transaction for $29.5 million. On October 4, 2003, the Corporation completed a merger of Suburban Community Bank with and into the Bank in a cash transaction for $24.1 million. These mergers did not fully impact the consolidated average balance sheets and income statements for the year ended December 31, 2003 and need to be considered when compared against the years ended December 31, 2004 and 2005.
 
The Corporation’s consolidated net income and earnings per share for 2005, 2004 and 2003 were as follows:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Net income
  $ 24,867     $ 23,591     $ 23,082  
Net income per share:
                       
Basic
    1.93       1.84       1.80  
Diluted
    1.91       1.80       1.78  
 
2005 versus 2004
 
The 2005 results compared to 2004 include the following significant pretax components:
 
  •  Net interest income grew due to greater volume and rate increases on average interest-earning assets than volume and rate increases on average interest-bearing liabilities. The net interest margin remained level at 3.8%. The net interest margin on a tax-equivalent basis also remained level at 4.0%.


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  •  Total noninterest income decreased by $159 thousand or 0.7% due primarily to fewer gains on the sales of securities and net losses on dispositions of fixed assets in 2005 compared to gains in 2004.
 
  •  Total noninterest expense increased $876 thousand or 2.0% primarily due to salaries and benefits expense.
 
2004 versus 2003
 
The 2004 results compared to 2003 include the following significant pretax components:
 
  •  Net interest income increased due to growth in average earning assets. The net interest margin remained level at 3.8%. The net interest margin on a tax-equivalent basis also remained level at 4.0%.
 
  •  Total noninterest income decreased by $877 thousand or 3.7% due primarily to fewer gains on the sales of securities.
 
  •  Total noninterest expense grew $2.9 million or 6.9% largely due to increases in salaries and benefits expense and in advertising, marketing and public relations.
 
Results of Operations — 2005 Versus 2004
 
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. Table 1 presents a summary of the Corporation’s average balances, the yields earned on average assets, the cost of average liabilities, and shareholders’ equity on a tax-equivalent and non-tax-equivalent basis for the years ended December 31, 2005 compared to 2004. Table 2 analyzes the changes in both tax-equivalent and non-tax-equivalent net interest income for the periods broken down by their rate and volume components. 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 stable net interest margin for the Corporation.


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Table 1 — Distribution of Assets, Liabilities and Stockholders’ Equity;
Interest Rates and Interest Differential for 2005 versus 2004
 
                                                                                 
    For the Year Ended
 		    For the Year Ended
 		 
    December 31, 2005     December 31, 2004  
                Non-
 		                Non-
 		 
          Tax-Equivalent     Tax-Equivalent           Tax-Equivalent     Tax-Equivalent  
    Average
 		    Income/
 		    Avg.
 		    Income/
 		    Avg.
 		    Average
 		    Income/
 		    Avg.
 		    Income/
 		    Avg.
 		 
    Balance     Expense     Rate     Expense     Rate     Balance     Expense     Rate     Expense     Rate  
 
Assets:
                                                                               
Interest-earning deposits with other banks
  $ 643     $ 17       2.6 %   $ 17       2.6 %   $ 1,158     $ 6       0.5 %   $ 6       0.5 %
U.S. Government obligations
    158,826       5,223       3.3       5,223       3.3       146,930       4,563       3.1       4,563       3.1  
Obligations of states & political subdivisions
    78,994       5,501       7.0       3,579       4.5       78,715       5,500       7.0       3,578       4.5  
Other securities
    103,854       4,515       4.3       4,515       4.3       140,065       6,141       4.4       6,141       4.4  
Federal Reserve Bank stock
    1,687       101       6.0       101       6.0       1,687       101       6.0       101       6.0  
Federal funds sold
    6,369       212       3.3       212       3.3       2,542       40       1.6       40       1.6  
                                                                                 
Total interest-earning deposits, investments and federal funds sold
    350,373       15,569       4.4       13,647       3.9       371,097       16,351       4.4       14,429       3.9  
                                                                                 
Commercial, financial and agricultural loans
    343,473       21,732       6.3       21,732       6.3       329,357       16,714       5.1       16,714       5.1  
Real estate — commercial and construction loans
    389,890       26,508       6.8       26,508       6.8       354,716       22,831       6.4       22,831       6.4  
Real estate — residential loans
    297,988       15,257       5.1       15,257       5.1       299,964       14,475       4.8       14,475       4.8  
Loans to individuals
    84,049       5,087       6.1       5,087       6.1       58,873       3,401       5.8       3,401       5.8  
Municipal loans
    83,481       4,629       5.5       3,271       3.9       75,033       4,242       5.7       2,939       3.9  
                                                                                 
Gross loans
    1,198,881       73,213       6.1       71,855       6.0       1,117,943       61,663       5.5       60,360       5.4  
                                                                                 
Total interest-earning assets
    1,549,254       88,782       5.7       85,502       5.5       1,489,040       78,014       5.2       74,789       5.0  
                                                                                 
Cash and due from banks
    39,974                                       40,889                                  
Reserve for loan losses
    (13,032 )                                     (13,240 )                                
Premises and equipment, net
    20,827                                       19,821                                  
Other assets
    103,912                                       99,384                                  
                                                                                 
Total assets
  $ 1,700,935                                     $ 1,635,894                                  
                                                                                 
 
Liabilities:
Interest checking deposits
  $ 150,024       175       0.1       175       0.1     $ 154,562     $ 190       0.1     $ 190       0.1  
Money market savings
    274,304       5,868       2.1       5,868       2.1       248,908       2,172       0.9       2,172       0.9  
Regular savings
    206,876       581       0.3       581       0.3       221,974       646       0.3       646       0.3  
Certificates of deposit
    442,523       13,144       3.0       13,144       3.0       388,060       10,819       2.8       10,819       2.8  
Time open & club accounts
    16,587       448       2.7       448       2.7       16,950       221       1.3       221       1.3  
                                                                                 
Total time and interest-bearing deposits
    1,090,314       20,216       1.9       20,216       1.9       1,030,454       14,048       1.4       14,048       1.4  
                                                                                 
Federal funds purchased
    6,087       204       3.4       204       3.4       9,328       148       1.6       148       1.6  
Securities sold under agreements to repurchase
    98,620       1,423       1.4       1,423       1.4       98,735       675       0.7       675       0.7  
Other short-term borrowings
    1,262       50       4.0       50       4.0       19,133       249       1.3       249       1.3  
Long-term debt
    56,818       2,436       4.3       2,436       4.3       55,277       2,378       4.3       2,378       4.3  
Subordinated notes and capital securities
    32,432       1,935       6.0       1,935       6.0       33,930       1,450       4.3       1,450       4.3  
                                                                                 
Total borrowings
    195,219       6,048       3.1       6,048       3.1       216,403       4,900       2.3       4,900       2.3  
                                                                                 
Total interest-bearing liabilities
    1,285,533       26,264       2.0       26,264       2.0       1,246,857       18,948       1.5       18,948       1.5  
                                                                                 
Demand deposits, noninterest-bearing
    226,523                                       216,050                                  
Accrued expenses & other liabilities
    21,607                                       20,424                                  
                                                                                 
Total liabilities
    1,533,663                                       1,483,331                                  
                                                                                 
Shareholders’ Equity:
                                                                               
Common stock
    68,461                                       49,580                                  
Additional paid-in capital
    21,762                                       20,949                                  
Retained earnings and other equity
    77,049                                       82,034                                  
                                                                                 
Total shareholders’ equity
    167,272                                       152,563                                  
                                                                                 
Total liabilities and shareholders’ equity
  $ 1,700,935                                     $ 1,635,894                                  
                                                                                 
Net interest income
          $ 62,518             $ 59,238                     $ 59,066             $ 55,841          
                                                                                 
Net interest Spread
                    3.7               3.5                       3.7               3.5  
Effect of net interest-free funding sources
                    0.3               0.3                       0.3               0.3  
                                                                                 
Net interest margin
                    4.0 %             3.8 %                     4.0 %             3.8 %
                                                                                 
Ratio of average interest-earning assets to interest-bearing liabilities
    120.5 %                                     119.4 %                                
                                                                                 
 
Notes:  For rate calculation purposes, average loan categories include unearned discount.
Nonaccrual loans have been included in the average loan balances.
Certain amounts have been reclassified to conform to the current-year presentation.
Included in interest income are loan fees of $1.4 million for 2005 and $1.3 million for 2004.
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35%.


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Table 2 — Analysis of Changes in Net Interest Income for 2005 Versus 2004
 
The rate-volume variance analysis set forth in the table below compares changes in net interest on both a tax-equivalent and non-tax-equivalent basis, for the years ended December 31, 2005 compared to the same period in 2004, indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated to change in volume.
 
                                                 
    For the Years Ended December 31, 2005 Versus 2004  
    Tax Equivalent     Non-Tax-Equivalent  
    Volume
 		    Rate
 		          Volume
 		    Rate
 		       
    Change     Change     Total     Change     Change     Total  
 
Interest income:
                                               
Interest-earning deposits with other banks
  $ (13 )   $ 24     $ 11     $ (13 )   $ 24     $ 11  
U.S. Government obligations
    366       294       660       366       294       660  
Obligations of states & political subdivisions
    1       —       1       1       —       1  
Other securities
    (1,486 )     (140 )     (1,626 )     (1,486 )     (140 )     (1,626 )
Federal Reserve Bank stock
    —       —       —       —       —       —  
Federal funds sold
    129       43       172       129       43       172  
                                                 
Interest on deposits, investments and federal funds sold
    (1,003 )     221       (782 )     (1,003 )     221       (782 )
                                                 
Commercial , financial and agricultural loans
    1,066       3,952       5,018       1,066       3,952       5,018  
Real estate — commercial and construction loans
    2,258       1,419       3,677       2,258       1,419       3,677  
Real estate — residential loans
    (118 )     900       782       (118 )     900       782  
Loans to individuals
    1,509       177       1,686       1,509       177       1,686  
Municipal loans
    537       (150 )     387       332       —       332  
                                                 
Interest and fees on loans
    5,252       6,298       11,550       5,047       6,448       11,495  
                                                 
Total interest income
    4,249       6,519       10,768       4,044       6,669       10,713  
                                                 
Interest expense:
                                               
Interest checking deposits
    (15 )     —       (15 )     (15 )     —       (15 )
Money market savings
    709       2,987       3,696       709       2,987       3,696  
Regular savings
    (65 )     —       (65 )     (65 )     —       (65 )
Certificates of deposit
    1,549       776       2,325       1,549       776       2,325  
Time open & club accounts
    (10 )     237       227       (10 )     237       227  
                                                 
Interest on deposits
    2,168       4,000       6,168       2,168       4,000       6,168  
                                                 
Federal funds purchased
    (112 )     168       56       (112 )     168       56  
Securities sold under agreement to repurchase
    57       691       748       57       691       748  
Other short-term borrowings
    (716 )     517       (199 )     (716 )     517       (199 )
Long-term debt
    58       —       58       58       —       58  
Subordinated notes and capital securities
    (92 )     577       485       (92 )     577       485  
                                                 
Interest on borrowings
    (805 )     1,953       1,148       (805 )     1,953       1,148  
                                                 
Total interest expense
    1,363       5,953       7,316       1,363       5,953       7,316  
                                                 
Net interest income
  $ 2,886     $ 566     $ 3,452     $ 2,681     $ 716     $ 3,397  
                                                 
 
Notes:  For rate calculation purposes, average loan categories include unearned discount.
Nonaccrual loans have been included in the average loan balances.
Certain amounts have been reclassified to conform to the current-year presentation.
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35%.


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Net interest income on a tax-equivalent basis increased $3.5 million in 2005 compared to 2004 primarily due to higher rates on commercial loans and volume growth in real estate-commercial and construction loans partially offset by higher rates on deposits in money market savings accounts and volume growth in certificates of deposit. The net interest margin on a tax-equivalent basis, which is tax-equivalent net interest income as a percentage of average interest-earning assets remained at 4.0% for December 31, 2005 and 2004. The net interest spread on a tax-equivalent basis, which represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, was 3.7% for December 31, 2005 and 2004. The effect of net interest free funding sources was 0.3% for December 31, 2005 and 2004; and represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.
 
Interest Income
 
Interest on U.S. Government obligations increased 14.5% for the year ended December 31, 2005 compared to 2004 due to volume growth of 8.1% and a positive 18 basis point rate change. This increase more than offset by a 26.5% decrease in interest on other securities, which consists mainly of U.S. Government Agency mortgage-backed securities. This decrease was primarily due to a 25.9% reduction in volume, whereas the rate on these securities remained relatively flat. This volume decrease was the result of the sale of approximately $50.3 million of primarily fixed-rate U.S. Government agency mortgage-backed securities in 2004 and prepayments during 2004 and 2005.
 
Interest on federal funds sold is income received from the daily investment of excess or unused funds. It can be volatile in both rate and volume. Interest on federal funds sold increased $172 thousand in 2005 compared to 2004 due to volume growth and higher federal funds rates.
 
Tax-equivalent interest and fees on loans grew 18.7% for the year ended December 31, 2005 compared to 2004 primarily due to a 126 basis point increase in the average rate on commercial loans, and average balance growth of 9.9% along with a 36 basis point increase in the average rate of real estate-commercial and construction loans. Also contributing to the increase in interest income on loans was a 42.8% growth in the average balance of consumer loans, primarily in indirect auto loans. The average tax-equivalent interest yield on the loan portfolio grew from 5.5% in 2004 to 6.1% in 2005 as a result of market conditions and a 185 basis point increase in the average prime rate.
 
Interest Expense
 
The Corporation’s average cost of deposits increased 49 basis points during 2005 compared to 2004. The average rate paid on money market savings increased 127 basis points due to new products and promotions offered to grow deposits in the Bank’s competitive marketplace. Interest on certificates of deposit increased 21.5%, primarily due to volume growth of 14.0% in addition to the 18 basis point increase in average rate. Since August 2004, the Bank began issuing Certificates with the Pennsylvania Local Government Investment Trust (“PLGIT”) to augment its fixed funding sources. The PLGIT deposits are public funds collateralized with a letter of credit that PLGIT maintains with the Federal Home Loan Bank of Pittsburgh (“FHLB”); therefore, Univest National Bank is not required to provide collateral on these deposits. The average balance of PLGIT certificates increased $36.8 million and the average rate increased 92 basis points comparing the year ended December 31, 2005 over the same period in 2004. The average balance of other certificates of deposit increased $17.6 million and the average rate increased 30 basis points, due to promotions offered to grow deposits. Interest on time open and club accounts grew due to a 55 basis point increase in average rate. Interest expense on demand deposits and regular savings deposits declined due to volume decreases as rates remained relatively flat during 2005 and 2004.
 
Interest expense on short-term borrowings includes interest paid on federal funds purchased and repurchase agreements and short-term FHLB borrowings. In addition, the Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account (“cash


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management accounts.”) Interest expense grew 56.4% during 2005 compared to 2004 primarily due to a 76 basis point increase in average rates paid on cash management accounts. This increase was partially offset by a decrease in interest expense on short-term FHLB borrowings.
 
Interest on long-term debt, which consists of long-term FHLB borrowings, increased slightly due to volume growth. Subordinated notes and capital securities includes the issuance of $15.0 million in Subordinated Capital Notes in 2003, and the issuance of, $20.0 million in Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Junior Subordinated Debentures of the Corporation (“Trust Preferred Securities”) in 2003. Interest expense on Subordinated Capital Notes and Trust Preferred Securities grew 33.4% due to increases in the Three Month London Interbank Offer Rate (“LIBOR”) which effect the variable rate paid on the Trust Preferred Securities
 
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 rates or the fair value of the collateral for certain collateral dependent loans as provided for under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS 114”). Any of the above criteria may cause the provision to fluctuate. The provision for the years ended December 31, 2005 and 2004 was $2.1 million and $1.6 million, respectively. Growing loan volumes in real estate-commercial and construction loans, indirect auto loans and a new credit card portfolio, along with current economic conditions, indicated the need for an increase to the reserve in 2005.
 
Noninterest Income
 
Noninterest income consists of trust department fee income, service charges on deposits income, commission income, net gains on sales of securities, and other miscellaneous types of income. It also includes various types of service fees, such as ATM fees, and life insurance income which primarily represents changes in the cash surrender value of bank-owned life insurance. Total noninterest income decreased during 2005 compared to 2004 and primarily due to less gains on the sales of securities in 2005 and a net loss on the disposition of fixed assets in 2005 compared to net gains in 2004.
 
The following table presents noninterest income for the years ended December 31, 2005 and 2004:
 
                                 
    For the Years Ended December 31,  
    2005     2004     $ Change     % Change  
 
Trust fee income
  $ 5,225     $ 5,028     $ 197       3.9 %
Service charges on deposit accounts
    6,908       6,537       371       5.7  
Investment advisory commission and fee income
    1,957       1,907       50       2.6  
Insurance commission and fee income
    3,551       3,068       483       15.7  
Life insurance income
    1,301       1,469       (168 )     (11.4 )
Other service fee income
    3,154       2,687       467       17.4  
Net gain on sales of securities
    150       1,066       (916 )     (85.9 )
Net (loss) gain on dispositions of fixed assets
    (218 )     226       (444 )     (196.5 )
Other
    416       615       (199 )     (32.4 )
                                 
Total noninterest income
  $ 22,444     $ 22,603     $ (159 )     (0.7 )
                                 
 
Trust income continued to grow in 2005 from 2004 primarily due to a larger number of accounts and an increase in the market value of assets managed. Service charges on deposit accounts grew in 2005 compared to 2004 due to a change in the fee structure on the deposit accounts; monthly charges decreased while nonsufficient funds fees increased.


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Investment advisory commissions and fee income, the primary source of income for Univest Investments, Inc., increased slightly in 2005 over 2004. Insurance commissions and fee income, the primary source of income for Univest Insurance, Inc., continued to grow in 2005 from 2004. Loss ratio based bonuses increased $9 thousand in 2005 compared to 2004. Other insurance commissions grew approximately $474 thousand due to higher premiums and volume in addition to the acquisition of Donald K. Martin & Company. The acquisition of Donald K. Martin & Company was completed in 2005 and expanded Univest Insurance, Inc. into the West Chester area of Pennsylvania. Donald K. Martin & Company specializes in property and casualty insurance primarily for the non-profit sector, including churches, senior communities and life communities.
 
Life insurance income is primarily the change in the cash surrender values of bank-owned life insurance policies. There was less of an increase in the cash surrender values of these policies in 2005 compared to 2004.
 
Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (“Mastermoney fees”), non-customer debt card fees, other merchant fees, mortgage servicing income and mortgage placement income. Other service fee income grew in 2005 compared to 2004 due to increases of $196 thousand in Mastermoney fees, $114 thousand in mortgage servicing income, $79 thousand in mortgage placement fee income and $68 thousand in official check fees.
 
Other noninterest income decreased in 2005 compared to 2004 primarily due to net losses on investments in low-income housing projects. These low-income housing projects generate tax credits for the Corporation.
 
Gains on Sales of Assets
 
Sales of $7.3 million in mortgage loans during the year ended December 31, 2005 resulted in a gain of $79 thousand as compared to sales of $8.1 million during the year ended December 31, 2004 for a gain of $113 thousand. Gains on sales of mortgages are included in other income.
 
Net losses on the disposition of fixed assets was $218 thousand for the year ended December 31, 2005, compared to net gains of $226 thousand for the year ended December 31, 2004. During 2005, the Corporation closed two supermarket banking offices and retired other long-lived assets replaced by the new Kulpsville branch at a net loss of $215 thousand. Net gains in 2004 were primarily the result of the sale of a branch office which was in close proximity to another more favorable Bank branch location for a gain of $196 thousand.
 
During 2005, approximately $1.5 million in U.S. Government treasuries, $1.2 million in Municipals, $7.3 million in U.S. Government Agencies and $353 thousand in equity securities were sold for a net gain of $150 thousand. Calls of FHLB equity securities totaled $5.5 million as the Bank was no longer required to hold these securities due to the level of FHLB borrowings. During 2004, available for sale debt and equity securities, primarily fixed-rate U.S. Government Agency mortgage-backed securities, with an amortized cost of approximately $57.1 million were sold for a net gain of $1.1 million. During 2004, mortgage-backed securities were sold to position the portfolio for higher rates by reducing extension risk and price volatility.
 
Noninterest Expense
 
The operating costs of the Corporation are known as noninterest expense, and include, but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses, and to provide technological innovation whenever practical, as operations change or expand.


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The following table presents noninterest expense for the years ended December 31, 2005 and 2004:
 
                                 
    For the Years Ended December 31,  
    2005     2004     $ Change     % Change  
 
Salaries and benefits
  $ 26,795     $ 25,360     $ 1,435       5.7 %
Net occupancy
    4,276       4,018       258       6.4  
Equipment
    2,994       2,854       140       4.9  
Other
    11,731       12,688       (957 )     (7.5 )
                                 
Total noninterest expense
  $ 45,796     $ 44,920     $ 876       2.0  
                                 
 
Salaries and benefits increased in 2005 in comparison to 2004 primarily due to the bonus accrual as the Corporation exceeded its 2005 planned income. Other increases were due to normal escalation of base salary and benefit costs and growth in the number of full-time-equivalent employees, primarily due to expansion. These increases were partially offset by a higher amount of compensation costs capitalized for loan originations.
 
Net occupancy expense increased for the year ended December 31, 2005 in comparison to 2004 due to higher rents and an operating lease termination penalty of $89 thousand. Equipment expense increased primarily due to software licenses.
 
Other expenses decreased for the year ending December 31, 2005 compared to 2004 primarily due to bank shares tax credits and reductions in loss contingency reserves. These reductions were partially offset by increases in advertising expense.
 
