United States

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2009.

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to                     .

UNIVEST CORPORATION OF PENNSYLVANIA

(Exact name of registrant as specified in its charter)

Pennsylvania		23-1886144
(State or other jurisdiction of incorporation of organization)		(IRS Employer Identification No.)

(Address of principal executive offices)(Zip Code)

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

Not applicable

Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

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

Common Stock, $5 par value		12,996,291
(Title of Class)		(Number of shares outstanding at 3/31/09)

 

 

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX

		Page Number
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2009 and December 31, 2008			2
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2009 and 2008			3
Condensed Consolidated Statements of Cash Flow for the Three Months Ended March 31, 2009 and 2008			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosure About Market Risk			26
Item 4. Controls and Procedures			26
Part II. Other Information:
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults Upon Senior Securities			27
Item 4. Submission of Matters to a Vote of Securities Holders			27
Item 5. Other Information			28
Item 6. Exhibits			28
Signatures			29
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVEST CORPORATION OF PENNSYLVANIA

		(UNAUDITED)				(SEE NOTE)
		March 31, 2009				December 31, 2008
		($ in thousands, except per share data)
ASSETS
Cash and due from banks		$	32,882			$	34,800
Interest-earning deposits with other banks			4,192				5,266
Investment securities held-to-maturity (fair value $1,358 and $1,432 at March 31, 2009 and December 31, 2008, respectively)			1,277				1,368
Investment securities available-for-sale			409,080				430,898
Loans held for sale			5,072				544
Loans and leases			1,450,420				1,449,892
Less: Reserve for loan and lease losses			(14,720	)			(13,118	)
Net loans and leases			1,435,700				1,436,774
Premises and equipment, net			32,970				32,602
Goodwill			50,398				50,236
Other intangibles, net of accumulated amortization of $6,860 and $6,497 at March 31, 2009 and December 31, 2008, respectively			5,605				5,815
Bank owned life insurance			45,576				45,419
Accrued interest and other assets			43,149				41,075
Total assets		$	2,065,901			$	2,084,797
LIABILITIES
Demand deposits, noninterest-bearing		$	218,148			$	221,863
Demand deposits, interest-bearing			486,987				487,983
Savings deposits			332,672				307,512
Time deposits			535,245				509,970
Total deposits			1,573,052				1,527,328
Securities sold under agreements to repurchase			78,146				81,230
Other short-term debt			75,500				111,500
Accrued expenses and other liabilities			40,649				41,526
Long-term debt			65,322				92,637
Subordinated notes			6,375				6,750
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding junior subordinated debentures of Univest (“Trust Preferred Securities”)			20,619				20,619
Total liabilities			1,859,663				1,881,590
SHAREHOLDERS’ EQUITY
Common stock, $5 par value: 48,000,000 shares authorized at March 31, 2009 and December 31, 2008; 14,873,904 shares issued at March 31, 2009 and December 31, 2008; 12,996,291 and 12,938,514 shares outstanding at March 31, 2009 and December 31, 2008, respectively			74,370				74,370
Additional paid-in capital			21,382				22,459
Retained earnings			153,065				151,816
Accumulated other comprehensive loss, net of tax benefit			(7,129	)			(8,619	)
Treasury stock, at cost; 1,877,613 shares and 1,935,390 shares at March 31, 2009 and December 31, 2008, respectively			(35,450	)			(36,819	)
Total shareholders’ equity			206,238				203,207
Total liabilities and shareholders’ equity		$	2,065,901			$	2,084,797

UNIVEST CORPORATION OF PENNSYLVANIA

		For the three months ended
		March 31,
		2009				2008
		($ in thousands, except per share data)
Interest income
Interest and fees on loans and leases:
Taxable		$	18,548			$	21,366
Exempt from federal income taxes			922				933
Total interest and fees on loans and leases			19,470				22,299
Interest and dividends on investment securities:
Taxable			3,816				4,388
Exempt from federal income taxes			1,113				1,058
Interest on federal funds sold and term federal funds			3				262
Total interest income			24,402				28,007
Interest expense
Interest on deposits			6,412				10,307
Interest on short-term borrowings			479				1,499
Interest on long-term borrowings			1,166				356
Total interest expense			8,057				12,162
Net interest income			16,345				15,845
Provision for loan and lease losses			2,156				999
Net interest income after provision for loan and lease losses			14,189				14,846
Noninterest income
Trust fee income			1,425				1,627
Service charges on deposit accounts			1,613				1,658
Investment advisory commission and fee income			754				615
Insurance commission and fee income			1,986				2,058
Bank owned life insurance income			157				791
Other service fee income			950				758
Net (losses) gains on sales of and impairments on securities			(1,140	)			56
Net loss on dispositions of fixed assets			(130	)			—
Other			559				180
Total noninterest income			6,174				7,743
Noninterest expense
Salaries and benefits			9,432				8,168
Net occupancy			1,392				1,291
Equipment			841				766
Marketing and advertising			163				189
Deposit insurance premiums			583				43
Other			3,092				3,151
Total noninterest expense			15,503				13,608
Income before income taxes			4,860				8,981
Applicable income taxes			1,024				2,260
Net income		$	3,836			$	6,721
Net income per share:
Basic		$	.30			$	.52
Diluted			.30				.52
Dividends declared			.20				.20