Tax Provision
 
The provision for income taxes was $8.9 million for the year ended December 31, 2005 compared to $8.3 million for the year ended December 31, 2004. The provision for income taxes for 2005 and 2004 was at effective rates of 26.4% and 26.1%, respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects, tax-exempt interest income from investments in municipal securities and loans and non-taxable cash surrender value changes on bank-owned life insurance. The increase in the effective tax rate in 2005 compared to 2004 is primarily due to an increase in pre-tax income while tax-exempt income remained relatively unchanged.
 
Results of Operations — 2004 Versus 2003
 
Net Interest Income
 
Table 3 presents a summary of the Corporation’s average balances, the yields earned on average assets, the cost of average liabilities, and shareholders’ equity on a tax-equivalent and non-tax-equivalent basis for the years ended December 31, 2004 compared to 2003. Table 4 analyzes the changes in both tax-equivalent and non-tax-equivalent net interest income for the periods broken down by their rate and volume components. Sensitivities associated with the mix of assets and liabilities are numerous and complex.


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Table 3 — Distribution of Assets, Liabilities and Stockholders’ Equity;
Interest Rates and Interest Differential for 2004 versus 2003
                                                                                 
    For the Year Ended
 		    For the Year Ended
 		 
    December 31, 2004     December 31, 2003  
                Non-
 		                Non-
 		 
          Tax-Equivalent     Tax-Equivalent           Tax-Equivalent     Tax-Equivalent  
    Average
 		    Income/
 		    Avg.
 		    Income/
 		    Avg.
 		    Average
 		    Income/
 		    Avg.
 		    Income/
 		    Avg.
 		 
    Balance     Expense     Rate     Expense     Rate     Balance     Expense     Rate     Expense     Rate  
 
Assets:
                                                                               
Interest-earning deposits with other banks
  $ 1,158     $ 6       0.5 %   $ 6       0.5 %   $ 2,636     $ 20       0.8 %   $ 20       0.8 %
U.S. Government obligations
    146,930       4,563       3.1       4,563       3.1       121,208       4,345       3.6       4,345       3.6  
Obligations of states & political subdivisions
    78,715       5,500       7.0       3,578       4.5       74,314       5,139       6.9       3,392       4.6  
Other securities
    140,065       6,141       4.4       6,141       4.4       204,585       9,885       4.8       9,885       4.8  
Federal Reserve Bank stock
    1,687       101       6.0       101       6.0       1,170       70       6.0       70       6.0  
Federal funds sold
    2,542       40       1.6       40       1.6       8,125       90       1.1       90       1.1  
                                                                                 
Total interest-earning deposits, investments and federal funds sold
    371,097       16,351       4.4       14,429       3.9       412,038       19,549       4.7       17,802       4.3  
                                                                                 
Commercial, financial and agricultural loans
    329,357       16,714       5.1       16,714       5.1       302,623       16,402       5.4       16,402       5.4  
Real estate — commercial and construction loans
    354,716       22,831       6.4       22,831       6.4       255,706       17,033       6.7       17,033       6.7  
Real estate — residential loans
    299,964       14,475       4.8       14,475       4.8       261,043       14,412       5.5       14,412       5.5  
Loans to individuals
    58,873       3,401       5.8       3,401       5.8       54,535       3,614       6.6       3,614       6.6  
Municipal loans
    75,033       4,242       5.7       2,939       3.9       63,358       3,827       6.0       2,702       4.3  
                                                                                 
Gross loans
    1,117,943       61,663       5.5       60,360       5.4       937,265       55,288       5.9       54,163       5.8  
                                                                                 
Total interest-earning assets
    1,489,040       78,014       5.2       74,789       5.0       1,349,303       74,837       5.5       71,965       5.3  
                                                                                 
Cash and due from banks
    40,889                                       38,434                                  
Reserve for loan losses
    (13,240 )                                     (11,880 )                                
Premises and equipment, net
    19,821                                       16,918                                  
Other assets
    99,384                                       74,067                                  
                                                                                 
Total assets
  $ 1,635,894                                     $ 1,466,842                                  
                                                                                 
 
LIABILITIES:
Interest checking deposits
  $ 154,562       190       0.1       190       0.1     $ 132,450       220       0.2       220       0.2  
Money market savings
    248,908       2,172       0.9       2,172       0.9       238,421       2,066       0.9       2,066       0.9  
Regular savings
    221,974       646       0.3       646       0.3       193,294       950       0.5       950       0.5  
Certificates of deposit
    388,060       10,819       2.8       10,819       2.8       375,153       14,097       3.8       14,097       3.8  
Time open & club accounts
    16,950       221       1.3       221       1.3       17,801       229       1.3       229       1.3  
                                                                                 
Total time and interest-bearing deposits
    1,030,454       14,048       1.4       14,048       1.4       957,119       17,562       1.8       17,562       1.8  
                                                                                 
Federal funds purchased
    9,328       148       1.6       148       1.6       7,122       91       1.3       91       1.3  
Securities sold under agreements to repurchase
    98,735       675       0.7       675       0.7       80,810       616       0.8       616       0.8  
Other short-term borrowings
    19,133       249       1.3       249       1.3       3,353       36       1.1       36       1.1  
Long-term debt
    55,277       2,378       4.3       2,378       4.3       47,246       2,202       4.7       2,202       4.7  
Subordinated notes and capital securities
    33,930       1,450       4.3       1,450       4.3       16,443       643       3.9       643       3.9  
                                                                                 
Total borrowings
    216,403       4,900       2.3       4,900       2.3       154,974       3,588       2.3       3,588       2.3  
                                                                                 
Total interest-bearing liabilities
    1,246,857       18,948       1.5       18,948       1.5       1,112,093       21,150       1.9       21,150       1.9  
                                                                                 
Demand deposits, noninterest-bearing
    216,050                                       192,354                                  
Accrued expenses & other liabilities
    20,424                                       23,150                                  
                                                                                 
Total liabilities
    1,483,331                                       1,327,597                                  
                                                                                 
Shareholders’ Equity:
                                                                               
Common stock
    49,580                                       49,582                                  
Additional paid-in capital
    20,949                                       20,912                                  
Retained earnings and other equity
    82,034                                       68,751                                  
                                                                                 
Total shareholders’ equity
    152,563                                       139,245                                  
                                                                                 
Total liabilities and shareholders’ equity
  $ 1,635,894                                     $ 1,466,842                                  
                                                                                 
Net interest income
          $ 59,066             $ 55,841                     $ 53,687             $ 50,815          
                                                                                 
Net interest Spread
                    3.7               3.5                       3.6               3.4  
Effect of net interest-free funding sources
                    0.3               0.3                       0.4               0.4  
                                                                                 
Net interest margin
                    4.0 %             3.8 %                     4.0 %             3.8 %
                                                                                 
Ratio of average interest-earning assets to interest-bearing liabilities
    119.4 %                                     121.3 %                                
                                                                                 
 
Notes:  For rate calculation purposes, average loan categories include unearned discount.
Nonaccrual loans have been included in the average loan balances.
Certain amounts have been reclassified to conform to the current-year presentation.
Included in interest income are loan fees of $1.3 million for 2004 and $1.3 million for 2003.
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35%.


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Table 4 — Analysis of Changes in Net Interest Income for 2004 Versus 2003
 
The rate-volume variance analysis set forth in the table below compares changes in net interest on both a tax-equivalent and non-tax-equivalent basis, for the years ended December 31, 2004 compared to the same period in 2003, indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated to change in volume.
 
                                                 
    For the Years Ended December 31, 2004 Versus 2003  
    Tax Equivalent     Non-Tax-Equivalent  
    Volume
 		    Rate
 		          Volume
 		    Rate
 		       
    Change     Change     Total     Change     Change     Total  
 
Interest income:
                                               
Interest-earning deposits with other banks
  $ (6 )   $ (8 )   $ (14 )   $ (6 )   $ (8 )   $ (14 )
U.S. Government obligations
    824       (606 )     218       824       (606 )     218  
Obligations of states & political subdivisions
    287       74       361       260       (74 )     186  
Other securities
    (2,926 )     (818 )     (3,744 )     (2,926 )     (818 )     (3,744 )
Federal Reserve Bank stock
    31       —       31       31       —       31  
Federal funds sold
    (91 )     41       (50 )     (91 )     41       (50 )
                                                 
Interest on deposits, investments and federal funds sold
    (1,881 )     (1,317 )     (3,198 )     (1,908 )     (1,465 )     (3,373 )
                                                 
Commercial , financial and agricultural loans
    1,220       (908 )     312       1,220       (908 )     312  
Real estate — commercial and construction loans
    6,565       (767 )     5,798       6,565       (767 )     5,798  
Real estate — residential loans
    1,890       (1,827 )     63       1,890       (1,827 )     63  
Loans to individuals
    223       (436 )     (213 )     223       (436 )     (213 )
Municipal loans
    605       (190 )     415       490       (253 )     237  
                                                 
Interest and fees on loans
    10,503       (4,128 )     6,375       10,388       (4,191 )     6,197  
                                                 
Total interest income
    8,622       (5,445 )     3,177       8,480       (5,656 )     2,824  
                                                 
Interest expense:
                                               
Interest checking deposits
    102       (132 )     (30 )     102       (132 )     (30 )
Money market savings
    106       —       106       106       —       106  
Regular savings
    83       (387 )     (304 )     83       (387 )     (304 )
Certificates of deposit
    474       (3,752 )     (3,278 )     474       (3,752 )     (3,278 )
Time open & club accounts
    (8 )     —       (8 )     (8 )     —       (8 )
                                                 
Interest on deposits
    757       (4,271 )     (3,514 )     757       (4,271 )     (3,514 )
                                                 
Federal funds purchased
    36       21       57       36       21       57  
Securities sold under agreement to repurchase
    140       (81 )     59       140       (81 )     59  
Other short-term borrowings
    206       7       213       206       7       213  
Long-term debt
    365       (189 )     176       365       (189 )     176  
Subordinated notes and capital securities
    741       66       807       741       66       807  
                                                 
Interest on borrowings
    1,488       (176 )     1,312       1,488       (176 )     1,312  
                                                 
Total interest expense
    2,245       (4,447 )     (2,202 )     2,245       (4,447 )     (2,202 )
                                                 
Net interest income
  $ 6,377     $ (998 )   $ 5,379     $ 6,235     $ (1,209 )   $ 5,026  
                                                 
 
Notes:  For rate calculation purposes, average loan categories include unearned discount.
Nonaccrual loans have been included in the average loan balances.
Certain amounts have been reclassified to conform to the current-year presentation.
Tax-equivalent amounts have been calculated using the Corporation’s federal applicable rate of 35%.
 
Net interest income on a tax-equivalent basis increased $5.4 million in 2004 compared to 2003 primarily due to volume growth of real estate-commercial and construction loans. The net interest margin on a tax-equivalent basis remained the same at 4.0% for both December 31, 2004 and 2003. The net interest spread on a tax-equivalent basis was 3.7%, and 3.6% for December 31, 2004 and 2003, respectively. However, the effect of net interest free funding sources of 0.3% and 0.4% December 31, 2004 and 2003, respectively, has declined.


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Interest Income
 
Interest on U.S. Government obligations increased 5.0% for the year ended December 31, 2004 compared to 2003 primarily due to volume growth of 21.2% which more than offset a 48 basis point decline in the rate. Tax-equivalent interest on state and political subdivisions increased to $5.5 million in 2004 from $5.2 million in 2003. The increase is a result of the Corporation’s decision to grow its investments in tax-exempt securities during 2003. During 2003, the Corporation acquired tax-exempt securities with a term of greater than ten years and at tax-equated yields substantially higher than other investment opportunities. Income on other securities declined 37.9% in 2004 compared to 2003 primarily due to the sale of approximately $50.3 million of primarily fixed-rate U.S. Government agency mortgage-backed securities and prepayments during 2004.
 
Interest on federal funds sold decreased in 2004 compared to 2003 due to a decline in volume offsetting increases in federal funds rates.
 
Tax-equivalent Interest and fees on loans grew 11.5% for the year ended December 31, 2004 compared to 2003 primarily due to a 38.7% increase in the average balance of real estate-commercial and construction loans. The average tax-equivalent interest yield on the loan portfolio decreased from 5.9% in 2003 to 5.2% in 2004 as a result of market conditions. This decrease in yield however, was more than offset by an increase in average loan balances outstanding. The increase in average loan volume came in part from the First County Bank and Suburban Community Bank acquisitions during 2003 and in part from regular loan growth.
 
Interest Expense
 
The average rates paid on deposits declined significantly during 2003 throughout the banking industry; the effects of this decline continued during 2004 as some categories flattened during 2004. The Corporation’s average cost of deposits declined 47 basis point during 2004 compared to 2003. Every major category of deposits grew in average volume, with the exception of time open and club accounts, during 2004. During 2004, the overall increase in volume was more than offset by the impact of a 97 basis point decline in the rate on certificates of deposit. Interest expense on demand deposits increased 3.3% during 2004 compared to 2003 as volume increased and rates flattened. Interest expense on regular savings deposits decreased 32.0% during 2004 compared to 2003 as interest rates declined.
 
Interest expense on short-term borrowings increased 44.3% during 2004 compared to 2003 primarily due to volume increases in cash management accounts of 39.3%. Interest on long-term debt increased 8.0% during 2004 compared to primarily due to a volume increase of 17.0%. This increase represents interest on higher volumes of long-term borrowings from the FHLB. Interest expense on Subordinated Capital Notes and Trust Preferred Securities increased 125.5% due to the full-year’s impact during 2004 for issuances of $15.0 million in Subordinated Capital Notes and $20.0 million in Trust Preferred Securities during 2003.
 
Provision For Loan Losses
 
The provision for the years ended December 31, 2004 and 2003 was $1.6 million and $1.0 million, respectively. Growing loan volumes and current economic conditions in addition to a $780 thousand increase in specific allowances for loan losses indicated the need for an increase to the reserve in 2004.
 
Noninterest Income
 
Total noninterest income decreased during 2004 compared to 2003 primarily due to gains on the sales of securities.


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The following table presents noninterest income for the years ended December 31, 2004 and 2003:
 
                                 
    For the Years Ended December 31,  
    2004     2003     $ Change     % Change  
 
Trust fee income
  $ 5,028     $ 4,629     $ 399       8.6 %
Service charges on deposit accounts
    6,537       5,739       798       13.9  
Investment advisory commission and fee income
    1,907       1,908       (1 )     (0.1 )
Insurance commission and fee income
    3,068       2,949       119       4.0  
Life insurance income
    1,469       2,057       (588 )     (28.6 )
Other service fee income
    2,687       2,996       (309 )     (10.3 )
Net gains on sales of securities
    1,066       2,076       (1,010 )     (48.7 )
Net gain (loss) on dispositions of fixed assets
    226       (111 )     337       —  
Other
    615       1,237       (622 )     (50.3 )
                                 
Total noninterest income
  $ 22,603     $ 23,480     $ (877 )     (3.7 )
                                 
 
Trust income grew in 2004 from 2003 primarily due to higher fees charged for trust services, as well as an increase in the market value of assets under management. Service charges on deposit accounts grew in 2004 from 2003 primarily due to increases in fees received for nonsufficient funds.
 
Investment advisory commissions and fee income remained level comparing 2004 to 2003. Insurance commissions and fee income increased in 2004 compared to 2003 primarily due to higher premiums and volume.
 
Life insurance income is primarily the change in the cash surrender values of bank-owned life insurance policies. This growth in 2003 is attributed to a liquidation distribution representing our membership interest in certain bank owned insurance policies of $378 thousand. Excluding this receipt, income decreased as there was less of an increase in the cash surrender values of these policies in 2004 compared to 2003.
 
Other service fee income decreased in 2004 over 2003 primarily due to lower mortgage servicing fee income and a change in the fee structure for what credit card companies charge merchants for debit card usages.
 
Other noninterest income decreased in 2004 compared to 2003 primarily due to higher gains on sales of mortgages in 2003 as discussed below.
 
Gains on Sales of Assets
 
Sales of $8.1 million in mortgage loans during the year ended December 31, 2004 resulted in a gain of $113 thousand as compared to sales of $41.4 million during the year ended December 31, 2003 for a gain of $553 thousand. Higher sales in 2003 were due to the large number of refinancings as a result of record low mortgage rates.
 
Net gains on sales of fixed assets was $226 thousand for the year ended December 31, 2004 compared to net losses of $111 thousand in 2003. Net gains in 2004 were primarily the result of the sale of a branch office which was in close proximity to another more favorable Bank branch location. Net losses in 2003 were primarily due to the consolidation of a supermarket branch location into an existing stand-alone branch within the same shopping center.
 
During 2004, available for sale debt and equity securities, primarily fixed-rate U.S. Government Agency mortgage-backed securities, with an amortized cost of approximately $57.1 million were sold for a net gain of $1.1 million. During 2004, mortgage-backed securities were sold to position the portfolio for higher rates by reducing extension risk and price volatility. During 2003, debt and equity securities with an amortized cost of approximately $103.0 million were sold from the available-for-sale portfolio resulting in a


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net gain of $2.1 million. During 2003, short-term securities were sold and the funds were reinvested in medium-term securities to take advantage of a steep yield curve.
 
Noninterest Expense
 
The following table presents noninterest expense for the years ended December 31, 2004 and 2003:
 
                                 
    For the Years Ended December 31,  
    2004     2003     $ Change     % Change  
 
Salaries and benefits
  $ 25,360     $ 24,524     $ 836       3.4 %
Net occupancy
    4,018       3,461       557       16.1  
Equipment
    2,854       2,763       91       3.3  
Other
    12,688       11,275       1,413       12.5  
                                 
Total noninterest expense
  $ 44,920     $ 42,023     $ 2,897       6.9  
                                 
 
Salaries and benefits only grew in 2004 in comparison to 2003 primarily due to normal base salary pay rate increases and the full-year effect the First County Bank and Suburban Community Bank acquisitions in 2003 offset by a reduction in bonuses and pension expense.
 
Net occupancy expense increased for the year ended December 31, 2004 in comparison to 2003 due to additional facilities from the 2003 acquisitions. Equipment expense remained relatively flat during 2004 in comparison to 2003.
 
Other expenses grew for the year ending December 31, 2004 in comparison to 2003 primarily due to increases of approximately $916 thousand in advertising, marketing and public relations expenses. The Corporation’s targeted market area and planned allocations were expanded in 2004 primarily due to the 2003 acquisitions. Legal, advisory and consulting fees increased approximately $466 thousand primarily due to legal costs associated with loan workout and foreclosure proceedings and tax advisory costs.
 
Tax Provision
 
The provision for income taxes was $8.3 million for the year ended December 31, 2004 and $8.2 million for the year ended December 31, 2003. The provision for income taxes for 2004 and 2003 were at effective rates of 26.1% and 26.2%, respectively. The effective tax rates reflect the benefits of tax credits generated from investments in low-income housing projects, tax-exempt income from investments in municipal securities and loans, and bank-owned life insurance.
 
Financial Condition
 
During 2005, total assets increased primarily due to loan growth. Total liabilities increased primarily due to deposits partially offset by a reduction in borrowings as funding for loan growth was supported by deposit growth. Detailed explanations follow.


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ASSETS
 
The following table presents assets at December 31, 2005 and December 31, 2004:
 
                                 
    At December 31,  
    2005     2004     $ Change     % Change  
 
Cash, interest-earning deposits and federal funds sold
  $ 59,439     $ 37,745     $ 21,694       57.5 %
Investment securities
    343,259       343,502       (243 )     (0.1 )
Total loans
    1,249,652       1,174,180       75,472       6.4  
Reserve for loan losses
    (13,363 )     (13,099 )     (264 )     2.0  
Premises and equipment, net
    21,635       19,818       1,817       9.2  
Goodwill and other intangibles
    43,387       43,561       (174 )     (0.4 )
Cash surrender value of insurance policies
    35,211       33,910       1,301       3.8  
Other assets
    30,089       27,340       2,749       10.1  
                                 
Total assets
  $ 1,769,309     $ 1,666,957     $ 102,352       6.1  
                                 
 
Acquisitions
 
On December 13, 2004, the Corporation acquired Donald K. Martin & Company. The acquisition expanded Univest Insurance, Inc. into the West Chester area of Pennsylvania. Donald K. Martin & Company specializes in property and casualty insurance primarily for the non-profit sector, including churches, senior communities and life communities. Univest Insurance, Inc. made an initial payment $200 thousand in January 2005 for the acquisition. Goodwill of $204 thousand was recorded for this acquisition in 2005.
 
Cash, Interest-earning Deposits and Federal Funds Sold
 
Cash, interest-earning deposits and federal funds sold grew primarily due to an $11.5 million increase in federal funds sold. Federal funds sold, an immediate liquid resource, is the daily investment of excess or unused funds and balances can fluctuate dramatically during any given day.
 
Investment Securities
 
The investment portfolio is managed as part of the overall asset and liability management process to optimize income and market performance over an entire interest rate cycle while mitigating risk. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns on these investments. The securities portfolio consists primarily of U.S. Government agency, mortgage-backed and municipal securities.
 
Total investments decreased in 2005 compared to 2004 as proceeds from sales and maturities of $148.0 million of securities were used to purchase $152.3 million in securities. During 2005, maturities of primarily U.S. government agency securities were replaced primarily with like securities. Paydowns on mortgage-backed securities were primarily reinvested in municipal securities and other debt securities.


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Table 5 — Investment Securities
 
The following table shows the carrying amount of investment securities as of the dates indicated. Held-to-maturity and available-for-sale portfolios are combined.
 
                         
    At December 31,  
    2005     2004     2003  
 
U.S. Treasury, government corporations and agencies
  $ 156,748     $ 154,907     $ 157,291  
State and political subdivisions
    84,789       78,178       80,159  
Mortgage-backed securities
    74,733       86,640       156,153  
Other
    26,989       23,777       29,656  
                         
Total investment securities
  $ 343,259     $ 343,502     $ 423,259  
                         
 
Table 6 — Investment Securities (Yields)
 
The following table shows the maturity distribution and weighted average yields of the investment securities for the periods indicated. The weighted average yield is calculated by dividing income, which has not been tax equated on tax-exempt obligations, within each maturity range by the outstanding amount of the related investment. Held-to-maturity and available-for-sale portfolios are combined.
 
                                                 
    At December 31,  
    2005
 		    2005
 		    2004
 		    2004
 		    2003
 		    2003
 		 
    Amount     Yield     Amount     Yield     Amount     Yield  
 
1 Year or less
  $ 78,735       2.94 %   $ 33,692       2.07 %   $ 11,352       3.84 %
1 Year-5 Years
    98,232       3.88       133,810       3.23       168,843       3.35  
5 Years-10 Years
    27,110       5.07       20,985       4.82       18,472       4.96  
After 10 Years
    139,182       4.57       155,015       4.52       224,592       4.67  
                                                 
Total
  $ 343,259       4.04     $ 343,502       3.80     $ 423,259       4.13  
                                                 
 
Loans
 
Total loans grew comparing December 31, 2005 to December 31, 2004 due to increases of $35.9 million consumer loans, primarily in the indirect auto loan portfolio, $15.5 million in commercial loans, $12.3 million in real estate-commercial loans and $8.1 million in real estate-construction loans. Real estate-residential loans, which are loans secured by one- to four-family properties, increased $3.6 million.
 
At December 31, 2005 there were no concentrations of loans exceeding 10% of total loans other than disclosed in Table 7.


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Table 7 — Loan Portfolio
 
The following table presents the composition of the loan portfolio as of the dates indicated:
 
                                         
    At December 31,  
    2005     2004     2003     2002     2001  
 
Commercial, financial and agricultural
  $ 384,207     $ 368,685     $ 326,154     $ 282,367     $ 267,638  
Real estate — commercial
    349,384       337,080       313,207       203,927       195,872  
Real estate — construction
    110,032       101,963       69,586       36,588       34,774  
Real estate — residential
    303,994       300,397       298,564       243,642       226,962  
Loans to individuals
    102,095       66,169       55,024       58,859       73,101  
                                         
Total gross loans
    1,249,712       1,174,294       1,062,535       825,383       798,347  
Unearned income
    (60 )     (114 )     (153 )     (5 )     (18 )
                                         
Total loans
  $ 1,249,652     $ 1,174,180     $ 1,062,382     $ 825,378     $ 798,329  
                                         
 
Table 8 — Loan Maturities and Sensitivity to Changes in Interest Rates
 
The following table presents the maturity and interest rate sensitivity of the loan portfolio at December 31, 2005:
 
                                 
          Due in One
 		    Due in One
 		    Due in
 		 
          Year or
 		    to Five
 		    Over Five
 		 
    Total     Less     Years     Years  
 
Commercial, financial and agricultural
  $ 384,147     $ 218,839     $ 142,092     $ 23,216  
Real estate — commercial
    349,384       105,350       190,143       53,891  
Real estate — construction
    110,032       55,448       40,164       14,420  
Real estate — residential
    303,994       68,163       75,362       160,469  
Loans to individuals
    102,095       5,837       55,963       40,295  
                                 
Total loans
  $ 1,249,652     $ 453,637     $ 503,724     $ 292,291  
                                 
Loans with fixed predetermined interest rates
  $ 687,320     $ 86,650     $ 350,208     $ 250,462  
Loans with variable or floating interest rates
    562,332       366,987       153,516       41,829  
                                 
Total loans
  $ 1,249,652     $ 453,637     $ 503,724     $ 292,291  
                                 
 
The commercial mortgages and Industrial Development Authority mortgages that are presently being written at both fixed and floating rates of interest include loans written for a three- or five-year term with a monthly payment based on a fifteen-year amortization schedule. At each three-year or five-year anniversary date of the mortgages, the interest rate is renegotiated and the term of the loan is extended for an additional three or five years. At each three-year or five-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.
 
Asset Quality
 
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 what actions should be taken when determining the collectibility of interest for accrual purposes.
 
When a loan, including a loan impaired under SFAS 114, is classified as nonaccrual, the accrual of interest on such a 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


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collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is 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.
 
Total cash basis, restructured and nonaccrual loans totaled $3.3 million at December 31, 2005, $10.1 million at December 31, 2004 and $8.6 million at December 31, 2003, and consist mainly of commercial loans and real estate-commercial loans. For the years ended December 31, 2005, 2004 and 2003, nonaccrual loans resulted in lost interest income of $521 thousand, $582 thousand and $403 thousand, respectively. The Corporation’s ratio of nonperforming assets to total loans and other real estate owned was 0.34% as of December 31, 2005, 0.99% as of December 31, 2004, and 0.89% as of December 31, 2003.
 
At December 31, 2005, the recorded investment in loans that are considered to be impaired under SFAS 114 was $3.3 million, all of which were on a nonaccrual basis. The related reserve for loan losses for those loans was $1.1 million. Nonaccruing loans decreased during 2005 primarily due to paydowns of $6.9 million and charge-offs of $1.9 million. These decreases were partially offset by additions of $1.5 million in real estate-commercial loans and $1.2 million in commercial loans placed on nonaccrual status. The Corporation foreclosed on one commercial property which secured a nonaccrual loan; this property is currently held as other real estate owned. Specific reserves of $1.1 million have been established for these loans based on current facts and management’s judgments about the ultimate outcome of these credits. The amount of the specific reserve needed for these credits could change in future periods subject to changes in facts and judgments related to these credits. At December 31, 2005, nonaccruing loans consisted of: $2.4 million in real estate-commercial loans and $1.2 million in commercial loans. At December 31, 2004, the recorded investment in loans that are considered to be impaired under SFAS 114 was $10.1 million, all of which were on a nonaccrual basis. The related reserve for loan losses for those loans was $2.7 million. At December 31, 2004 nonaccruing loans consisted of: $6.7 million in real estate-commercial loans and $3.3 million in commercial loans.
 
At December 31, 2005 there were no concentrations of loans exceeding 10% of total loans other than disclosed in Table 7.


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Table 9 — Nonaccrual, Past Due and Restructured Loans
 
The following table details the aggregate principal balance of loans classified as nonaccrual, past due and restructured:
 
                                         
    At December 31,  
    2005     2004     2003     2002     2001  
 
Nonaccruing loans
  $ 3,263     $ 10,090     $ 8,586     $ 2,639     $ 1,617  
                                         
Accruing loans 90 days or more past due:
                                       
Real estate loans:
                                       
Secured by 1-4 family dwellings
  $ 114     $ 543     $ 661     $ 132     $ 128  
Commercial and industrial loans
    146       31       3       520       3  
Loans to individuals
    350       353       217       228       186  
                                         
Total accruing loans, 90 days or more past due
  $ 610     $ 927     $ 881     $ 880     $ 317  
                                         
Restructured loans, not included above
  $ —     $ —     $ —     $ —     $ —  
                                         
Other real estate owned
  $ 344     $ 607     $ —     $ —     $ —  
                                         
 
Reserve For Loan Losses
 
Management believes the reserve for loan losses is maintained at a level that is adequate to absorb losses 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 loan losses is determined through a monthly evaluation of reserve adequacy. Quarterly, this analysis 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. Nonaccrual loans are evaluated individually. All other loans are evaluated as pools. Based on historical loss experience, loss factors are determined giving consideration to the areas noted in the first paragraph and applied to the pooled loan categories to develop the general or allocated portion of the reserve. 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 under SFAS 114. Management also reviews the activity within the allowance to determine what actions, if any, should be taken to address differences between estimated and actual losses. Any of the above factors may cause the provision to fluctuate.
 
The reserve for loan losses is based on management’s evaluation of the loan portfolio under current economic conditions and such other factors, which, in management’s opinion, deserve recognition in estimating 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 at the loan’s observable market price or the fair value of the collateral, less costs to sell, if the loan is collateral dependent.
 
The reserve for loan losses consists of an allocated reserve and an unallocated reserve. The allocated reserve is comprised of reserves established on specific loans, and class reserves based on historical loan loss experience, current trends, and management assessments. The unallocated reserve is based on both general economic conditions and other risk factors in the Corporation’s individual markets and portfolios.


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The specific reserve element is based on a regular analysis of impaired commercial and real estate loans. For these loans, the specific reserve established is based on an analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.
 
The class reserve element is determined by an internal loan grading process in conjunction with associated allowance factors. The Corporation revises the class allowance factors whenever necessary, but no less than quarterly, in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification.
 
The Corporation maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded in categories with historical loss experience.
 
Table 10 — Allocated, Unallocated Loan Loss Reserves
 
The reserve for loan losses is made up of the allocated reserve and the unallocated portion. The following table summarizes the two categories for the periods indicated.
 
                         
    At December 31,  
    2005     2004     2003  
 
Allocated
  $ 12,385     $ 12,181     $ 12,087  
Unallocated
    978       918       701  
                         
Total
  $ 13,363     $ 13,099     $ 12,788  
                         
 
The $204 thousand increase in the allocated portion of the reserve for the year ended December 31, 2005 was due to a $952 thousand increase in reserves on commercial real estate and construction loans as balances increased and the credit quality of certain loans decreased and a $648 thousand increase in homogeneous loans pool reserves as indirect auto loans grew from $36.4 million at December 31, 2004 to $73.3 million at December 31, 2005 and the addition of credit cards being offered in 2005. This increase was partially offset by a reduction in specific reserves of $1.6 million as the balance of impaired loans decreased from $10.1 million at December 31, 2004 to $3.3 million at December 31, 2005. The $94 thousand increase in the allocated portion of the reserve for the year ended December 31, 2004 was the result of a $780 thousand increase in specific reserves, primarily on impaired real estate-commercial loans, partially offset by a $632 thousand reduction on homogeneous loan pools such as loans to individuals. The reduction in homogeneous loans pool reserves were due to more favorable trends in recent historical loss experience and reserve methodology adjustments. The $217 thousand increase in the unallocated position is a result of the improved loan grade migration of the homogeneous loan pools. Analysis of unallocated adequacy is based on an assessment of loan grade migration as influenced by economic conditions and grading accuracy.
 
Management believes that both the allocated and unallocated portions of the reserve are maintained at a level that is adequate to absorb losses in the loan portfolio.


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Table 11 — Summary of Loan Loss Experience
 
The following table presents average loans and summarizes loan loss experience for the years ended December 31, 2005, 2004, 2003, 2002 and 2001:
 
                                         
    For the Years Ended December 31,  
    2005     2004     2003     2002     2001  
 
Average amount of loans outstanding
  $ 1,198,881     $ 1,117,943     $ 937,265     $ 807,248     $ 761,640  
Loan loss reserve at beginning of period
  $ 13,099     $ 12,788     $ 10,518     $ 10,294     $ 10,208  
Charge-offs:
                                       
Real estate loans
    911       382       —       54       12  
Commercial and industrial loans
    1,329       894       965       1,185       602  
Loans to individuals
    1,019       468       374       535       603  
                                         
Total charge-offs
    3,259       1,744       1,339       1,774       1,217  
                                         
Recoveries:
                                       
Real estate loans
    368       86       45       367       143  
Commercial and industrial loans
    625       146       326       182       223  
Loans to individuals
    421       201       155       146       174  
                                         
Total recoveries
    1,414       433       526       695       540  
                                         
Net charge-offs
    1,845       1,311       813       1,079       677  
Additions to loan loss reserve
    2,109       1,622       1,000       1,303       763  
Additions to loan loss reserve as a result of acquisitions
    —       —       2,083       —       —  
                                         
Loan loss reserve at end of period
  $ 13,363     $ 13,099     $ 12,788     $ 10,518     $ 10,294  
                                         
Ratio of net charge-off to average loans
    .15 %     .12 %     .09 %     .13 %     .09 %
                                         
 
The increase in charge-offs during 2005 compared to 2004 was due to the charge-off of $1.2 million in nonaccrual commercial loans and $758 thousand in nonaccrual real estate — commercial loans as these nonaccrual loans were considered to be permanently impaired. The increase in charge-offs of loans to individuals was primarily due to the indirect auto loan portfolio. Recoveries increased during 2005 compared to 2004 due to the sale of a commercial mortgage to a third party investor and payments made on a commercial credit as the borrowers were able to sell personal and business assets not used as collateral for the loan.
 
The following table summarizes the allocation of the allowance for loan losses and the percentage of loans in each major loan category to total loans at December 31, 2005, 2004, 2003, 2002 and 2001:
 
                                                                                 
    At December 31,  
    2005     2004     2003     2002     2001  
 
Real estate loans
  $ 5,431       61.1 %   $ 4,887       63.0 %   $ 3,970       64.1 %   $ 3,777       58.7 %   $ 3,515       57.3 %
Commercial and industrial loans
    6,005       30.7       6,945       31.4       7,258       30.7       4,344       34.2       3,939       33.5  
Loans to individuals
    949       8.2       349       5.6       859       5.2       1,125       7.1       1,466       9.2  
Unallocated portion
    978       —       918       —       701       —       1,272       —       1,374       —  
                                                                                 
Total
  $ 13,363       100.0 %   $ 13,099       100.0 %   $ 12,788       100.0 %   $ 10,518       100.0 %   $ 10,294       100.0 %
                                                                                 
 
The ratio of the reserve for loan losses to total loans was 1.1% at December 31, 2005 and 1.1% at December 31, 2004.


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Goodwill and Other Intangible Assets
 
On January 1, 2002, the Corporation adopted Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). In accordance with the provisions of SFAS 142, the Corporation has completed the annual impairment tests and no impairment was noted. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.
 
The Corporation has intangible assets due to bank and branch acquisitions, core deposit intangibles, covenants not to compete (in favor of the Corporation) 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 was $532 thousand for the year ended December 31, 2005, $616 thousand for the year ended December 31, 2004, and $607 thousand for the year ended December 31, 2003. The Corporation also has goodwill of $41.0 million, which is deemed to be an indefinite intangible asset and will not be amortized.
 
LIABILITIES
 
The following table presents liabilities at December 31, 2005 and December 31, 2004:
 
                                 
    At December 31,  
    2005     2004     $ Change     % Change  
 
Deposits
  $ 1,366,715     $ 1,270,884     $ 95,831       7.5 %
Borrowings
    196,761       212,360       (15,599 )     (7.3 )
Other liabilities
    32,753       23,320       9,433       40.5  
                                 
Total liabilities
  $ 1,596,229     $ 1,506,564     $ 89,665       6.0  
                                 
 
Deposits
 
Total deposits grew during 2005 due to a $51.6 million increase in certificates of deposits and other time deposits, a $44.4 million increase in money market savings and a $28.3 million increase in noninterest-bearing demand deposits. Certificates of deposits and money market savings grew during 2005 primarily as a result of new products and promotions offered to grow deposits in the Bank’s competitive marketplace. These increases were partially offset by decreases in interest-bearing checking accounts of $6.0 million and regular savings accounts of $22.9 million, as these depositors migrated to new higher-yielding money market savings products. The Bank issued $75.0 million in PLGIT certificates of deposit during 2005 to replace $60.0 million of matured PLGIT certificates and to augment its fixed funding sources. Average deposit growth for the years ended December 31, 2005 compared to 2004 was due to money market savings and certificates of deposits as discussed above. Average deposit growth for the years ended December 31, 2004 compared to 2003 was due to the acquisitions of First County Bank and Suburban Community Bank in 2003. The issuance of Brokered and PLGIT certificates of deposit contributed to $12.3 million of the average deposit growth in 2004 compared to 2003.
 
Table 12 — Deposits
 
The following table summarizes the average amount of deposits for the years indicated:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Noninterest-bearing demand deposits
  $ 226,523     $ 216,050     $ 192,354  
Interest checking deposits
    150,024       154,562       132,450  
Money market savings
    274,304       248,908       238,421  
Regular savings
    206,876       221,974       193,294  
Certificates of deposit and other time deposits
    459,110       405,010       392,954  
                         
Total average deposits
  $ 1,316,837     $ 1,246,504     $ 1,149,473  
                         


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The following table summarizes the maturities of certificates of deposit and other time deposits with balances of $100 thousand or more at December 31, 2005:
 
                                 
    Due 3 Months
 		    Due 3-6
 		    Due 6-12
 		    Due Over
 		 
    or Less     Months     Months     12 Months  
 
Certificates of deposit
  $ 67,986     $ 8,824     $ 18,722     $ 32,889  
Other time deposits
    4,381       6,986       854       —  
 
Borrowings
 
Long-term debt increased $469 thousand during 2005 due to amortization of fair market value adjustments on advances from the Federal Home Loan Bank acquired in the 2003 acquisitions. Short-term borrowings decreased $13.6 million during 2005 primarily due to declines in Federal funds purchased. In May 2003, the Corporation issued $15.0 million in Subordinated Capital Notes, payments of $1.5 million were made on these notes in 2005; the subordinated capital notes qualify for Tier 2 capital status. In August 2003, the Corporation issued $20.0 million of Trust Preferred Securities that qualify for Tier 1 capital status. The proceeds from these transactions were used to support the future growth of the Corporation and its banking subsidiary and for general corporate purposes. The Corporation deconsolidated its Capital Trust in the first quarter of 2004, as a consequence of the adoption of FIN 46. The result was an increase in the junior debt of $619 thousand.
 
Table 13 — Short Term Borrowings
 
The following table details key information pertaining to securities sold under agreement to repurchase on an overnight basis for the periods indicated:
 
                         
    2005     2004     2003  
 
Balance at December 31
  $ 108,312     $ 104,442     $ 100,630  
Weighted average interest rate at year end
    2.1%       0.7%       0.6%  
Maximum amount outstanding at any month’s end
  $ 111,624     $ 117,664     $ 100,630  
Average amount outstanding during the year
  $ 98,620     $ 98,735     $ 80,810  
Weighted average interest rate during the year
    1.4%       0.7%       0.8%  
 
Shareholders’ Equity
 
The following table presents the shareholders’ equity at December 31, 2005 and 2004:
 
                                 
    At December 31,  
    2005     2004     $ Change     % Change  
 
Common stock
  $ 74,370     $ 49,580     $ 24,790       50.0 %
Additional paid-in capital
    22,051       21,632       419       1.9  
Retained earnings
    114,346       125,772       (11,426 )     (9.1 )
Accumulated other comprehensive (loss) income
    (1,050 )     2,187       (3,237 )     (148.0 )
Treasury stock
    (36,637 )     (38,778 )     2,141       (5.5 )
                                 
Total shareholders’ equity
  $ 173,080     $ 160,393     $ 12,687       7.9  
                                 
 
On March 23, 2005 the Corporation declared a three-for-two split in the form of a 50 percent stock dividend which was distributed on April 29, 2005. The declaration of this split was recorded in March 2005, which increased common stock by $24.8 million and decreased retained earnings by $24.8 million; this amount equates to the par value of the common stock the Corporation distributed on April 29, 2005. Retained earnings was favorably impacted by net income of $24.9 million partially offset by cash dividends of $9.3 million declared during 2005. Treasury stock decreased primarily because treasury shares were issued for option exercises. There is a buyback program in place that as of December 31, 2005 allows the


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Corporation to purchase an additional 452,399 shares of its outstanding common stock in the open market or in negotiated transactions.
 
Accumulated other comprehensive loss related to debt securities of $989 thousand, net of taxes, is included in shareholders’ equity at December 31, 2005. Accumulated other comprehensive income related to debt securities of $2.2 million, net of taxes, has been included in shareholders’ equity at December 31, 2004. Accumulated other comprehensive income (loss) related to debt securities is the unrealized gain (loss), or difference between the book value and market value, on the available-for-sale investment portfolio, net of taxes. The period-to-period decrease in accumulated other comprehensive income (loss) was a result of declines in the market values of fixed rate mortgage-backed and non-mortgage-backed government agency debt securities, and a decline in the market value of municipal securities. The market value declines are attributable to an increase in the 2-year treasury yield of 147 basis points, an increase in the 3-year treasury yield of 115 basis points, an increase in the 5-year treasury yield of 62 basis points and an increase in the 7-year treasury yield of 28 basis points from December 31, 2004 to December 31, 2005.
 
In the third quarter of 2005, the Corporation entered into an interest-rate swap agreement that converts a portion of its floating rate commercial loans to a fixed rate basis. The accumulated other comprehensive loss related to interest-rate swaps, net of taxes, included in shareholders’ equity at December 31, 2005 was $61 thousand. Accumulated other comprehensive loss related to interest-rate swaps reflects the current market value of the swap net of taxes. There were no interest-rate swaps at December 31, 2004.
 
Capital Adequacy
 
Capital guidelines which banking regulators have adopted assign minimum capital requirements for categories of assets depending on their assigned risks. The components of risk-based capital for the Corporation are Tier 1 and Tier 2. Minimum required total risk-based capital is 8.0%. At December 31, 2005, the Corporation had a Tier 1 capital ratio of 11.0% and total risked-based capital ratio of 12.5%. The Corporation had a Tier 1 capital ratio of 10.6% and total risk-based capital ratio of 12.4% at December 31, 2004. The Corporation continues to be in the “well-capitalized” category under regulatory standards. Details on the capital ratios can be found in Note 17 “Regulatory Matters” of this Form 10-K along with a discussion on dividend and other restrictions.
 
In April 2003, the Corporation secured $15.0 million in subordinated capital notes of which $11.3 million remains outstanding at December 31, 2005, that qualify for Tier 2 capital status. In August 2003, the Corporation, through an unconsolidated affiliate, issued $20.0 million of trust preferred securities that qualify for Tier 1 capital status.
 