UNIVEST CORPORATION OF PENNSYLVANIA

		For the Three Months Ended
		March 31,
		2009				2008
		($ in thousands)
Cash flows from operating activities:
Net income		$	3,836			$	6,721
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses			2,156				999
Depreciation of premises and equipment			611				500
Net losses (gains) on sale of and impairment on investment securities			1,140				(56	)
Net losses on dispositions of fixed assets			130				—
Proceeds from the sale of loans and leases			34,289				1,615
Bank owned life insurance income			(157	)			(302	)
Other adjustments to reconcile net income to cash provided by operating activities			(727	)			(248	)
Decrease (increase) in interest receivable and other assets			259				(7,554	)
(Decrease) increase in accrued expenses and other liabilities			(158	)			3,291
Net cash provided by operating activities			41,379				4,966
Cash flows from investing activities:
Net cash paid due to acquisitions, net of cash acquired			(162	)			(151	)
Net capital expenditures			(312	)			(2,814	)
Proceeds from maturities of securities held-to-maturity			91				132
Proceeds from maturities of securities available-for-sale			12,250				67,958
Proceeds from sales and calls of securities available-for-sale			71,900				41,189
Purchases of investment securities held-to-maturity			—				(29,375	)
Purchases of investment securities available-for-sale			(61,842	)			(126,216	)
Purchases of lease financings			(2,836	)			(6,975	)
Net (increase) decrease in loans and leases			(39,422	)			1,867
Net decrease in interest-bearing deposits			1,074				22
Net increase in federal funds sold			—				(29,552	)
Net cash used in investing activities			(19,259	)			(83,915	)
Cash flows from financing activities:
Net increase in deposits			45,724				84,246
Net decrease in short-term borrowings			(67,084	)			(16,169	)
Issuance of long-term debt			—				10,000
Repayment of subordinated debt			(375	)			(375	)
Purchases of treasury stock			(370	)			(435	)
Stock issued under dividend reinvestment and employee stock purchase plans			586				634
Proceeds from exercise of stock options, including tax benefits			64				10
Cash dividends paid			(2,583	)			(2,559	)
Net cash (used in) provided by financing activities			(24,038	)			75,352
Net decrease in cash and due from banks			(1,918	)			(3,597	)
Cash and due from banks at beginning of year			34,800				47,135
Cash and due from banks at end of period		$	32,882			$	43,538
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest		$	9,263			$	14,691
Income taxes, net of refunds received			24				2,265

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

Note 1. Financial Information

The accompanying unaudited condensed consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (the “Corporation”) and its wholly owned subsidiaries; the Corporation’s primary subsidiary is Univest National Bank and Trust Co. (the “Bank”). The unaudited condensed consolidated financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary to present a fair statement of the results and condition for the interim periods presented. Certain amounts have been reclassified to conform to the current-year presentation. Operating results for the three-month period ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, which has been filed with the SEC on March 6, 2009.

Note 2. Loans and Leases

The following is a summary of the major loan and lease categories:

		At March 31,				At December 31,
($ in thousands)		2009				2008
Commercial, financial and agricultural		$	427,926			$	424,649
Real estate-commercial			424,434				399,003
Real estate-construction			139,393				153,506
Real estate-residential			308,122				316,039
Loans to individuals			51,513				54,212
Lease financings			108,045				110,095
Total gross loans and leases			1,459,433				1,457,504
Less: Unearned income			(9,013	)			(7,612	)
Total loans and leases		$	1,450,420			$	1,449,892

Note 3. Reserve for Loan and Lease Losses

A summary of the activity in the reserve for loan and lease losses is as follows:

		Three Months Ended March 31,
($ in thousands)		2009				2008
Reserve for loan and lease losses at beginning of period		$	13,118			$	13,086
Provision for loan and lease losses			2,156				999
Recoveries			194				109
Loans charged off			(748	)			(1,197	)
Reserve for loan and lease losses at period end		$	14,720			$	12,997