Critical Accounting Policies
 
Management, in order to prepare the Corporation’s financial statements in conformity with generally accepted accounting principles, is required to make estimates and assumptions that effect the amounts reported in the Corporation’s financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the reserve for loan losses, intangible assets, investment securities, mortgage servicing rights, income taxes and benefit plans as its critical accounting policies.
 
Reserve for loan losses are provided using techniques that specifically identify losses on impaired loans, estimate losses on pools of homogeneous loans, and estimate the amount of unallocated reserve necessary to account for losses that are present in the loan portfolio but not yet currently identifiable. The adequacies 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


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negatively impact the Corporation’s results of operation and statements of financial condition in the periods requiring additional reserves.
 
Intangible assets have been recorded on the books of the Corporation in connection with its acquisitions of First County Bank, Pennview Savings Bank, Suburban Community Bank, Univest Investments, Inc. and Univest Insurance, Inc. 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 asset 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. SFAS 142, which took effect January 1, 2002, defines the methods that are acceptable for determining whether intangible asset values are sustainable.
 
The Corporation 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” (“SFAS 115”). 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.
 
The Corporation 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 Extinguishments of Liabilities — a replacement of FAS No. 125.” As such, the value of the rights is booked as income when the corresponding mortgages are sold. The income booked at sale is the estimated present value of the cash flows that will be received from servicing the loans over the entire future term. The term of a servicing right can be reasonably estimated using prepayment assumptions of comparable assets priced in the secondary market. As mortgage rates being offered to the public decrease, the life of loan servicing rights tends to shorten, as borrowers have increased incentive to refinance. Shortened loan servicing lives require a change in the value of the servicing rights that have already been recorded to be marked down in the statement of operations of the servicing company. This may cause a material change in reported operations for the Corporation depending on the size of the servicing portfolio and the degree of change in the prepayment speed of the type and coupon of loans being serviced.
 
The Corporation recognizes deferred tax assets and liabilities under the liability method of FAS 109. Enacted tax rates are applied to cumulative temporary differences based on expected taxable income in the periods in which the deferred tax asset or liability is anticipated to be realized. Future tax rate changes could occur that would require the recognition of income or expense in the statement of operations in the period in which they are enacted. Deferred tax assets must be reduced by a valuation allowance if in management’s judgment it is “more likely than not” that some portion of the asset will not be realized. Management may need to modify their judgments in this regard from one period to another should a material change occur in, the business environment, tax legislation, or in any other business factor that could impair the Corporation’s ability to benefit from the asset in the future.
 
The Corporation has a retirement plan that it provides as a benefit to employees and former employees and supplemental retirement plans that it provides as a benefit to certain current and former executives. Determining the adequacy of the funding of these plans may require estimates of future salary rate increases, of long-term rates of investment return, and the use of an appropriate discount rate for the obligation. Changes in these estimates and assumptions due to changes in the economic environment or financial markets may result in material changes in the Corporation’s report of operation or statement of financial condition.
 
Readers of the Corporation’s financial statements should be aware that the estimates and assumptions used in the Corporation’s current financial statements may need to be updated in future financial


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presentations for changes in circumstances, business or economic conditions in order to fairly represent the condition of the Corporation at that time.
 
Asset/Liability Management
 
The primary functions of Asset/ Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers and corporate needs. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates.
 
The Corporation uses both an interest-sensitivity gap analysis and a simulation model to quantify its exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year horizon. The simulation uses existing portfolio rate and repricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities.
 
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 December 31, 2005, the total notional amount of the “Pay Floating, Receive Fixed” swap outstanding was $20.0 million. The net payable or receivable from interest-rate swap agreement is accrued as an adjustment to interest income. The $20.0 million in notional amount of the interest-rate swap outstanding at December 31, 2005 expires on November 2, 2006. There was one swap outstanding during 2004 that matured on January 7, 2004.
 
The impact of the interest-rate swap on interest income for the year ended December 31, 2005 was a positive $21 thousand compared to $4 thousand for the year ended December 31, 2004. The Corporation’s credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. As of December 31, 2005, the market value of the interest-rate swap was in an unfavorable position of $94 thousand. Credit risk would exist when the counterparty to a derivative contract with an unrealized gain might fail to perform according to the terms of the agreement. There were no interest-rate swaps outstanding at December 31, 2004.
 
Credit Risk
 
Extending credit exposes the Corporation to credit risk, which is the risk that the principal balance of a loan and any related interest will not be collected due to the inability of the borrower to repay the loan. The Corporation manages credit risk in the loan portfolio through adherence to consistent standards, guidelines and limitations established by the Board of Directors. Written loan policies establish underwriting standards, lending limits and other standards or limits as deemed necessary and prudent.
 
The loan review department conducts ongoing, independent reviews of the lending process to ensure adherence to established policies and procedures, monitors compliance with applicable laws and regulations, provides objective measurement of the risk inherent in the loan portfolio, and ensures that proper documentation exists.
 
The Corporation focuses on both assessing the borrower’s capacity and willingness to repay and on obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Eastern Pennsylvania market area and are secured by developed real estate at conservative loan-to-value ratios and often by a guarantee of the borrowers. Management closely monitors the composition and


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quality of the total commercial loan portfolio to ensure that significant credit concentrations by borrower or industry do not exist.
 
Credit risk in the direct consumer loan portfolio, card portfolio and indirect auto loan portfolio is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values. In the home equity loan portfolio, combined loan-to-value ratios are generally limited to 80%. Other credit considerations may warrant higher combined loan-to-value ratios for approved loans.
 
The Corporation originates fixed-rate and adjustable-rate residential mortgage loans that are secured by the underlying 1- to 4-family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.
 
The Corporation closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts begin after a loan payment is missed, by attempting to contact all borrowers. If collection attempts fail, the Corporation will proceed to gain control of any and all collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all monies owed to the Corporation. The Corporation monitors delinquency trends and past due reports are submitted to the Board of Directors.
 
Liquidity
 
The Corporation, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans and deposit withdrawals. The Corporation manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. The Corporation has a contingency funding plan in place to address liquidity needs in the event of an institution-specific or a systemic financial crisis.
 
Sources of Funds
 
Core deposits and cash management repurchase agreements (“Repos”) have historically been the most significant funding sources for the Corporation. These deposits and Repos are generated from a base of consumer, business and public customers primarily located in Bucks and Montgomery counties, Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, thrifts, mutual funds, security dealers and others.
 
The Corporation supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the Bank’s investment portfolio and are at current money market mutual fund rates. This funding source is subject to changes in the asset allocations of the trust accounts.
 
Since August 2004, the Bank began issuing Certificates with PLGIT to augment its short-term fixed funding sources. The PLGIT deposits are public funds collateralized with a letter of credit that PLGIT maintains with the FHLB; therefore, Univest National Bank is not required to provide collateral on these deposits. At December 31, 2005, the Bank had $50.0 million in PLGIT deposits,
 
The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $362.5 million. At December 31, 2005, outstanding borrowings under the FHLB credit facilities totaled $54.6 million. The maximum borrowing capacity changes as a function of qualifying collateral assets and the amount of funds received may be reduced by additional required purchases of FHLB stock.


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The Corporation maintains federal fund lines with several correspondent banks totaling $70.0 million. At December 31, 2005, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.
 
The Corporation, through the Bank, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At December 31, 2005, the Corporation had no outstanding borrowings under this line.
 
Cash Requirements
 
The Corporation has cash requirements including various financial obligations, including contractual obligations and commitments that require cash payments. The contractual obligations and commitments table that follows presents, as of December 31, 2005, significant fixed and determinable contractual obligations to third parties. The most significant obligation, in both the under and over one year time period, is for the Bank to repay its certificates of deposit. Securities sold under agreement to repurchase constitute the next largest payment obligation and it is short term in nature. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its branch network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market.
 
The table also shows the amounts and expected maturities of significant commitments as of December 31, 2005. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon. Commitments to extend credit are the Bank’s most significant commitment in both the under and over one year time periods.
 
Contractual Obligations and Commitments
 
The Corporation enters into contractual obligations in the normal course of business as a source of funds for its asset growth and its asset/liability management, to fund acquisitions and to meet required capital needs. These obligations require the Corporation to make cash payments over time as detailed in the table below.
 
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to manage the Corporation’s exposure to fluctuation in interest rates. These financial instruments include commitments to extend credit, standby and commercial letters of credit and forward contracts. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of these financial instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
 
The Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Corporation does not require and is not required to pledge collateral or other security to support financial instruments with credit risk. These commitments expire over time as detailed in Table 14.
 
Forward contracts represent agreements for delayed delivery of financial instruments or commodities in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument or commodity at a specified price or yield. Forward contracts are not traded on organized exchanges and their contractual terms are not standardized. The Corporation’s forward contracts are commitments to sell loans secured by 1-to-4 family residential properties whose predominant risk characteristic is interest rate risk. At December 31, 2005, the Corporation had no obligations under forward contracts.


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For further information regarding the Corporation’s commitments, refer to Footnote 14 of the Consolidated Financial Statements, herein.
 
Table 14 — Contractual Obligations
 
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows, including interest payable, as of December 31, 2005:
 
                                         
    Payments Due by Period  
          Due in One
 		    Due in One to
 		    Due in Four
 		    Due in Over
 		 
    Total     Year or Less     Three Years     to Five Years     Five Years  
 
Long-term debt(a)
  $ 67,560     $ 2,965     $ 6,694     $ 47,469     $ 10,432  
Subordinated capital notes(b)
    13,946       2,133       4,021       3,682       4,110  
Trust preferred securities(c)
    64,053       1,564       3,128       3,129       56,232  
Securities sold under agreement to repurchase(d)
    108,316       108,316       —       —       —  
Time deposits(e)
    510,658       313,845       134,310       53,621       8,882  
Operating leases
    8,222       1,373       2,223       1,318       3,308  
Standby and commercial letters of credit
    60,731       56,647       4,078       6       —  
Commitments to extend credit (f)
    448,333       128,969       50,572       28,999       239,793  
                                         
Total contractual obligations
  $ 1,281,819     $ 615,812     $ 205,026     $ 138,224     $ 322,757  
                                         
 
 
Notes: 
 
(a) Interest expense is projected based upon the weighted average interest rate of long-term debt.
 
(b) Includes interest on both fixed and variable rate obligations. The interest expense associated with the variable rate obligations is based upon interest rates in effect at December 31, 2005. The contractual amounts to be paid on variable rate obligations are effected by changes in the market interest rates. Future changes in the market interest rates could materially affect the contractual amounts to be paid.
 
(c) Includes interest on variable rate obligations. The interest expense is based upon interest rates in effect at December 31, 2005. The contractual amounts to be paid on variable rate obligations are effected by changes in the market interest rates. Future changes in the market interest rates could materially affect the contractual amounts to be paid. The trust preferred securities mature in 2033 and interest is calculated to this maturity date. The first non-penalized call date is in 2008, the Corporation may choose to call these securities as a result of interest rate fluctuations and capital needs.
 
(d) Includes interest on variable rate obligations. The interest expense is based upon the fourth quarter average interest rate. The contractual amounts to be paid on variable rate obligations are effected by changes in the market interest rates. Future changes in the market interest rates could materially affect the contractual amounts to be paid.
 
(e) Includes interest on both fixed and variable rate obligations. The interest expense is based upon the fourth quarter average interest rate. The contractual amounts to be paid on variable rate obligations are affected by changes in the market interest rates. Future changes in the market interest rates could materially affect the contractual amounts to be paid.
 
(f) Includes both revolving and straight lines of credit. Revolving lines, including unused credit card lines, are reporting in the “Due in One Year or Less” category.


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Recent Accounting Pronouncements
 
In December 2004 the Financial Accounting Standards Board revised Statement No. 123, “Accounting for Stock Based Compensation” (“SFAS 123R”). SFAS 123R required that the fair-value-based method of accounting for stock options be used for all public entities and eliminates alternative accounting methods; consequently, similar economic transactions will be accounted for similarly. Entities are required to estimate the number of instruments for which the requisite service is expected to be rendered as compared to the original statement which permitted entities to account for forfeitures as they occur. In addition, SFAS 123R amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Incremental compensation cost for a modification of the terms or conditions of an award is measured by comparing the fair value of the modified award with the fair value of the award immediately before the modification. On April 14, 2005 the Securities and Exchange Commission amended the compliance dates for SFAS 123R. Under the amended compliance dates, SFAS 123R becomes effective for public entities that do not file as small business issuers, as of the beginning of the first fiscal reporting period that begins after June 15, 2005. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. As of the required effective date, all public entities that used the fair-value-based method for either recognition or disclosure under the original statement will apply SFAS 123R using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards, for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under the original statement for either recognition or pro forma disclosures. For periods before the required effective date, those entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original statement. Pro forma disclosures under the original statement are presented in Note 1 “Stock Options.” Actual stock-based compensation expense for stock options, net of tax, to be recorded in the fiscal year 2006 under the transition method will be approximately $420 thousand. Future grants, unvested forfeitures of prior grants and unrecognizable deferred tax benefits may alter this projected number. Under SFAS 123R compensation expense amounting to the entire discount for shares issued under employee share purchase plans must be recognized if the discount is greater than 5%. Actual stock-based compensation expense for shares issued under the Corporation’s employee stock purchase plan, to be recorded in the fiscal year 2006 under the transition method will be approximately $29 thousand.
 
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the tier 1 capital of bank holding companies. The final rule became effective on April 11, 2005 for quarterly reporting periods beginning after July 1, 2005 and impacts the calculation of risk-based capital ratios. The final rule limits restricted core capital to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liabilities. Amounts of restricted core capital elements in excess of these limits generally may be included in tier 2 capital under quantitative limits which will be transitioned over a five-year period ending March 31, 2009. Under the new rule, the requirement for trust preferred securities to include a call option has been eliminated and standards for the junior subordinated debt underlying trust preferred securities eligible for tier 1 capital have been clarified. The Corporation’s trust preferred securities amount to less than the 25 percent limitation for tier 1 capital and none would be subject to the tighter quantitative limits of tier 2 capital under the new rule. The Corporation does not anticipate a material change in its risk-based capital ratios as a result of this new rule.
 
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”.) SFAS 154 changes the accounting for and reporting of a voluntary change in accounting principle and replaces ABP Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Under Opinion No. 20, most changes in accounting principle were reported in the income statement of the period of change as a cumulative adjustment. However, under SFAS 154, a voluntary change in accounting principle must be shown retrospectively in the financial statements, if


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practicable, for all periods presented. In cases where retrospective application is impracticable, an adjustment to the assets, liabilities and a corresponding adjustment to retained earnings can be made as of the beginning of the earliest period for which retrospective application is practicable rather than being reported in the income statement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years after December 15, 2005.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the risk of loss from adverse changes in market prices and rates. In the course of its lending and deposit taking activities, the Corporation is subject to changes in the economic value and/or earnings potential of these assets and liabilities due to changes in interest rates. The Corporation’s Asset/Liability Management Committee (“ALMC”) manages interest rate risk in a manner so as to provide adequate and reliable earnings. This is accomplished through the establishment of policy limits on maximum risk exposures, as well as the regular and timely monitoring of reports designed to quantify risk and return levels.
 
The Corporation uses both an interest-rate sensitivity gap analysis and a simulation model to quantify its exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year horizon. The simulation uses existing portfolio rate and repricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is permitted to use interest-rate swaps and interest-rate caps/floors with indices that correlate to on-balance sheet instruments, to modify its indicated net interest sensitivity to levels deemed to be appropriate based on the Corporation’s current economic outlook. The effect of the interest-rate swaps that the Bank uses to reduce its earnings volatility due to rate risk is also included in the results of the simulation.
 
At December 31, 2005, the simulation, based upon forward-looking assumptions, projects that the Corporation’s greatest interest margin exposure to interest-rate risk would occur if interest rates increased from present levels. Given the assumptions, a 200 basis point parallel shift in the yield curve applied on a ramp-up basis would cause the Corporation’s net interest margin, over a 1-year horizon, to be approximately 0.4% less than it would be if market rates would remain unchanged. At December 31, 2004, the simulation, based upon forward-looking assumptions, projects that the Corporation’s greatest interest margin exposure to interest-rate risk would occur if interest rates decline from present levels. Given the assumptions, a 200 basis point parallel shift in the yield curve applied on a ramp-down basis would cause the Corporation’s net interest margin, over a 1-year horizon, to be approximately 1.8% less than it would be if market rates would remain unchanged. Policy limits have been established which allow a tolerance for no more than approximately a 5.0% negative impact to the interest margin resulting from a 200 basis point parallel yield curve shift over a forward looking 12-month period. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Net Interest Income” and “Asset/Liability Management, Liquidity” and Table 15.


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Table 15 — Interest Sensitivity Analysis
 
Interest Sensitivity Analysis at December 31, 2005:
 
                                                 
    Within
 		    3 to 12
 		    1 to 5
 		    Over
 		    Non-Rate
 		       
    3 Months     Months     Years     5 Years     Sensitive     Total  
 
Assets:
Cash and due from banks
  $ —     $ —     $ —     $ —     $ 46,226     $ 46,226  
Interest-earning deposits with other banks
    563       —       —       —       —       563  
Federal funds sold
    12,650       —       —       —       —       12,650  
Investment securities
    9,963       65,609       106,943       160,744       —       343,259  
Loans, net
    443,039       155,450       539,056       112,107       (13,363 )     1,236,289  
Other assets
    —       —       —       —       130,322       130,322  
                                                 
Total assets
    466,215       221,059       645,999       272,851       163,185     $ 1,769,309  
                                                 
 
Liabilities and shareholders’ equity:
Noninterest-bearing deposits
    —       —       —       —       246,736     $ 246,736  
Interest-bearing demand deposits
    253,499       30,300       161,596       —       —       445,395  
Savings deposits
    12,876       28,308       150,970       —       —       192,154  
Time deposits
    94,519       210,089       170,282       7,540       —       482,430  
Borrowed funds
    43,287       15,177       127,047       11,250       —       196,761  
Other liabilities
    —       —       —       —       32,753       32,753  
Shareholders’ equity
    —       —       —       —       173,080       173,080  
                                                 
Total liabilities and shareholders’ equity
    404,181       283,874       609,895       18,790       452,569     $ 1,769,309  
                                                 
Interest rate swaps
    (20,000 )     20,000       —       —       —          
                                                 
Incremental gap
  $ 42,034     $ (42,815 )   $ 36,104     $ 254,061     $ (289,384 )        
                                                 
Cumulative gap
  $ 42,034     $ (781 )   $ 35,323     $ 289,384                  
                                                 
Cumulative gap as a percentage of interest-earning assets
    2.62 %     (0.05 )%     2.20 %     18.02 %                
                                                 


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Table 16 — Interest Rate Derivatives
 
Following are details on the interest rate derivative subject to interest rate risk at December 31, 2005:
 
         
Interest Rate Swaps:
       
Receive fixed/pay variable notional amount
  $ 20,000  
Fair value
  $ (94 )
Maturity
    November 2006  
Variable rate payable (a)
    7.08 %
Fixed rate receivable
    7.04 %
 
 
Notes: 
 
(a) Interest payable based on Bank Prime Loan rates published by The Federal Reserve.
 
Item 8.   Financial Statements and Supplementary Data
 
The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the following pages:
 
         
    Page
 
  44
  45
  46
  47
  48
  49


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Univest Corporation of Pennsylvania:
 
We have audited the accompanying consolidated balance sheets of Univest Corporation of Pennsylvania and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated financial statements of the Company for the year ended December 31, 2003 were audited by other auditors whose report thereon dated February 23, 2004, expressed an unqualified opinion on those statements.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
 
/s/ KPMG LLP
 
Philadelphia, Pennsylvania
February 28, 2006


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UNIVEST CORPORATION OF PENNSYLVANIA
 
 
                 
    At December 31,  
    2005     2004  
    (In thousands,
 		 
    except share data)  
 
ASSETS
               
Cash and due from banks
  $ 46,226     $ 35,876  
Interest-earning deposits with other banks
    563       711  
Federal funds sold
    12,650       1,158  
Investment securities held-to-maturity (market value $14,686 and $40,146 at December 31, 2005 and 2004, respectively)
    14,808       40,000  
Investment securities available-for-sale
    328,451       303,502  
Loans
    1,249,652       1,174,180  
Less: Reserve for loan losses
    (13,363 )     (13,099 )
                 
Net loans
    1,236,289       1,161,081  
                 
Premises and equipment, net
    21,635       19,818  
Goodwill, net of accumulated amortization of $2,845 at December 31, 2005 and 2004
    40,998       40,794  
Other intangibles, net of accumulated amortization and fair value adjustments of $4,424 and $3,954 at December 31, 2005 and 2004, respectively
    2,389       2,767  
Cash surrender value of insurance policies
    35,211       33,910  
Accrued interest and other assets
    30,089       27,340  
                 
Total assets
  $ 1,769,309     $ 1,666,957  
                 
 
LIABILITIES
Demand deposits, noninterest-bearing
  $ 246,736     $ 218,410  
Demand deposits, interest-bearing
    445,395       407,045  
Savings deposits
    192,154       214,588  
Time deposits
    482,430       430,841  
                 
Total deposits
    1,366,715       1,270,884  
                 
Securities sold under agreements to repurchase
    108,312       104,442  
Other short-term borrowings
     —        17,500  
Accrued expenses and other liabilities
    32,753       23,320  
Long-term debt
    56,580       57,049  
Subordinated notes
    11,250       12,750  
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding junior subordinated debentures of Univest (“Trust Preferred Securities”)
    20,619       20,619  
                 
Total liabilities
    1,596,229       1,506,564  
                 
SHAREHOLDERS’ EQUITY
               
Common stock, $5 par value; 24,000,000 shares authorized at December 31, 2005 and 2004; 14,873,904 and 9,916,062 shares issued at December 31, 2005 and 2004; and 12,947,001 and 8,575,618 shares outstanding at December 31, 2005 and 2004, respectively
    74,370       49,580  
Additional paid-in capital
    22,051       21,632  
Retained earnings
    114,346       125,772  
Accumulated other comprehensive (loss) income, net of tax
    (1,050 )     2,187  
Treasury stock, at cost; 1,926,903 shares and 1,340,444 shares at December 31, 2005 and 2004, respectively
    (36,637 )     (38,778 )
                 
Total shareholders’ equity
    173,080       160,393  
                 
Total liabilities and shareholders’ equity
  $ 1,769,309     $ 1,666,957  
                 
 
See accompanying notes to consolidated financial statements.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
    (In thousands, except share data)  
 
Interest income
                       
Interest and fees on loans:
                       
Taxable
  $ 68,584     $ 57,421     $ 51,461  
Exempt from federal income taxes
    3,271       2,939       2,702  
                         
Total interest and fees on loans
    71,855       60,360       54,163  
                         
Interest and dividends on investment securities:
                       
Taxable
    9,839       10,805       14,300  
Exempt from federal income taxes
    3,579       3,578       3,392  
Interest on time deposits with other banks
    17       6       20  
Interest on federal funds sold and term federal funds
    212       40       90  
                         
Total interest income
    85,502       74,789       71,965  
                         
Interest expense
                       
Interest on demand deposits
    6,043       2,362       2,286  
Interest on savings deposits
    581       646       950  
Interest on time deposits
    13,592       11,040       14,326  
Interest on long-term borrowings
    4,371       3,828       2,845  
Interest on short-term debt
    1,677       1,072       743  
                         
Total interest expense
    26,264       18,948       21,150  
                         
Net interest income
    59,238       55,841       50,815  
Provision for loan losses
    2,109       1,622       1,000  
                         
Net interest income after provision for loan losses
    57,129       54,219       49,815  
                         
Noninterest income
                       
Trust fee income
    5,225       5,028       4,629  
Service charges on deposit accounts
    6,908       6,537       5,739  
Investment advisory commission and fee income
    1,957       1,907       1,908  
Insurance commission and fee income
    3,551       3,068       2,949  
Life insurance income
    1,301       1,469       2,057  
Other service fee income
    3,154       2,687       2,996  
Net gains on sales of securities
    150       1,066       2,076  
Net (loss) gain of dispositions of fixed assets
    (218 )     226       (111 )
Other
    416       615       1,237  
                         
Total noninterest income
    22,444       22,603       23,480  
                         
Noninterest expense
                       
Salaries and benefits
    26,795       25,360       24,524  
Net occupancy
    4,276       4,018       3,461  
Equipment
    2,994       2,854       2,763  
Other
    11,731       12,688       11,275  
                         
Total noninterest expense
    45,796       44,920       42,023  
                         
Income before income taxes
    33,777       31,902       31,272  
Applicable income taxes
    8,910       8,311       8,190  
                         
Net income
  $ 24,867     $ 23,591     $ 23,082  
                         
Net income per share:*
                       
Basic
  $ 1.93     $ 1.84     $ 1.80  
Diluted
  $ 1.91     $ 1.80     $ 1.78  
 
* Per share data has been restated to give effect to a three-for-two stock split in the form of a dividend declared on March 23, 2005 which was distributed on April 29, 2005.
 
See accompanying notes to consolidated financial statements.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
 
                                                         
          Accumulated
 		                               
    Common
 		    Other
 		          Additional
 		                   
    Shares
 		    Comprehensive
 		    Common
 		    Paid-In
 		    Retained
 		    Treasury
 		       
    Outstanding     Income     Stock     Capital     Earnings     Stock     Total  
    (in thousands, except share data)  
 
Balance at December 31, 2002
    8,549,502     $ 7,240     $ 49,587     $ 20,912     $ 96,316     $ (39,836 )   $ 134,219  
Comprehensive Income:
                                                       
Net Income for 2003
                                    23,082               23,082  
Other comprehensive income, net of income tax benefit of $(2,412):
                                                       
Unrealized losses on investment securities available-for-sale
            (3,421 )                                     (3,421 )
Unrealized losses on swaps
            (322 )                                     (322 )
                                                         
Total comprehensive income
                                                    19,339  
                                                         
Cash paid in lieu of fractional shares
    (390 )             (7 )             (9 )             (16 )
Cash dividends declared ($0.533 per share)*
                                    (6,832 )             (6,832 )
Stock issued under dividend reinvestment and employee stock purchase plans
    51,543                               (18 )     1,819       1,801  
Exercise of stock options
    65,726                               (882 )     2,365       1,483  
Acquisition of treasury stock
    (119,963 )                                     (4,242 )     (4,242 )
                                                         
Balance at December 31, 2003
    8,546,418       3,497       49,580       20,912       111,657       (39,894 )     145,752  
Comprehensive Income:
                                                       
Net Income for 2004
                                    23,591               23,591  
Other comprehensive income, net of income tax benefit of $(700):
                                                       
Unrealized losses on investment securities available-for-sale
            (1,307 )                                     (1,307 )
Unrealized losses on swaps
            (3 )                                     (3 )
                                                         
Total comprehensive income
                                                    22,281  
                                                         
Cash dividends declared ($0.667 per share)*
                                    (8,560 )             (8,560 )
Stock issued under dividend reinvestment and employee stock purchase plans
    44,112                               (24 )     1,991       1,967  
Exercise of stock options
    45,416                       720       (892 )     1,865       1,693  
Acquisition of treasury stock
    (60,328 )                                     (2,740 )     (2,740 )
                                                         
Balance at December 31, 2004
    8,575,618     $ 2,187       49,580     $ 21,632     $ 125,772     $ (38,778 )   $ 160,393  
Comprehensive Income:
                                                       
Net Income for 2005
                                    24,867               24,867  
Other comprehensive income, net of income tax benefit of $(1,742):
                                                       
Unrealized losses on investment securities available-for-sale
            (3,176 )                                     (3,176 )
Unrealized losses on swaps
            (61 )                                     (61 )
                                                         
Total comprehensive income
                                                    21,630  
                                                         
Cash paid in lieu of fractional shares
                                    (6 )             (6 )
Three-for-two stock split
    4,294,143               24,790               (24,790 )             —  
Cash dividends declared ($0.717 per share)*
                                    (9,260 )             (9,260 )
Stock issued under dividend reinvestment and employee stock purchase plans
    59,450                               (27 )     2,020       1,993  
Exercise of stock options
    174,898                       419       (2,210 )     4,805       3,014  
Acquisition of treasury stock
    (157,108 )                                     (4,684 )     (4,684 )
                                                         
Balance at December 31, 2005
    12,947,001     $ (1,050 )   $ 74,370     $ 22,051     $ 114,346     $ (36,637 )   $ 173,080  
                                                         
 
* Per share data has been restated to give effect to a three-for-two stock split in the form of a dividend declared on March 23, 2005 which was distributed on April 29, 2005.
 
See accompanying notes to consolidated financial statements.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
Cash flows from operating activities:
                       
Net income
  $ 24,867     $ 23,591     $ 23,082  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Provision for loan losses
    2,109       1,622       1,000  
Depreciation of premises and equipment
    2,013       1,995       1,850  
(Discount accretion) premium amortization on investment securities
    (170 )     174       563  
Amortization and fair market adjustments on intangibles
    470       579       424  
Premium accretion on deposits and long-term debt
    (879 )     (1,170 )     (654 )
Increase in cash surrender values of insurance policies
    (1,301 )     (1,469 )     (1,679 )
Realized gains on investment securities
    (150 )     (1,066 )     (2,076 )
Realized losses (gains) on sales fixed assets
    218       (226 )     111  
Other adjustments
    (136 )     454       250  
Deconsolidation of capital trust
    —       619       —  
(Increase) decrease in interest receivable and other assets
    (1,364 )     8,186       (12,570 )
Increase (decrease) in accrued expenses and other liabilities
    9,081       (910 )     (4,984 )
                         
Net cash provided by operating activities
    34,758       32,379       5,317  
                         
Cash flows from investing activities:
                       
Net cash paid due to acquisitions, net of cash acquired
    (200 )     —       (51,621 )
Proceeds from maturing securities held-to-maturity
    75,207       75,027       46,532  
Proceeds from maturing securities available-for-sale
    56,761       91,166       142,466  
Proceeds from sales and calls of securities available-for-sale
    16,053       58,125       105,065  
Purchases of investment securities held-to-maturity
    (49,885 )     (79,914 )     (12,608 )
Purchases of investment securities available-for-sale
    (102,458 )     (65,765 )     (285,742 )
Decrease in interest-earning deposits
    148       590       15,612  
Net decrease (increase) in federal funds sold
    (11,492 )     1,370       19,985  
Proceeds from sales of mortgages
    7,329       8,255       41,903  
Net increase in loans
    (84,322 )     (121,532 )     (117,054 )
Capital expenditures
    (4,038 )     (2,089 )     (6,073 )
                         
Net cash used in investing activities
    (96,897 )     (34,767 )     (101,535 )
                         
Cash flows from financing activities:
                       
Net increase in deposits
    96,241       1,279       44,836  
Net (decrease) increase in short-term borrowings
    (13,630 )     (7,688 )     31,806  
Issuance of long-term debt
    —       7,500       5,000  
Repayment of long-term debt
    —       (3,000 )     (4,000 )
Issuance of subordinated debt
    —       —       15,000  
Repayment of subordinated debt
    (1,500 )     (1,500 )     (750 )
Issuance of trust preferred securities
    —       —       20,000  
Purchases of treasury stock
    (4,684 )     (2,740 )     (4,242 )
Stock issued under dividend reinvestment and employee
stock purchase plans
    1,993       1,967       1,801  
Proceeds from exercise of stock options
    3,014       1,693       1,483  
Cash dividends paid
    (8,945 )     (8,128 )     (6,714 )
                         
Net cash provided by (used in) financing activities
    72,489       (10,617 )     104,220  
                         
Net increase (decrease) in cash and due from banks
    10,350       (13,005 )     8,002  
Cash and due from banks at beginning of year
    35,876       48,881       40,879  
                         
Cash and due from banks at end of year
  $ 46,226     $ 35,876     $ 48,881  
                         
Supplemental disclosures of cash flow information
                       
Cash paid during the year for:
                       
Interest
  $ 24,032     $ 22,459     $ 20,896  
Income taxes, net of refunds received
  $ 8,231     $ 7,150     $ 8,576  
 
See accompanying notes to consolidated financial statements.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
(All dollar amounts presented in tables are in thousands, except per share data)
 
Note 1.   Summary of Significant Accounting Policies
 
Organization
 
Univest Corporation of Pennsylvania (the “Corporation”) through its wholly owned subsidiary, Univest National Bank and Trust Co. (the “Bank”), is engaged in domestic commercial and retail banking services and provides a full range of community banking and trust services to its customers. The Bank wholly owns Delview, Inc., who through its subsidiaries, Univest Investments, Inc. and Univest Insurance, Inc., provides financial planning, investment management, insurance products and brokerage services. Univest Investments, Univest Insurance and Univest Reinsurance Corporation, a wholly owned subsidiary of the Corporation, were formed to enhance the traditional banking and trust services provided by the Bank. Univest Investments, Univest Insurance and Univest Reinsurance do not currently meet the quantitative thresholds for separate disclosure provided under Statement of Financial Accounting Standard (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Therefore, the Corporation currently has one reportable segment, “Community Banking,” and strategically is how the Corporation operates and has positioned itself in the marketplace. The Corporation’s activities are interrelated, each activity is dependent, and performance is assessed based on how each of these activities supports the others. Accordingly, significant operating decisions are based upon analysis of the Corporation as one Community Banking operating segment. The Bank serves Montgomery and Bucks counties of Pennsylvania through 34 banking offices and provides banking and trust services to the residents and employees of 12 retirement communities, a work site office which performs a payroll check cashing service and an express banking center located in the Montgomery Mall.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, the Bank, Univest Realty Corporation, Univest Delaware, Inc. and Univest Reinsurance Company. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
Interest-earning Deposits with Other Banks
 
Interest-earning deposits with other banks consist of deposit accounts with other financial institutions generally having maturities of three months or less.
 
Investment Securities
 
Securities are classified as investment securities held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Securities purchased with the intention of recognizing short-term profits are placed in the trading account and are carried at market value. Securities not classified as held-to-maturity or trading are designated securities available-for-sale and carried at fair value with unrealized gains and losses reflected in accumulated other comprehensive income, net of estimated income taxes. The net unrealized gain (loss) on available-for-sale securities included in accumulated other comprehensive income was a loss of $989 thousand at December 31, 2005


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

and a gain of $2.2 million December 31, 2004. Gains and losses on sales of securities are computed on a specific security basis.
 
Loans
 
Loans are stated at the principal amount less net deferred loan fees and unearned discount. Interest income on commercial, consumer, and mortgage loans is recorded on the outstanding balance method, using actual interest rates applied to daily principal balances. Accrual of interest income on loans ceases when collectibility of interest and/or principal is questionable. If it is determined that the collection of interest previously accrued is uncertain, such accrual is reversed and charged to current earnings. Thereafter, income is only recognized as payments are received for loans on which there is no uncertainty as to the collectibility of principal. Loans are considered past due based upon failure to comply with contractual terms.
 
When a loan, including a loan impaired under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS 114”), is classified as nonaccrual, the accrual of interest on such a loan is discontinued. A loan is classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is 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.
 
Loan Fees
 
Fees collected upon loan origination and certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as yield adjustments. Upon prepayment or other disposition of the underlying loans before their contractual maturities, any associated unamortized fees or costs are recognized.
 
Derivative Financial Instruments
 
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), requires us to recognize all derivative financial instruments on our Statements of Condition at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings immediately. To determine fair value, we use pricing models that incorporate assumptions about market conditions and risks that are current as of the reporting date.
 
The Corporation uses interest-rate swap agreements to manage the interest-rate risk of its floating-rate loan portfolio. The Corporation accounts for its interest-rate swap contracts in cash flow hedging relationships in compliance with SFAS 133 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. To determine effectiveness, the Corporation performs an analysis to identify if changes in fair value or cash flow of the derivative correlate to the equivalent changes in the forecasted interest receipts related to a


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

specified portfolio of loans. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The change in market value of the ineffective part of the instrument would need to be charged to the statement of operations, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods.
 
Reserve for Loan Losses
 
The reserve for 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 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 at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.
 
The reserve for loan losses consists of an allocated reserve and an unallocated reserve. The allocated reserve is comprised of reserves established on specific loans, and class reserves based on historical loan loss experience, current trends, and management assessments. The unallocated reserve is based on both general economic conditions and other risk factors in the Corporation’s individual markets and portfolios, and is 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 reserve established for these loans is based on a careful analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.
 
The class reserve element is determined by an internal loan grading process in conjunction with associated allowance factors. The Corporation revises the class allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification.
 
The Corporation maintains an unallocated reserve to recognize the existence of credit exposures that are 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.
 
Premises and Equipment
 
Land is stated at cost, and bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method and charged to operating expenses over the estimated useful lives of the assets. The estimated useful life for new buildings constructed on land owned is forty years, and for new buildings constructed on leased land, is the lesser of forty years or the lease term. The useful life of purchased existing buildings is the estimated remaining useful life at the time of the purchase. Land improvements are considered to have estimated useful lives of fifteen years. Furniture, fixtures and equipment have estimated useful lives ranging from three to ten years.
 
Other Real Estate Owned
 
Other real estate owned represents properties acquired through customers’ loan defaults and is included in accrued interest and other assets. The real estate is stated at an amount equal to the loan


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

balance prior to foreclosure, plus costs incurred for improvements to the property, but no more than the fair market value of the property, less estimated costs to sell.
 
Stock Options
 
The Corporation grants stock options to employees with an exercise price equal to the fair value of the shares at the date of grant. The Corporation has elected to follow the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations in accounting for its employee stock options. The Corporation originally choose not to adopt SFAS No. 123, “Accounting for Stock-Based-Compensation” (“SFAS 123”,) which was revised in December 2004 as discussed under “Recent Accounting Pronouncement” of this footnote. The Corporation has adopted SFAS No. 148, “Accounting for Stock-Based-Compensation — Transition and Disclosure” (“SFAS 148”).The following table provides a pro forma presentation of the effects that such an election would have on income and earnings per share. Under APB 25, no compensation expense is recognized because the exercise price of the Corporation’s employee stock options equals the market price of the underlying stock on the date of grant. Had compensation expense for stock option awards been determined consistent with SFAS 123, net income and earnings per share would be reduced to the pro forma amounts indicated as follows:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Net income, as reported
  $ 24,867     $ 23,591     $ 23,082  
Less pro forma expense related to stock options
    306       578       574  
                         
Pro forma net income
  $ 24,561     $ 23,013     $ 22,508  
                         
Basic earnings per share:
                       
As reported
  $ 1.93     $ 1.84     $ 1.80  
                         
Pro forma
  $ 1.91     $ 1.79     $ 1.76  
                         
Diluted earnings per share:
                       
As reported
  $ 1.91     $ 1.80     $ 1.78  
                         
Pro forma
  $ 1.89     $ 1.76     $ 1.73  
                         
 
Significant assumptions used to calculate the above and the resulting fair values are as follows:
 
                         
    2005     2004*     2003  
 
Expected option life in years
    8.7       —       8.0  
Risk free interest rate
    4.35 %     —       3.04 %
Expected dividend yield
    3.11 %     —       2.11 %
Expected volatility
    .335       —       .142  
Fair value of options
  $ 7.69       —     $ 4.57  
 
* There were no options granted in 2004
 
The pro forma effects are presented in accordance with the requirements of SFAS 123; however, such effects are not representative of the effects to be reported in future years due to the fact that options vest over several years and additional awards generally are made each year. For purposes of providing the pro forma disclosures required under SFAS 123 and SFAS 148, the fair value of stock options granted were estimated at the date of grant using a Black-Sholes option pricing model. The model is sensitive to changes in subjective assumptions, which can affect the resulting fair value estimates. The Corporation


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

used assumptions for volatility, expected life of the options, assumed risk-free rates, and expected dividend rates. The model applies these assumptions along with the known characteristics of the options such as vesting period and exercise price to establish a fair value estimate. The estimated pro forma presentation of compensation expense and resulting pro forma net income and earnings per share is sensitive to the subjective assumptions mentioned which affect the fair value estimates of the options at the date of grant. Management cautions the reader that the Black-Sholes option pricing model does not necessarily provide an accurate estimate of the fair value of the stock options that the Corporation has granted. The options in question have vesting restrictions and are limited in their transferability, characteristics that are not factored into the Black-Sholes option pricing model methodology for establishing fair value estimates of options.
 
Dividend Reinvestment and Employee Stock Purchase Plans
 
The Univest Dividend Reinvestment Plan (the “Reinvestment Plan”) provided 1,968,750 shares of common stock and the 1996 Employee Stock Purchase Plan (the “Purchase Plan”) provided 984,375 shares of common stock available for issuance. Employees may elect to make contributions to the Purchase Plan in an aggregate amount not less than 2% nor more than 10% of such employee’s total compensation. These contributions are then used to purchase stock during an offering period determined by the Corporation’s Administrative Committee. The purchase price of the stock is established by the Administrative Committee provided, however, that the purchase price will not be less than 85% of the lesser of the market price on the first day or last day of the offering period.
 
During 2005 and 2004, 61,803 and 58,083 shares, respectively, were issued under the Reinvestment Plan, with 1,320,858 shares available for future purchase as of December 31, 2005. During 2005 and 2004, 9,392 and 8,079 shares, respectively, were issued under the Purchase Plan, with 889,910 shares available for future purchase as of December 31, 2005.
 
Income Taxes
 
Deferred income taxes are provided on temporary differences between amounts reported for financial statement and tax purposes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax basis of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
Intangible Assets
 
On July 20, 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Accounting for Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which changed the initial measurement and subsequent recording of goodwill and intangible assets. The Corporation acquired intangible assets in connection with the acquisitions of Pennview Savings Bank, First County Bank and Suburban Community Bank, and acquisitions through Univest Investments, Inc. and Univest Insurance, Inc., that include goodwill, covenants not to compete and core deposit intangibles. In accordance with the adoption of SFAS 142, goodwill is no longer amortized. In accordance with the provisions of SFAS 142, the Corporation completes annual impairment tests. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. Core


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

deposit intangibles are being amortized over their average estimated useful lives of eight years. The covenants not to compete are being amortized over their three- to five-year contractual lives.
 
Mortgage servicing rights are recognized as separate assets when mortgage loans are sold and the rights are retained. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing period of the underlying mortgage loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the unamortized capitalized amount.
 
Retirement Plan, Supplemental Plans and Other Postretirement Benefit Plans
 
Substantially all employees are covered by a noncontributory retirement plan. The plan provides benefits based on a formula of each participant’s final average pay.
 
The Corporation also provides supplemental executive retirement benefits, a portion of which is in excess of limits imposed on qualified plans by federal tax law. These plans are non-qualified benefit plans.
 
The Corporation sponsors a 401(k) deferred salary savings plan, which is a qualified defined contribution plan, and which covers all employees of the Corporation and its subsidiaries, and provides that the Corporation make matching contributions as defined by the plan.
 
The Corporation provides certain postretirement healthcare and life insurance benefits for retired employees. The Corporation accrues the costs associated with providing these benefits during the active service periods of employees in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS 106”).
 
Statement of Cash Flows
 
The Corporation has defined those items included in the caption “Cash and due from banks” as cash and cash equivalents.
 
Trust Assets
 
Assets held by the Corporation in a fiduciary or agency capacity for its customers are not included in the consolidated financial statements since such items are not assets of the Corporation.
 
Stock Split
 
On March 23, 2005, the Corporation’s board of directors declared a three-for-two stock split in the form of a dividend distributed on April 29, 2005 to all shareholders of record as of April 6, 2005. All share and per share amounts have been retroactively adjusted to give effect to the stock split.
 
Earnings Per Share
 
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if option common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Comprehensive Income
 
Unrealized gains or losses on the Corporation’s available-for-sale securities and cash flow hedges are included in comprehensive income. The following shows the accumulated comprehensive income, net of income taxes, for the periods presented:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Net income
  $ 24,867     $ 23,591     $ 23,082  
Unrealized gain/(loss) on cash flow hedges
    (61 )     (3 )     (322 )
Unrealized gain/(loss) on available-for-sale investment securities
    (3,078 )     (614 )     (2,072 )
Less: reclassification adjustment for gains realized in net income
    98       693       1,349  
                         
Total comprehensive income
  $ 21,630     $ 22,281     $ 19,339  
                         
 
Recent Accounting Pronouncements
 
In December 2004 the Financial Accounting Standards Board revised Statement No. 123, “Accounting for Stock Based Compensation” (“SFAS 123R”). SFAS 123R required that the fair-value-based method of accounting for stock options be used for all public entities and eliminates alternative accounting methods; consequently, similar economic transactions will be accounted for similarly. Entities are required to estimate the number of instruments for which the requisite service is expected to be rendered as compared to the original statement which permitted entities to account for forfeitures as they occur. In addition, SFAS 123R amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Incremental compensation cost for a modification of the terms or conditions of an award is measured by comparing the fair value of the modified award with the fair value of the award immediately before the modification. On April 14, 2005 the Securities and Exchange Commission amended the compliance dates for SFAS 123R. Under the amended compliance dates, SFAS 123R becomes effective for public entities that do not file as small business issuers, as of the beginning of the first fiscal reporting period that begins after June 15, 2005. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. As of the required effective date, all public entities that used the fair-value-based method for either recognition or disclosure under the original statement will apply SFAS 123R using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards, for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under the original statement for either recognition or pro forma disclosures. For periods before the required effective date, those entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original statement. Pro forma disclosures under the original statement are presented in Note 1 “Stock Options.” Actual stock-based compensation expense for stock options, net of tax, to be recorded in the fiscal year 2006 under the transition method will be approximately $420 thousand. Future grants, unvested forfeitures of prior grants and unrecognizable differed tax benefits may alter this projected number. Under SFAS 123R compensation expense amounting to the entire discount for shares issued under employee share purchase plans must be recognized if the discount is greater than 5%. Actual stock-based compensation expense for shares issued under the Corporation’s employee stock purchase plan, to be recorded in the fiscal year 2006 under the transition method will be approximately $29 thousand.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
On March 1, 2005, the Federal Reserve Board adopted a final rule that allows the continued limited inclusion of trust preferred securities in the tier 1 capital of bank holding companies. The final rule became effective on April 11, 2005 for quarterly reporting periods beginning after July 1, 2005 and impacts the calculation of risk-based capital ratios. The final rule limits restricted core capital to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liabilities. Amounts of restricted core capital elements in excess of these limits generally may be included in tier 2 capital under quantitative limits which will be transitioned over a five-year period ending March 31, 2009. Under the new rule, the requirement for trust preferred securities to include a call option has been eliminated and standards for the junior subordinated debt underlying trust preferred securities eligible for tier 1 capital have been clarified. The Corporation’s trust preferred securities amount to less than the 25 percent limitation for tier 1 capital and none would be subject to the tighter quantitative limits of tier 2 capital under the new rule. The Corporation does not anticipate a material change in its risk-based capital ratios as a result of this new rule.
 
In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”.) SFAS 154 changes the accounting for and reporting of a voluntary change in accounting principle and replaces ABP Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Under Opinion No. 20, most changes in accounting principle were reported in the income statement of the period of change as a cumulative adjustment. However, under SFAS 154, a voluntary change in accounting principle must be shown retrospectively in the financial statements, if practicable, for all periods presented. In cases where retrospective application is impracticable, an adjustment to the assets, liabilities and a corresponding adjustment to retained earnings can be made as of the beginning of the earliest period for which retrospective application is practicable rather than being reported in the income statement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years after December 15, 2005.
 
Note 2.   Restrictions on Cash and Due from Bank Accounts
 
The Bank maintains reserve balances under Federal Reserve Bank requirements. The reserve requirement at December 31, 2005 was $7.3 million and was satisfied by vault cash held at the Bank’s branches. No additional reserves were required to be maintained at the Federal Reserve Bank of Philadelphia in excess of the required $25 thousand clearing balance requirement. The average balances at the Federal Reserve Bank of Philadelphia were $729 thousand and $858 thousand for the years ended December 31, 2005 and 2004, respectively.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 3.   Investment Securities
 
The following table shows the amortized cost and the approximate market value of the held-to-maturity securities and available-for-sale securities at December 31, 2005 and 2004, by maturity within each type:
 
                                                                 
    December 31, 2005     December 31, 2004  
          Gross
 		    Gross
 		                Gross
 		    Gross
 		       
    Amortized
 		    Unrealized
 		    Unrealized
 		    Market
 		    Amortized
 		    Unrealized
 		    Unrealized
 		    Market
 		 
    Cost     Gains     Losses     Value     Cost     Gains     Losses     Value  
 
Held-to-Maturity Securities
                                                               
U.S. Treasury, government corporations and agencies:
                                                               
Within 1 year
  $ 10,000     $  —      $ (262 )   $ 9,738     $ 23,092     $ 16     $ —     $ 23,108  
1 to 5 years
    —       —       —       —       9,999       —       (232 )     9,767  
                                                                 
      10,000       —       (262 )     9,738       33,091       16       (232 )     32,875  
                                                                 
State and political subdivisions:
                                                               
Over 10 years
    1,154       15       —       1,169       1,154       56       —       1,210  
                                                                 
      1,154       15       —       1,169       1,154       56       —       1,210  
                                                                 
Mortgage-backed securities:
                                                               
Within 1 year
    31        —        —       31       —       —       —       —  
1 to 5 years
    230       5       —       235       455       19       —       474  
5 to 10 years
    1,226       27       —       1,253       1,713       85       —       1,798  
Over 10 years
    2,155       93       —       2,248       3,038       201       —       3,239  
                                                                 
      3,642       125       —       3,767       5,206       305       —       5,511  
                                                                 
Other:
                                                               
Within 1 year
     —         —        —       —       15       —       —       15  
1 to 5 years
     —         —        —       —       523       1       —       524  
5 to 10 years
    12        —        —       12       11       —       —       11  
                                                                 
      12        —        —       12       549       1       —       550  
                                                                 
Total
  $ 14,808     $ 140     $ (262 )   $ 14,686     $ 40,000     $ 378     $ (232 )   $ 40,146  
                                                                 
Securities Available-for-Sale
                                                               
U.S. Treasury, government corporations and agencies:
                                                               
Within 1 year
  $ 62,075     $  —      $ (694 )   $ 61,381     $ 6,515     $ —     $ (45 )   $ 6,470  
1 to 5 years
    86,936        —        (1,569 )     85,367       115,881       159       (694 )     115,346  
                                                                 
      149,011        —        (2,263 )     146,748       122,396       159       (739 )     121,816  
                                                                 
State and political subdivisions:
                                                               
5 to 10 years
    19,370       1,203       —       20,573       7,681       625       —       8,306  
Over 10 years
    62,361       1,004       (303 )     63,062       66,186       2,778       (246 )     68,718  
                                                                 
      81,731       2,207       (303 )     83,635       73,867       3,403       (246 )     77,024  
                                                                 
Mortgage-backed securities:
                                                               
Within 1 year
    75        —        —       75       —       —       —       —  
1 to 5 years
    6,740       18       (98 )     6,660       2,382       72       —       2,454  
5 to 10 years
    368       10       —       378       7,863       87       —       7,950  
Over 10 years
    64,931       110       (1,063 )     63,978       70,554       834       (358 )     71,030  
                                                                 
      72,114       138       (1,161 )     71,091       80,799       993       (358 )     81,434  
                                                                 
Other:
                                                               
Within 1 year
    7,248        —        —       7,248       4,115       —       —       4,115  
1 to 5 years
    5,994        —        (19 )     5,975       4,997       36       —       5,033  
5 to 10 years
    4,999        —        (78 )     4,921       3,000       5       —       3,005  
Over 10 years
    8,875       64       (106 )     8,833       10,964       124       (13 )     11,075  
                                                                 
      27,116       64       (203 )     26,977       23,076       165       (13 )     23,228  
                                                                 
Total
  $ 329,972     $ 2,409     $ (3,930 )   $ 328,451     $ 300,138     $ 4,720     $ (1,356 )   $ 303,502  
                                                                 
 
Expected maturities will differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Securities with a market value of $241.2 million and $236.5 million at December 31, 2005 and 2004, respectively, were pledged to secure public deposits and for other purposes as required by law.
 
During the year ended December 31, 2005, available-for-sale securities with a fair value at the date of sale of $11.4 million were sold; $58.1 million were sold in 2004; and $105.1 million were sold in 2003. Gross realized gains on such sales totaled $151 thousand during 2005, $1.3 million in 2004 and $2.6 million in 2003. The gross realized losses totaled $1 thousand during 2005, $204 thousand in 2004, and $504 thousand in 2003. Tax expense related to net realized gains from the sales of investments securities for the years ended December 31, 2005, 2004 and 2003 were $53 thousand, $373 thousand, and $727 thousand, respectively. Accumulated other comprehensive loss related to debt securities of $989 thousand, net of taxes, is included in shareholders’ equity at December 31, 2005. Accumulated other comprehensive income related to debt securities of $2.2 million, net of taxes, has been included in shareholders’ equity at December 31, 2004. Unrealized losses in investment securities at December 31, 2005 and 2004 do not represent permanent impairments.
 
At December 31, 2005 and 2004, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.
 
The following table shows the amount of securities that were in an unrealized loss position at December 31, 2005:
 
                                                 
    Less than 12 Months     12 Months or Longer     Total  
    Fair
 		    Unrealized
 		    Fair
 		    Unrealized
 		    Fair
 		    Unrealized
 		 
    Value     Losses     Value     Losses     Value     Losses  
 
U.S. Treasury, government corporations and agencies
  $ 62,487     $ (846 )   $ 93,999     $ (1,679 )   $ 156,486     $ (2,525 )
State and political subdivisions
    9,090       (76 )     7,495       (227 )     16,585       (303 )
Mortgage-backed securities
    43,443       (416 )     21,275       (745 )     64,718       (1,161 )
Other
    11,897       (97 )     —       —       11,897       (97 )
                                                 
Subtotal, Debt Securities
    126,917       (1,435 )     122,769       (2,651 )     249,686       (4,086 )
Common Stock
    974       (106 )     —       —       974       (106 )
                                                 
Total temporarily impaired securities
  $ 127,891     $ (1,541 )   $ 122,769     $ (2,651 )   $ 250,660     $ (4,192 )
                                                 
 
As of December 31, 2005, the amount of unrealized losses, for less than twelve months, in debt and equity securities classified as either available-for-sale or held-to-maturity was $1.5 million and had a fair value of $127.9 million. The amount of unrealized losses, for twelve months or longer, in debt and equity securities classified as either available-for-sale or held-to-maturity was $2.7 million and had a fair value of $122.8 million. The Corporation believes that the unrealized losses listed in the twelve months or longer category are not other-than temporary because the securities have, subsequent to December 31, 2005, traded at book cost. As of December 31, 2005, the Corporation has concluded that the unrealized losses are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers of our investment portfolio. None of the investments are believed to be other-than-temporarily impaired. The Corporation has the ability and intent to hold the securities until maturity to recover the entire value.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 4.   Loans
 
The following is a summary of the major loan categories:
 
                 
    At December 31,  
    2005     2004  
 
Commercial, financial and agricultural
  $ 384,207     $ 368,685  
Real estate-commercial
    349,384       337,080  
Real estate-construction
    110,032       101,963  
Real estate-mortgage
    303,994       300,397  
Loans to individuals
    102,095       66,169  
                 
Total gross loans
    1,249,712       1,174,294  
Less: Unearned income
    (60 )     (114 )
                 
Total loans
  $ 1,249,652     $ 1,174,180  
                 
 
Net unamortized deferred loan origination fees for the years ended December 31, 2005 and 2004 were $1.5 million and $2.1 million, respectively.
 
Note 5.   Reserve for Loan Losses
 
A summary of the activity in the reserve for loan losses is as follows:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Balance at beginning of year
  $ 13,099     $ 12,788     $ 10,518  
Provision charged to operating expenses
    2,109       1,622       1,000  
Additions to loan loss reserve as a result of acquisitions
    —        —        2,083  
Recoveries
    1,414       433       526  
Loans charged off
    (3,259 )     (1,744 )     (1,339 )
                         
Balance at end of year
  $ 13,363     $ 13,099     $ 12,788  
                         
 
Information with respect to loans that are considered to be impaired under SFAS 114 is as follows:
 
                                 
    December 31,  
    2005     2004  
    Loan
 		    Specific
 		    Loan
 		    Specific
 		 
    Balance     Reserve     Balance     Reserve  
 
Average recorded investment in impaired loans
  $ 7,717             $ 9,094          
                                 
Recorded investment in impaired loans at year-end subject to a specific reserve for loan losses and corresponding specific reserve
  $ 3,263     $ 1,076     $ 6,205     $ 2,672  
Recorded investment in impaired loans at year-end requiring no specific reserve for loan losses
    —        —        3,885       —  
                                 
Recorded investment in impaired loans at year-end
  $ 3,263             $ 10,090          
                                 
Recorded investment in nonaccrual and restructured loans
  $ 3,263             $ 10,090          
                                 


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Loans greater than 90 days past due and still accruing interest were $610 thousand and $927 thousand at December 31, 2005 and 2004 respectively. Any income accrued on one- to four-family residential properties after the loan becomes 90 days past due is held in a reserve for uncollected interest. The reserve for uncollected interest was $7 thousand and $28 thousand at December 31, 2005 and 2004, respectively. Total other real estate owned at December 31, 2005 and 2004 was $344 thousand and $607 thousand, respectively.
 
The following is an analysis of interest on nonaccrual and restructured loans:
 
                         
    December 31,  
    2005     2004     2003  
 
Nonaccrual and restructured loans
  $ 3,263     $ 10,090     $ 8,586  
Interest income that would have been recognized under original terms
    521       582       403  
 
No interest income was recognized on these loans for the years ended December 31, 2005, 2004 and 2003.
 
Note 6.   Premises and Equipment
 
The following table reflects the components of premises and equipment:
 
                 
    At December 31,  
    2005     2004  
 
Land and land improvements
  $ 5,060     $ 4,410  
Premises and improvements
    23,929       23,242  
Furniture and equipment
    21,879       21,269  
                 
Total cost
    50,868       48,921  
Less: accumulated depreciation
    (29,233 )     (29,103 )
                 
Net book value
  $ 21,635     $ 19,818  
                 
 
Note 7.   Intangible Assets
 
In accordance with the provisions of SFAS 142, the Corporation has completed the annual impairment tests and no impairment was noted. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.
 
The Corporation has covenants not to compete, intangible assets due to branch acquisitions, core deposit intangibles 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 was: $532 thousand for the year ended December 31, 2005; $616 thousand for the year ended December 31, 2004; and $607 thousand for the year ended December 31, 2003. The Corporation also has goodwill with a net carrying amount of $41.0 million, which is deemed to be an indefinite intangible asset and will not be amortized. On December 13, 2004, Univest Insurance, Inc. acquired Donald K. Martin & Company. In connection with that acquisition, $204 thousand was recorded to goodwill during 2005. In connection with the acquisitions of First County Bank and Suburban Community Bank, the Corporation recorded $34.9 million of goodwill in 2003, which was adjusted for unrecorded deferred taxes during 2004.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
The following table reflects the components of intangible assets:
 
                                                 
    At December 31, 2005     At December 31, 2004  
          Accumulated
 		                Accumulated
 		       
    Gross
 		    Amortization
 		    Net
 		    Gross
 		    Amortization
 		    Net
 
    Carrying
 		    and Fair
 		    Carrying
 		    Carrying
 		    and Fair Value
 		    Carrying
 		 
    Amount     Value Adjustments     Amount     Amount     Adjustments     Amount  
 
Non-amortized intangible assets:
                                               
Goodwill
  $ 43,843     $ 2,845     $ 40,998     $ 43,639     $ 2,845     $ 40,794  
Amortized intangible assets:
                                               
Covenants not to compete
  $ 220     $ 170     $ 50     $ 200     $ 123     $ 77  
Branch acquisitions
    2,951       2,642       309       2,957       2,473       484  
Core Deposit Intangibles
    2,201       799       1,402       2,201       527       1,674  
Mortgage servicing rights, net
    1,441       813       628       1,363       831       532  
                                                 
Total amortized intangible assets
  $ 6,813     $ 4,424     $ 2,389     $ 6,721     $ 3,954     $ 2,767  
                                                 
 
The estimated aggregate amortization expense for each of the five succeeding fiscal years is:
 
         
Year
  Amount  
 
2006
  $ 543  
2007
    492  
2008
    330  
2009
    317  
2010
    281  
 
The following table reflects the components of mortgage servicing rights as of the periods indicated:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Mortgage servicing rights beginning balance
  $ 532     $ 569     $ 353  
Mortgage servicing rights capitalized
    78       87       428  
Mortgage servicing rights amortized
    (44 )     (62 )     (212 )
Fair market value adjustments
    62       (62 )     —  
                         
Mortgage servicing rights ending balance
  $ 628     $ 532     $ 569  
                         
Mortgage loans serviced for others
  $ 66,654     $ 69,345     $ 72,792  
                         
 
The balance of capitalized mortgage servicing rights, net of valuation allowances and accumulated amortization, included in other assets at December 31, 2005 was $628 thousand and at December 31, 2004 was $532 thousand. The aggregate fair value of these rights was $628 thousand and $532 thousand at December 31, 2005 and 2004, respectively. The fair value of mortgage servicing rights was determined using discount rates ranging from 5.1% to 7.5%. Amortization of mortgage servicing rights of approximately $44 thousand was recorded during 2005, $62 thousand during 2004, and $212 thousand during 2003. The valuation allowance was $27 thousand at December 31, 2005 and $89 thousand at December 31, 2004.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 8.   Income Taxes
 
The provision for federal and state income taxes included in the accompanying consolidated statements of income consists of the following:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Current:
                       
Federal
  $ 8,797     $ 7,932     $ 8,016  
State
    110       93       110  
Deferred
                       
Federal
    3       286       64  
                         
    $ 8,910     $ 8,311     $ 8,190  
                         
 
The provision for income taxes differs from the expected statutory provision as follows:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Expected provision at statutory rate
    35.0 %     35.0 %     35.0 %
Difference resulting from:
                       
Tax exempt interest income
    (6.8 )     (6.9 )     (6.7 )
Increase in value of contracts
    (1.3 )     (1.6 )     (1.9 )
Other, including state income taxes
    (0.5 )     (0.4 )     (0.2 )
                         
      26.4 %     26.1 %     26.2 %
                         
 
During the twelve months ended December 31, 2005 and 2004, the Corporation recorded tax benefits resulting from the exercise on employee stock options of $419 thousand and $720 thousand, respectively, to additional paid-in capital.
 
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
The assets and liabilities giving rise to the Corporation’s deferred tax assets and liabilities as of December 31, 2005 and 2004 are as follows:
 
                 
    At December 31,  
    2005     2004  
 
Deferred tax assets:
               
Loan loss
  $ 4,677     $ 4,585  
Deferred compensation
    1,844       1,795  
Postretirement benefits
    421       415  
Vacation accrual
    357       294  
Deferred fees and expense
    278       255  
Intangible assets
    404       525  
Mark-to-market adjustment*
    565       —  
Other
    186       344  
                 
Total deferred tax assets
    8,732       8,213  
                 
Deferred tax liabilities:
               
Market discount
    375       293  
Retirement plans
    1,078       1,194  
Depreciation
    261       202  
Prepaid expenses
    282       382  
Mark-to-market adjustment*
    —       1,177  
Other
    137       105  
                 
Total deferred tax liabilities
    2,133       3,353  
                 
Net deferred tax assets
  $ 6,599     $ 4,860  
                 
 
* Represents the amount the deferred taxes recorded to other comprehensive income (loss).
 
No valuation allowance was recognized for the deferred tax assets at December 31, 2005 and 2004, as management believes it is more likely than not that such deferred tax assets will be realized.
 
Note 9.   Retirement Plan and Supplemental Retirement Plans
 
Substantially all employees are covered by a noncontributory retirement plan. The plan provides benefits based on a formula of each participant’s final average pay.
 
The Corporation also provides supplemental executive retirement benefits, a portion of which is in excess of limits imposed on qualified plans by federal tax law. These plans are non-qualified benefit plans.
 
The Corporation provides certain postretirement healthcare and life insurance benefits for retired employees. The Corporation accrues the costs associated with providing these benefits during the active service periods of employees in accordance SFAS 106.
 
The Corporation sponsors a 401(k) deferred salary savings plan, which is a qualified defined contribution plan, and which covers all employees of the Corporation and its subsidiaries, and provides that the Corporation makes matching contributions as defined by the plan. Expense recorded by the Corporation for the 401(k) deferred salary savings plan for the years ended December 31, 2005, 2004 and 2003 was $456 thousand, $452 thousand and $371 thousand, respectively.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Information with respect to the Retirement and Supplemental Retirement Plans and Other Postretirement Benefits follows:
 
                                 
          Other Postretirement
 		 
    Retirement Plans     Benefits  
    2005     2004     2005     2004  
 
Change in benefit obligation:
                               
Benefit obligation at beginning of year
  $ 25,724     $ 23,717     $ 1,184     $ 1,077  
Service cost
    1,235       1,162       52       48  
Interest cost
    1,553       1,449       71       65  
Actuarial loss
    1,067       776       47       77  
Benefits paid
    (1,577 )     (1,380 )     (89 )     (83 )
                                 
Benefit obligation at end of year
  $ 28,002     $ 25,724     $ 1,265     $ 1,184  
                                 
Change in plan assets:
                               
Fair value of plan assets at beginning of year
  $ 18,768     $ 16,467     $ —     $ —  
Actual return on plan assets
    895       1,315       —       —  
Benefits paid
    (1,577 )     (1,380 )     (89 )     (83 )
Employer contribution and non-qualified benefit payments
    1,500       2,366       89       83  
                                 
Fair value of plan assets at end of year
    19,586       18,768       —       —  
                                 
Funded status
    (8,416 )     (6,956 )     (1,265 )     (1,184 )
Unrecognized net actuarial gain
    6,348       4,895       218       178  
Unrecognized prior service costs
    (128 )     (201 )     (170 )     (190 )
                                 
Net amount recognized
  $ (2,196 )   $ (2,262 )   $ (1,217 )   $ (1,196 )
                                 
Prepaid benefit cost
  $ 3,362     $ 3,055     $ —     $ —  
Accrued benefit cost
    (5,558 )     (5,317 )     (1,217 )     (1,196 )
                                 
Net amount recognized
  $ (2,196 )   $ (2,262 )   $ (1,217 )   $ (1,196 )
                                 
 
Information for the pension plans with an accumulated benefit obligation in excess of plan assets:
 
                 
    At December 31,  
    2005     2004  
 
Projected benefit obligation
  $ 22,203     $ 19,559  
Accumulated benefit obligation
    19,250       17,600  
Fair value of plan assets
    19,586       18,768  


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
The retirement benefit cost includes the following components:
 
                                                 
          Other Postretirement
 		 
    Retirement Plans     Benefits  
    2005     2004     2003     2005     2004     2003  
 
Service cost
  $ 1,235     $ 1,162     $ 1,780     $ 52     $ 48     $ 42  
Interest cost
    1,553       1,449       1,425       71       65       63  
Expected return on plan assets
    (1,483 )     (1,411 )     (1,240 )     7       6       —  
Amortization of prior service cost
    129       145       75       (20 )     (20 )     (20 )
                                                 
Net periodic benefit cost
  $ 1,434     $ 1,345     $ 2,040     $ 110     $ 99     $ 85  
                                                 
 
There was no minimum liability included in other comprehensive income.
 
The following benefit payments, which reflect an expected future service, as appropriate, are expected to be paid:
 
                 
          Other
 		 
    Retirement
 		    Postretirement
 		 
For the Fiscal Year Ending:
  Plans     Benefits  
 
2006
  $ 1,550     $ 94  
2007
    1,603       99  
2008
    1,689       104  
2009
    1,708       109  
2010
    1,872       115  
Years 2011-2015
    11,426       610  
 
Weighted-average assumptions used to determine benefit obligations at December 31, 2005 and 2004 were as follows:
 
                                 
          Other
 		 
          Postretirement
 		 
    Retirement Plans     Benefits  
    2005     2004     2005     2004  
 
Assumed discount rate for obligation
    6.0 %     6.2 %     6.0 %     6.2 %
Assumed salary increase rate
    5.1 %     5.1 %     —       —  
 
Weighted-average assumptions used to determine net periodic costs for the years ended December 31, 2005 and 2004 were as follows:
 
                                 
          Other
 		 
          Postretirement
 		 
    Retirement Plans     Benefits  
    2005     2004     2005     2004  
 
Assumed discount rate for obligation
    6.2 %     6.2 %     6.2 %     6.2 %
Assumed long-term rate of investment return
    8.0       8.5       —       —  
Assumed salary increase rate
    5.1       5.1       —       —  
 
Historical investment returns is the basis used to determine the overall expected long-term rate of return on assets.
 
                         
Assumed Health Care Cost Trend Rates
  2005     2004     2003  
 
Health care cost trend rate assumed for next year
    6.5 %     6.5 %     6.5 %
Rate to which the cost trend rate is assumed to decline
    5.0       5.0       5.0  
Year that the rate reaches the ultimate rate
    2007       2006       2005  


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
 
                 
    One Percentage Point  
    Increase     Decrease  
 
Effect on total of service and interest cost components
  $ 4     $ (4 )
Effect on postretirement benefit obligation
    41       (38 )
 
The Corporation’s pension plan asset allocation at December 31, 2005 and 2004, by asset category are as follows:
 
                 
    Percentage of
 		 
    Plan Assets at
 		 
    December 31,  
Asset Category:
  2005     2004  
 
Equity securities
    51 %     53 %
Debt securities
    43       42  
Other
    6       5  
                 
Total
    100 %     100 %
                 
 
Plan assets include marketable equity securities, corporate and government debt securities, and certificates of deposit. The investment strategy is to keep a 50% equity to 50% fixed income mix to achieve the overall expected long-term rate of return of 8.0%. Equity securities do not include any common stock of the Corporation.
 
Note 10.   Long-Term Incentive Plan
 
The Corporation adopted the shareholders’ approved 2003 Long-Term Incentive Plan to replace the 1993 Long-Term Incentive Plan at its expiration. The 385,546 unissued common shares remaining under the 1993 plan expired and are no longer available for future options. There were 352,874 options to purchase common shares outstanding at December 31, 2005 under the 1993 plan. The Corporation may grant options to employees to purchase up to 1,500,000 shares of common stock under the 2003 plan. The plan provides for the issuance of options to purchase common shares at prices not less than 100 percent of the fair market value at the date of option grant. After two years, 33 percent of the optioned shares are exercisable each year for a period not exceeding ten years. There were 1,263,651 common shares available for future grants and 236,349 options to purchase common shares were outstanding at December 31, 2005 under the 2003 plan.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Transactions involving the plans are summarized as follows:
 
                 
          Weighted
 		 
          Average
 		 
          Exercise
 		 
    Shares
 		    Price
 		 
    Under Option     Per Share  
 
Outstanding at December 31, 2002
    739,101     $ 16.26  
Granted
    133,649       28.27  
Forfeited
    (25,000 )     17.39  
Exercised
    (100,821 )     14.00  
                 
Outstanding at December 31, 2003
    746,929       18.67  
                 
Forfeited
    (3,600 )     28.27  
Exercised
    (68,114 )     13.99  
                 
Outstanding at December 31, 2004
    675,215       19.09  
                 
Granted
    113,800       24.37  
Forfeited
    (15,001 )     24.23  
Exercised
    (184,791 )     14.04  
                 
Outstanding at December 31, 2005
    589,223     $ 21.57  
                 
 
The following table summarizes the Corporation’s stock options outstanding at December 31, 2005:
 
                                         
    Options Outstanding     Options Exercisable  
          Weighted
 		    Weighted
 		          Weighted
 		 
          Average
 		    Average
 		          Average
 		 
          Exercise
 		    Remaining
 		          Exercise
 		 
          Price Per
 		    Contractual
 		          Price Per
 		 
Exercise Prices
  Shares     Share     Life in Years     Shares     Share  
 
$11.87-$13.52
    86,402     $ 12.29       1.1       86,402     $ 12.29  
$13.52-$18.85
    126,998       18.85       1.9       126,998       18.85  
$18.85-$21.62
    139,474       21.62       2.7       98,097       21.62  
$21.62-$24.70
    110,800       24.27       10.0       —       —  
$24.70-$28.27
    125,549       28.26       7.2       50,646       28.26  
                                         
      589,223     $ 21.57       4.6       362,143     $ 19.35  
                                         
 
Note 11.   Time Deposits
 
The aggregate amount of certificates of deposit in denominations of $100 thousand or more was $128.6 million at December 31, 2005 and $99.8 million at December 31, 2004, with interest expense of $3.7 million for 2005 and $2.1 million for 2004. Other time deposits in denominations of $100 thousand or more were $12.0 million at December 31, 2005, and $12.8 million at December 31, 2004, with interest expense of $437 thousand for 2005 and $212 thousand for 2004.


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Table of Contents

 
UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
At December 31, 2005, the scheduled maturities of time deposits in denominations of $100 thousand or more are as follows:
 
         
Due in 2006
  $ 107,753  
Due in 2007
    19,645  
Due in 2008
    4,187  
Due in 2009
    3,293  
Due in 2010
    4,174  
Thereafter
    1,590  
         
Total
  $ 140,642  
         
 
Note 12.   Borrowings
 
At December 31, 2005 and 2004, long-term borrowings consisted of the following:
 
                                     
    Balance     Interest Rate      
    2005     2004     2005     2004     Maturity
 
Federal Home Loan Bank Advances*
  $ 54,575     $ 54,575       5.30 %     5.30 %   September 2006 - January 2013
Subordinated Term Loan Note
    3,750       4,250       5.50 %     5.50 %   April 2013
Subordinated Term Loan Note
    7,500       8,500       5.79 %     3.70 %   May 2013
Trust Preferred Securities
    20,619       20,619       7.60 %     5.11 %   October 2033
                                     
    $ 86,444     $ 87,944                      
                                     
 
* Federal Home Loan Bank Advances are calculated at a weighted average rate and do not include the unamortized fair value adjustment of $2.0 million and $2.5 million, at December 31, 2005 and 2004, respectively, recorded on debt assumed through the 2003 acquisitions.
 
The contractual maturities of long-term borrowings as of December 31, 2005 are as follows:
 
         
Due in 2006
  $ 1,575  
Due in 2007
    2,500  
Due in 2008
    1,500  
Due in 2009
    18,000  
Due in 2010
    28,500  
Thereafter
    34,369  
         
    $ 86,444  
         
 
Advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”) are collateralized by Federal Home Loan Bank stock and substantially all first mortgage loans of the Bank. As a result of the acquisitions of First County Bank and Suburban Community Bank, $18.0 million in FHLB advances were assumed. The net carrying value of the fair market value adjustment of the assumed advances was $2.0 million at December 31, 2005. The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $362.5 million. At December 31, 2005, the Bank’s outstanding borrowings under the FHLB credit facilities totaled $54.6 million. The maximum borrowing capacity changes as a function of the Bank’s qualifying collateral assets and the amount of funds received may be reduced by additional required purchases of FHLB stock. Included in the


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

$54.6 million of outstanding FHLB borrowings are $54.5 million of convertible advances whereby the FHLB has the option at a pre-determined time to convert the fixed interest rate to an adjustable rate tied to three-month LIBOR. The Bank has the option to prepay these advances without penalty if the rate on these borrowings is converted and on each quarterly reset date thereafter. Management does not believe that conversion is likely unless short-term interest rates increase several hundred basis points.
 
The Corporation secured two subordinated term loan notes during the second quarter of 2003. The first note was issued for $5.0 million at the fixed rate of 5.5% per annum. This note converts to a floating rate in second quarter 2008 based upon the one-month LIBOR plus 1.40% per annum. Quarterly principal and interest payments are made on this note. The second note was issued for $10.0 million at a floating rate based upon the one-month LIBOR plus 1.40% per annum. Quarterly principal and interest payments are made on this note. Both of these notes mature in second quarter 2013. At December 31, 2005, the outstanding balance of these notes was $11.3 million.
 
On August 27, 2003, the Corporation issued $20.0 million of Capital Securities of Univest Capital Trust I, a Delaware statutory trust formed by the Corporation. This issuance constitutes Trust Preferred Securities, which were completed through a placement in Junior Subordinated Debentures of the Corporation. The 30-year term securities were issued on a variable rate based upon the published Libor rate plus 3.05% per annum. The initial interest rate of the securities is 4.19% and is callable by Univest at par in whole or in part after five years. Quarterly interest payments are made on this note. At December 31, 2005, the $20.6 million in capital securities qualified as Tier 1 capital under capital guidelines of the Federal Reserve. In December 2003, the Financial Accounting Standards Board (“FASB”) 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 Univest Capital Trust I, which maintains the Trust Preferred Securities, in the first quarter of 2004. The result was an increase in the junior debt of $619 thousand on the balance sheet. The proceeds from the Trust Preferred Securities were used to support the future growth of the Corporation and its banking subsidiary, the Bank.
 
The Bank maintains federal fund credit lines with several correspondent banks totaling $70.0 million. At December 31, 2005, there were no outstanding borrowings under these lines. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.
 
The Corporation, through the Bank, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At December 31, 2005, the Corporation had no outstanding borrowings from this line.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
The following table details key information pertaining to securities sold under agreement to repurchase on an overnight basis for the periods indicated:
 
                         
    2005     2004     2003  
 
Balance at December 31
  $ 108,312     $ 104,442     $ 100,630  
Weighted average interest rate at year end
    2.1 %     0.7 %     0.6 %
Maximum amount outstanding at any month’s end
  $ 111,624     $ 117,664     $ 100,630  
Average amount outstanding during the year
  $ 98,620     $ 98,735     $ 80,810  
Weighted average interest rate during the year
    1.4 %     0.7 %     0.8 %
 
Note 13.   Earnings per Share
 
The following table sets forth the computation of basic and diluted earnings per share:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
 
Numerator:
                       
Numerator for basic and diluted earnings per share — income available to common shareholders
  $ 24,867     $ 23,591     $ 23,082  
                         
Denominator:
                       
Denominator for basic earnings per share — weighted-average shares outstanding
    12,867       12,841       12,811  
Effect of dilutive securities:
                       
Employee stock options
    141       246       156  
                         
Denominator for diluted earnings per share — adjusted weighted-average shares outstanding
    13,008       13,087       12,967  
                         
Basic earnings per share
  $ 1.93     $ 1.84     $ 1.80  
                         
Diluted earnings per share
  $ 1.91     $ 1.80     $ 1.78  
                         
 
Note 14.   Commitments and Contingencies
 
Loan commitments are made to accommodate the financial needs of the Bank’s customers. The Bank offers commercial, mortgage, and consumer credit products to their customers in the normal course of business, which are detailed in Note 4. These products represent a diversified credit portfolio and are generally issued to borrowers within the Bank’s branch office systems in eastern Pennsylvania. The ability of the customers to repay their credit is, to some extent, dependent upon the economy in the Bank’s market areas. Collateral is obtained based on management’s credit assessment of the customer.
 
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. If funded the majority of the letters of credit carry current market interest rates if converted to loans. Because letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The carrying amount is recorded unamortized deferred fees.
 
The maximum potential amount of future payments under the guarantee is $60.7 million.
 
The current carrying amount of the contingent obligation is $101 thousand.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
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.
 
The Bank also controls their credit risk by limiting the amount of credit to any business, institution, or individual. As of December 31, 2005, the Bank has identified the due from banks’ balance of $30.8 million as a significant concentration of credit risk because it contains a balance due from a single depository institution that is unsecured. Management evaluates the creditworthiness of the institution on at least a quarterly basis in an effort to monitor its credit risk associated with this concentration.
 
The Bank maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded. At December 31, 2005 the reserve for off-balance sheet credits was $105 thousand.
 
The following schedule summarizes the Corporation’s off-balance sheet financial instruments:
 
         
    Contract or
 		 
    Notional Amount  
 
Financial instruments representing credit risk:
       
Commitments to extend credit
  $ 448,333  
Letters of credit
    60,731  
 
As of December 31, 2005, the Corporation and its subsidiaries were obligated under noncancelable leases for various premises and equipment. A summary of the future minimum rental commitments under noncancelable operating leases net of related sublease revenue is as follows:
 
         
Year
  Amount  
 
2006
  $ 1,373  
2007
    1,167  
2008
    1,056  
2009
    738  
2010
    580  
Thereafter
    3,308  
         
Total
  $ 8,222  
         
 
Rental expense charged to operations was $1.5 million, $1.3 million, and $1.1 million for the years ended December 31, 2005, 2004 and 2003, respectively.
 
Note 15.   Derivative Instruments and Hedging Activities
 
The Corporation uses interest-rate swap agreements that convert a portion of its floating rate commercial loan portfolio 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 interest rate changes on the Corporation’s net interest income.
 
At December 31, 2005, the total notional amount of the “Pay Floating, Receive Fixed” swap outstanding was $20.0 million. The $20.0 million in notional amount of the interest-rate swap outstanding at December 31, 2005 expires on November 2, 2006. There was one swap outstanding during 2004 that matured on January 7, 2004.
 
The Corporation’s current credit exposure on swaps is limited to the value of interest-rate swaps that have become favorable to the Corporation. At December 31, 2005, the market value of interest-rate swaps in an unfavorable position was $94 thousand. Credit risk also exists when the counterparty to a derivative


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

contract with an unrealized gain fails to perform according to the terms of the agreement. Changes in the fair value of derivative instruments designated as hedges of future cash flows are recognized in equity until the underlying cash flows occur, at which time the deferred gains and losses are included in the initial measurement of the associated asset or liability or are recognized in income. All forecasted transactions are expected to occur by the third quarter of 2006.
 
Following is an analysis of the changes in the net gain (loss) on cash flow hedges recognized in equity:
 
                         
    2005     2004     2003  
 
Balance at beginning of year
  $ —     $ 3     $ 325  
Net loss for the year
    (61 )     (3 )     (322 )
                         
Balance at end of year
  $ (61 )   $ —     $ 3  
                         
 
Note 16.   Fair Values of Financial Instruments
 
Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”), requires all entities to disclose the estimated fair value of its financial instruments whether or not recognized in the balance sheet. For the Corporation, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Corporation’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporation’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities other than residential mortgage loans held-for-sale and those investment securities classified as available-for-sale. Significant estimations and present value calculations, which are affected by the assumptions used, including the discount rate and estimate of future cash flows, were used for purposes of this disclosure.
 
The Corporation utilizes a third-party vendor to determine the estimated fair values for those financial instruments that lack an available trading market, which include: loans, deposit liabilities, short-term borrowings, long-term debt, commitments to extend credit and letters of credit. Various methodologies are described in the accompanying notes.
 
SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.
 
Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of readily available active secondary market valuations for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Certain estimated fair values cannot be substantiated by comparison to independent valuation sources and, in many cases, might not be realized in immediate settlement of the instrument.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
The following table represents the estimates of fair value of financial instruments:
 
                                 
    December 31, 2005     December 31, 2004  
    Carrying, Notional
 		          Carrying, Notional
 		       
    or Contract
 		          or Contract
 		       
    Amount     Fair Value     Amount     Fair Value  
 
Assets:
                               
Cash and short-term assets
  $ 59,439     $ 59,439     $ 37,745     $ 37,745  
Investment securities
    343,259       343,137       343,502       343,648  
Net loans
    1,236,289       1,235,483       1,161,081       1,167,848  
Liabilities:
                               
Deposits
    1,366,715       1,361,122       1,270,884       1,271,568  
Short-term borrowings
    108,312       108,387       121,942       121,942  
Long-term debt
    88,449       87,929       90,418       92,450  
Off-Balance-Sheet:
                               
Commitments to extend credit
    448,333       (1,539 )     444,162       (1,446 )
Letters of credit
    60,731       (911 )     58,368       (876 )
Forward contracts
    —       —       318       4  
Interest-rate swap, notional principal amount
    20,000       (61 )     —       —  
 
The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:
 
Cash and due from banks and short-term investments:  The carrying amounts reported in the balance sheets for cash and due from banks, interest-earning deposits with other banks, and federal funds sold and other short-term investments approximates those assets’ fair values.
 
Investment securities (including mortgage-backed securities):  Fair values for investment securities are based on quoted market prices.
 
Loans:  The fair values for loans are estimated using discounted cash flow analyses, using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and imbedded prepayment options.
 
Deposit liabilities:  The fair values for deposits with fixed maturities are estimated by discounting the final maturity, and the fair values for non-maturity deposits are established using a decay factor estimate of cash flows based upon industry-accepted assumptions. The discount rate applied to deposits consists of an appropriate risk free rate and included components for credit risk, operating expense, and imbedded prepayment options.
 
Short-term borrowings:  The carrying amounts of securities sold under repurchase agreements, and other short-term borrowings approximate their fair values.
 
Long-term debt:  The fair values of the Corporation’s long-term borrowings (other than deposits) are estimated using a discounted cash flow analysis using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and imbedded prepayment options.
 
Off-balance-sheet instruments:  Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 17.   Regulatory Matters
 
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and Bank’s financial statements. Capital adequacy guidelines, and additionally for the Bank prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
 
                                                 
                For Capital
 		    To Be Well-
 		 
                Adequacy
 		    Capitalized Under Prompt Corrective
 		 
    Actual     Purposes     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
 
As of December 31, 2005:
                                               
Total Capital (to Risk-Weighted Assets):
                                               
Consolidated
  $ 171,484       12.48 %   $ 109,922       8.00 %   $ 137,403       10.00 %
Univest National Bank
    166,620       12.30       108,352       8.00       135,440       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Consolidated
    151,266       11.01       54,961       4.00       82,442       6.00  
Univest National Bank
    153,152       11.31       54,176       4.00       81,264       6.00  
Tier 1 Capital (to Average Assets):
                                               
Consolidated
    151,266       8.88       51,104       3.00       68,139       4.00  
Univest National Bank
    153,152       9.06       50,697       3.00       67,596       4.00  
As of December 31, 2004:
                                               
Total Capital (to Risk-Weighted Assets):
                                               
Consolidated
  $ 156,945       12.36 %   $ 101,577       8.00 %   $ 126,971       10.00 %
Univest National Bank
    153,280       12.24       100,188       8.00       125,235       10.00  
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Consolidated
    135,123       10.64       50,788       4.00       76,182       6.00  
Univest National Bank
    139,762       11.16       50,094       4.00       75,141       6.00  
Tier 1 Capital (to Average Assets):
                                               
Consolidated
    135,123       8.44       48,052       3.00       64,070       4.00  
Univest National Bank
    139,762       8.82       47,520       3.00       63,360       4.00  
 
Management believes, as of December 31, 2005, that the Corporation and the Bank met all capital adequacy requirements to which it is subject. The Corporation, like other bank holding companies, currently is required to maintain Tier 1 Capital and Total Capital (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

balance-sheet items, such as standby letters of credit). The Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and Total Capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. As of December 31, 2005, the most recent notification from the Office of Comptroller of the Currency and Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
 
Dividend and Other Restrictions
 
The primary source of the Corporation’s dividends paid to its shareholders is from the earnings of its subsidiaries paid to the Corporation in the form of dividends.
 
The approval of the Office of Comptroller of the Currency is required for a national bank to pay dividends if the total of all dividends declared in any calendar year exceeds the Bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Bank can declare dividends in 2006 without approval of the Office of Comptroller of the Currency of approximately $24.0 million plus an additional amount equal to the Bank’s net profits for 2006 up to the date of any such dividend declaration.
 
The Federal Reserve Act requires that extension of credit by the Bank to certain affiliates, including Univest Corporation (parent), be secured by readily marketable securities, that extension of credit to any one affiliate be limited to 10% of the Bank’s capital and surplus (as defined), and that extensions of credit to all such affiliates be limited to 20% of the Bank’s capital and surplus.
 
Note 18.   Related Party Transactions
 
At December 31, 2005, loans to directors and executive officers of the Corporation and companies in which directors have an interest (“Related Parties”) aggregated $36.5 million. These loans have been made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with customers and did not involve more than the normal risk of collectibility or present other unfavorable terms.
 
The summary of activity for the past year is as follows:
 
                             
Balance at
 		          Amounts
 		    Balance at
 		 
January 1, 2005
    Additions     Collected     December 31, 2005  
 
$ 24,600     $ 24,789     $ (12,894 )   $ 36,495  
 
The Corporation paid $2.0 million and $1.9 million during 2005 and 2004, respectively, to H. Mininger & Son, Inc. for building expansion projects which were in the normal course of business on substantially the same terms as available for others. H. Ray Mininger, a director of the Corporation, is president of H. Mininger & Son, Inc.
 
Deposits received from Related Parties as of December 31, 2005 was $9.6 million.
 
At December 31, 2005, the Bank had commitment to extend credit to Related Parties of $9.4 million and standby and commercial letters of credit for Related Parties of $954 thousand. These commitments have been made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with customers and did not involve more than the normal risk of collectibility or present other unfavorable terms.


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 19.   Parent Company Financial Information
 
Condensed financial statements of Univest, parent company only, follow:
 
                 
    At December 31,  
Balance Sheets   2005     2004  
 
Assets:
               
Deposits with bank subsidiary
  $ 90     $ 44  
Investments in securities
    3,603       2,840  
Investments in subsidiaries, at equity in net assets:
               
Bank
    179,951       169,952  
Non-banks
    20,336       20,241  
Other assets
    11,023       10,145  
                 
Total assets
  $ 215,003     $ 203,222  
                 
Liabilities:
               
Dividends payable
  $ 2,463     $ 2,142  
Subordinated capital notes
    11,250       12,750  
Junior subordinated debentures
    20,619       20,619  
Other liabilities
    7,591       7,318  
                 
Total liabilities
    41,923       42,829  
                 
Shareholders’ equity
    173,080       160,393  
                 
Total liabilities and shareholders’ equity
  $ 215,003     $ 203,222  
                 
 
                         
    For the Years Ended December 31,  
Statements of Income   2005     2004     2003  
 
Dividends from bank
  $ 11,183     $ 10,141     $ 4,804  
Dividends from non-banks
    1,200       1,190       1,190  
Other income
    12,357       12,451       12,886  
                         
Total operating income
    24,740       23,782       18,880  
Operating expenses
    13,448       12,506       13,107  
                         
Income before income tax benefit and equity in undistributed income of subsidiaries
    11,292       11,276       5,773  
Applicable income tax benefit
    (350 )     (54 )     (44 )
                         
Income before equity in undistributed income of subsidiaries
    11,642       11,330       5,817  
Equity in undistributed income of subsidiaries:
                       
Bank
    13,130       12,228       17,205  
Non-banks
    95       33       60  
                         
Net income
  $ 24,867     $ 23,591     $ 23,082  
                         
 


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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

                         
    For the Years Ended December 31,  
Statements of Cash Flows   2005     2004     2003  
 
Cash flows from operating activities:
                       
Net income
  $ 24,867     $ 23,591     $ 23,082  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Equity in undistributed net income/loss of subsidiaries
    (13,225 )     (12,261 )     (17,265 )
Deconsolidation of capital trust
    —       619       —  
Realized gains on investment securities
    (64 )     (65 )     (166 )
Increase in other assets
    (1,230 )     (3,638 )     (1,238 )
Depreciation of premises and equipment
    371       368       381  
Increase (decrease) in other liabilities
    330       (378 )     1,105  
                         
Net cash provided by operating activities
    11,049       8,236       5,899  
                         
Cash flows from investing activities:
                       
Investments in subsidiaries
     —        —       (32,126 )
Proceeds from sales of securities
    1,909       2,903       1,893  
Purchases of investment securities
    (2,790 )     (2,633 )     (2,870 )
                         
Net cash (used in) provided by investing activities
    (881 )     270       (33,103 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of long-term debt
     —        —       35,619  
Repayment of long-term debt
    (1,500 )     (1,500 )     (750 )
Purchases of treasury stock
    (4,684 )     (2,740 )     (4,242 )
Stock issued under dividend reinvestment and employee stock purchase plans
    1,993       1,967       1,801  
Proceeds from exercise of stock options
    3,014       1,698       1,610  
Cash dividends paid
    (8,945 )     (8,128 )     (6,714 )
                         
Net cash (used in) provided by financing activities
    (10,122 )     (8,703 )     27,324  
                         
Net increase (decrease) in deposits with bank subsidiary
    46       (197 )     120  
Deposits with bank subsidiary at beginning of year
    44       241       121  
                         
Deposits with bank subsidiary at end of year
  $ 90     $ 44     $ 241  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid during the year for:
                       
Interest
  $ 1,807     $ 1,399     $ 317  
                         
Income tax
  $ 8,231     $ 7,150     $ 8,576  
                         

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UNIVEST CORPORATION OF PENNSYLVANIA
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 20.   Quarterly Data (Unaudited)
 
The unaudited results of operations for the quarters for the years ended December 31, 2005 and 2004 were as follows:
 
                                 
2005 Quarterly Financial Data:   Fourth     Third     Second     First  
 
Interest income
  $ 23,122     $ 22,165     $ 20,667     $ 19,548  
Interest expense
    7,932       6,964       6,007       5,361  
                                 
Net interest income
    15,190       15,201       14,660       14,187  
Provision for loan losses
    700       509       450       450  
                                 
Net interest income after provision for loan losses
    14,490       14,692       14,210       13,737  
Net gains on sales of securities
     —        63       87        —   
Noninterest income
    5,789       5,493       5,295       5,717  
Noninterest expense
    11,623       11,071       11,447       11,655  
                                 
Income before income taxes
    8,656       9,177       8,145       7,799  
Applicable income taxes
    2,262       2,475       2,145       2,028  
                                 
Net income
  $ 6,394     $ 6,702     $ 6,000     $ 5,771  
                                 
Per share data:
                               
Net income:
                               
Basic
  $ 0.500     $ 0.519     $ 0.466     $ 0.448  
                                 
Diluted
  $ 0.496     $ 0.514     $ 0.461     $ 0.442  
                                 
Dividends per share
  $ 0.190     $ 0.190     $ 0.170     $ 0.167  
                                 
 
                                 
2004 Quarterly Financial Data:   Fourth     Third     Second     First  
 
Interest income
  $ 19,177     $ 18,798     $ 18,298     $ 18,516  
Interest expense
    5,118       4,785       4,430       4,615  
                                 
Net interest income
    14,059       14,013       13,868       13,901  
Provision for loan losses
    316       474       158       674  
                                 
Net interest income after provision for loan losses
    13,743       13,539       13,710       13,227  
Net gains on sales of securities
    235       246       —       585  
Noninterest income
    5,467       5,330       5,558       5,182  
Noninterest expense
    10,376       11,134       11,757       11,653  
                                 
Income before income taxes
    9,069       7,981       7,511       7,341  
Applicable income taxes
    2,406       2,092       1,922       1,891  
                                 
Net income
  $ 6,663     $ 5,889     $ 5,589     $ 5,450  
                                 
Per share data:
                               
Net income:
                               
Basic
  $ 0.518     $ 0.460     $ 0.435     $ 0.425  
                                 
Diluted
  $ 0.510     $ 0.453     $ 0.426     $ 0.415  
                                 
Dividends per share
  $ 0.167     $ 0.167     $ 0.167     $ 0.167  
                                 


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Item 9.   Change in and Disagreements with Accountants on Accounting and Financial Disclosures
 
None.
 
Item 9A.   Controls and Procedures
 
Disclosure Controls and Procedures
 
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are in place to assure that all material information is collected and disclosed in accordance with Rule 13a — 15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on their evaluation Management believes that the financial information required to be disclosed in accordance with the Securities Exchange Act of 1934 is presented fairly, recorded summarized and reported within the required time periods.
 
Management’s Report on Internal Control over Financial Reporting
 
Internal controls over financial reporting are the responsibility of the Management of the Corporation. Based on their assessment, Management believes the internal control process is effective as of December 31, 2005, although no evaluation of controls can provide absolute assurance that control weaknesses or fraud activity does not exist at the Corporation.
 
Management is required to base its assessment of the effectiveness of internal control over financial reporting on a suitable, recognized control framework. Our assessment was based on the “Internal Control-Integrated Framework,” which was developed by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
 
The Corporation’s financial information as shown in the Annual Report Form 10-K for the Years 2005 and 2004 has been audited by KPMG LLP, independent registered public accounting firm. Ernst & Young LLP audited the Year 2003, and their consent for their opinion is part of the Annual Report Form 10-K. Both firms, for their respective audit years, presented the Corporation with unqualified opinions.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Univest Corporation of Pennsylvania:
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that Univest Corporation of Pennsylvania and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Company management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2005, and our report dated February  28, 2006 expressed an unqualified opinion on those consolidated financial statements. The accompanying consolidated financial statements of the Company for the year ended December 31, 2003, were audited by other auditors whose report thereon dated February 23, 2004, expressed an unqualified opinion on those statements.
 
/s/ KPMG LLP
 
 
Philadelphia, Pennsylvania
February 28, 2006


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Item 9B.   Other Information
 
None.
 
PART III
 
Item 10.   Directors and Executive Officers of the Registrant
 
Information required by Items 401, 405 and 406 of Regulation S-K are incorporated herein by reference from the Registrant’s definitive proxy statement on Schedule 14A for the annual meeting of shareholders on April 11, 2006 (“2006 Proxy”), under the headings: “Election of Directors,” “Compliance with Section 16(a) of the Securities Exchange Act of 1954,” “The Board, the Board’s Committees and Their Functions,” “Audit Committee,” “Nominating Committee,” and “Code of Conduct.”
 
The Corporation has adopted a Code of Conduct for Directors and a Code of Conduct for all officers and employees, which includes the CEO and senior financial officers. The waiver reporting requirement process was established in 2003 and there have been no waivers. The codes of conduct are available on the Corporation’s website at www.univest.net and are also available to any person without charge by sending a request to the Corporate Secretary at Univest Corporation, P. O. Box 64197, Souderton, PA 18964.
 
Item 11.   Executive Compensation
 
Information required by Item 402 of Regulation S-K is incorporated herein by reference from the Registrant’s 2006 Proxy under the headings: “The Board, the Board’s Committees and Their Functions,” “Compensation and Additional Information,” “Retirement, Salary Continuation, and Deferred Salary Savings Plans,” and “Comparison of 5 Year Cumulative Total Return.”
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management
 
Information required by Items 201(d) and 403 of Regulation S-K is Incorporated herein by reference from the Registrant’s 2006 Proxy under the heading, “Beneficial Ownership of Directors and Officers.”
 
Item 13.   Certain Relationships and Related Transactions
 
Information required by Item 404 of Regulation S-K is incorporated herein by reference from the Registrant’s 2006 Proxy under the heading, “Transactions with Management and Others.”
 
Item 14.   Principal Accountant Fees and Services
 
Information required by Item 9(e) of Schedule 14A is incorporated herein by reference from the Registrant’s 2006 Proxy under the headings: “Audit Committee” and “Independent Auditor Firm Fees.”
 
Part IV
 
Item 15.   Exhibits and Financial Statement Schedules
 
(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) Exhibits — The response of this portion of item 15 is submitted as a separate section.
 
(c) Financial Statement Schedules  —  none.


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UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
 
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
 
[Item 15(a) 1. & 2.]
 
         
Annual Report
 		   
to Shareholders
  Page
 
  44
  45
  46
  47
  48
  49
 
Financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.


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UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
 
INDEX TO EXHIBITS
 
[Items 15(a) 3. & 15(b)]
 
     
   
Description
 
(3.1)
  Articles of Incorporation as Amended through April 12, 1994 are incorporated by reference to Exhibit 4(b) of Form S-8, File No. 333-24987, filed with the Securities and Exchange Commission (the SEC) on November 4, 1997.
(3.2)
  Amended By-Laws dated November 23, 2005 are incorporated by reference to Exhibit 3.2 of Form 8-K, filed with the SEC on November 29, 2005.
(10.1)
  Univest 2003 Long-term Incentive Plan is incorporated by reference to Exhibit 4 of Form S-8, File No. 333-123189, filed with the SEC on March 8, 2005.
(10.2)
  Non-Qualified Pension Plan, including Split-dollar Agreement, for certain executive officers, incorporated by reference to Exhibit 10.2 of Form 10-K, filed with the SEC on March 7, 2005.
(10.3)
  Supplemental Retirement Plan, incorporated by reference to Exhibit 10.3 of Form 10-K, filed with the SEC on March 7, 2005.
(10.4)
  Univest 1993 Long-term Incentive Plan is incorporated by reference to Form S-8, File No. 333-24987, filed with the SEC on April 11, 1997
(11)
  Statement Re Computation of Per Share Earnings — is incorporated by reference from Footnote 13 in Item (8) of this Form 10-K.
(14)
  Code of Ethics — is incorporated by reference from Item (10) of the Form 10-K.
(21)
  Subsidiaries of the Registrant
(23.1)
  Ernst & Young LLP — Consent of independent registered public accounting firm
(23.2)
  KPMG LLP — Consent of independent registered public accounting firm
(31.1)
  Certification of William S. Aichele, Chairman, President and Chief Executive Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)
  Certification of Wallace H. Bieler, Senior Executive Vice President, Chief Operation Officer, Chief Financial Officer and Corporate Secretary of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)*
  Certification of William S. Aichele, Chief Executive Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)*
  Certification of Wallace H. Bieler, Chief Financial Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
* A certification furnished pursuant to this item will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
UNIVEST CORPORATION OF PENNSYLVANIA
Registrant
 
  By: 
/s/  Wallace H. Bieler
Wallace H. Bieler
Senior Executive Vice President,
Chief Operation Officer and Chief Financial Officer
February 22, 2006
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
             
Signature
 
Title
 
Date
 
/s/  William S. Aichele

William S. Aichele 		  Chairman, President, CEO
and Director 		  February 22, 2006
         
/s/  Marvin A. Anders

Marvin A. Anders 		  Retired Chairman, Director   February 22, 2006
         
    
Charles H. Hoeflich 		  Chairman Emeritus   February 22, 2006
         
/s/  James L. Bergey

James L. Bergey 		  Director   February 22, 2006
         
/s/  R. Lee Delp

R. Lee Delp 		  Director   February 22, 2006
         
/s/  Norman L. Keller

Norman L. Keller 		  Director   February 22, 2006
         
/s/  Thomas K. Leidy

Thomas K. Leidy 		  Director   February 22, 2006
         
/s/  H. Ray Mininger

H. Ray Mininger 		  Director   February 22, 2006
         
/s/  Merrill S. Moyer

Merrill S. Moyer 		  Director   February 22, 2006
         
/s/  Paul G. Shelly

Paul G. Shelly 		  Director   February 22, 2006
         
/s/  John U. Young

John U. Young 		  Director   February 22, 2006
         
/s/  K. Leon Moyer

K. Leon Moyer 		  Senior Executive Vice
President 		  February 22, 2006


85

EX-21 2 w17921exv21.txt SUBSIDIARIES OF THE REGISTRANT UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES EXHIBIT 21 [Item 15(c)] SUBSIDIARIES OF THE REGISTRANT 100% VOTING SECURITIES OWNED BY REGISTRANT 1) Univest National Bank and Trust Co. - chartered in the Commonwealth of Pennsylvania - and its wholly-owned subsidiary as follows: a. Delview, Inc. - chartered in the State of Delaware and it wholly-owned subsidiaries: i. Univest Investments, Inc. - chartered in the Commonwealth of Pennsylvania ii. Univest Insurance, Inc. - chartered in the Commonwealth of Pennsylvania 2) Univest Delaware, Inc. - chartered in the State of Delaware 3) Univest Realty Corporation - chartered in the Commonwealth of Pennsylvania 4) Univest Reinsurance Corporation is chartered in the State of Arizona 100% COMMON STOCK OWNED BY REGISTRANT 5) Univest Capital Trust I - chartered in the State of Delaware All the subsidiaries do business under the above names. EX-23.1 3 w17921exv23w1.txt ERNST & YOUNG LLP - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-02513) pertaining to the Univest 1996 Employee Stock Purchase Plan of Univest Corporation of Pennsylvania and in the related Prospectus, in the Registration Statement (Form S-8 No. 333-24987) pertaining to the Univest Corporation of Pennsylvania 1993 Long Term Incentive Plan and in the related Prospectus, and in the Registration Statement (Form S-3 No. 333-02509) pertaining to the Univest Dividend Reinvestment and Stock Purchase Plan of Univest Corporation of Pennsylvania of our report dated February 23, 2004 with respect to the consolidated statements of income, shareholders' equity and cash flows of Univest Corporation of Pennsylvania for the year ended December 31, 2003 included in the Annual Report (Form 10-K) for the year ended December 31, 2005. /s/ Ernst & Young LLP Philadelphia, Pennsylvania February 28, 2006 EX-23.2 4 w17921exv23w2.txt KPMG LLP KPMG LLP - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm -------------------------------------------------------- The Board of Directors Univest Corporation of Pennsylvania: We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-02513) pertaining to the Univest 1996 Employee Stock Purchase Plan of Univest Corporation of Pennsylvania and in the related Prospectus, in the Registration Statement on Form S-8 (No. 333-24987) pertaining to the Univest Corporation of Pennsylvania 1993 Long Term Incentive Plan and in the related Prospectus, and in the Registration Statement on Form S-3 (No. 333-02509) pertaining to the Univest Dividend Reinvestment and Stock Purchase Plan of Univest Corporation of Pennsylvania and in the related Prospectus, of our reports dated February 28, 2006, with respect to the consolidated balance sheets of Univest Corporation of Pennsylvania as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 2005 and 2004, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 Annual Report on Form 10-K of Univest Corporation of Pennsylvania. /s/ KPMG LLP Philadelphia, Pennsylvania February 28, 2006 EX-31.1 5 w17921exv31w1.txt CERTIFICATION OF WILLIAM S. AICHELE, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION I, William S. Aichele, certify that: 1. I have reviewed this Annual Report on Form 10-K of Univest Corporation of Pennsylvania; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: March 1, 2006 --------------- /s/ William S. Aichele - -------------------------------------- William S. Aichele, Chairman, President, and Chief Executive Officer EX-31.2 6 w17921exv31w2.txt CERTIFICATION OF WALLACE H. BIELER, SENIOR EXECUTIVE VICE PRESIDENT Exhibit 31.2 CERTIFICATION I, Wallace H. Bieler, certify that: 1. I have reviewed this Annual report on Form 10-K of Univest Corporation of Pennsylvania; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: March 1, 2006 --------------- /s/ Wallace H. Bieler - ------------------------------------- Wallace H. Bieler, Senior Executive Vice President, Chief Financial Officer, Chief Operation Officer and Corporate Secretary EX-32.1 7 w17921exv32w1.txt CERTIFICATION OF WILLIAM S. AICHELE, CEO, AS ENACTED BY SECTION 906 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Univest Corporation of Pennsylvania on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. A signed original of this written statement required by Section 906 has been provided to Univest Corporation of Pennsylvania and will be retained by Univest Corporation of Pennsylvania and furnished to the Securities and Exchange Commission or its staff upon request. /s/ William S. Aichlele - ----------------------- William S. Aichele, Chief Executive Officer March 1, 2006 EX-32.2 8 w17921exv32w2.txt CERTIFICATION OF WALLACE H. BIELER, CFO, AS ENACTED BY SECTION 906 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Univest Corporation of Pennsylvania on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. A signed original of this written statement required by Section 906 has been provided to Univest Corporation of Pennsylvania and will be retained by Univest Corporation of Pennsylvania and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Wallace H. Bieler - --------------------- Wallace H. Bieler, Chief Financial Officer March 1, 2006 -----END PRIVACY-ENHANCED MESSAGE-----