Information with respect to loans and leases that are considered to be impaired under Statement of Financial Accounting Standard (“SFAS”) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS 114”) at March 31, 2009 and December 31, 2008 is as follows:

		At March 31, 2009								At December 31, 2008
						Specific								Specific
($ in thousands)		Balance				Reserve				Balance				Reserve
Recorded investment in impaired loans and leases at period-end subject to a specific reserve for loan and lease losses and corresponding specific reserve		$	1,041			$	621			$	166			$	36
Recorded investment in impaired loans and leases at period-end requiring no specific reserve for loan and lease losses			3,381								5,243
Recorded investment in impaired loans and leases at period-end		$	4,422							$	5,409
Recorded investment in nonaccrual and restructured loans and leases		$	4,422							$	5,409

The following is an analysis of interest on nonaccrual and restructured loans and leases:

		For the Three Months Ended
		March 31,
($ in thousands)		2009				2008
Nonaccrual and restructured loans and leases at period end		$	4,422			$	6,165
Average recorded investment in impaired loans and leases			4,611				6,564
Interest income that would have been recognized under original terms			92				142

Interest income of $11 thousand was recognized on these loans for the three months ended March 31, 2009. There was no interest income recognized on these loans and leases for the three months ended March 31, 2008.

Note 4. Earnings Per Share

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

		For the Three Months Ended
		March 31,
($ in thousands, except per share data)		2009				2008
Numerator:
Numerator for basic and diluted earnings per share —
Income available to common shareholders		$	3,836			$	6,721
Denominator:
Denominator for basic earnings per share — weighted-average shares outstanding			12,977				12,839
Effect of dilutive securities:
Employee stock options			—				15
Denominator for diluted earnings per share — adjusted weighted-average shares outstanding			12,977				12,854
Basic earnings per share		$	0.30			$	0.52
Diluted earnings per share			0.30				0.52

Note 5. Accumulated Comprehensive Income

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

		For the Three Months Ended
		March 31,
($ in thousands)		2009				2008
Net Income		$	3,836			$	6,721
Unrealized gain on cash flow hedges:
Unrealized holding gains arising during the period			311				—
Unrealized gain on available-for-sale investment securities:
Unrealized gains arising during the period			287				1,680
Less: reclassification adjustment for (losses) gains realized in net income			(741	)			36
Defined benefit pension plans:
Unrealized gains arising during the period			12				4
Less: amortization of net gain included in net periodic pension costs			(134	)			(59	)
Prior service costs arising during the period			11				9
Less: amortization (accretion) of prior service cost included in net periodic pension costs			6				(10	)
Total comprehensive income		$	5,326			$	8,447

Note 6. Pensions and Other Postretirement Benefits

Components of net periodic benefit cost:

		For the Three Months Ended March 31,
		2009				2008				2009				2008
($ in thousands)		Retirement Plans								Other Post Retirement
Service cost		$	335			$	330			$	18			$	17
Interest cost			508				462				24				21
Expected return on plan assets			(413	)			(458	)			—				—
Amortization of net loss			204				90				2				1
Amortization (accretion) of prior service cost			14				(10	)			(5	)			(5	)
Net periodic cost		$	648			$	414			$	39			$	34

The Corporation previously disclosed in its financial statements for the year ended December 31, 2008, that it expected to make payments of $2.2 million for its qualified and non-qualified retirement plans and $126 thousand for its other postretirement benefit plans in 2009. As of March 31, 2009, $479 thousand and $22 thousand have been paid to participants from its qualified and non-qualified retirement plans and other postretirement plans, respectively. During the three months ended March 31, 2008, the Corporation contributed $464 thousand and $22 thousand to its qualified and non-qualified retirement plans and other postretirement plans, respectively.

Note 7. Income Taxes

As of January 1, 2009 the Corporation had no material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in non-interest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in non-interest expense in the year it is assessed and is treated as a deductible expense for tax purposes. Tax Years 2005 through 2008 remain subject to Federal examination as well as examination by state taxing jurisdictions.

Note 8. Derivative Instruments and Hedging Activities

The Corporation may use interest-rate swap agreements to modify the interest rate characteristics from variable to fixed or fixed to floating in order to reduce the impact of interest rate changes on future net interest income. The Corporation accounts for its interest-rate swap contracts in cash flow and fair value hedging relationships in compliance with SFAS 133 by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows or fair value of assets or liabilities that are being hedged. 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 specified hedged item. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The change in fair 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.

The Corporation’s credit exposure on interest rate swaps includes fair value and any collateral that is held by a third party. Changes in the fair value of derivative instruments designated as hedges of future cash flows are recognized in equity until the underlying forecasted transactions occur, at which time the deferred gains and losses are recognized in income. Under SFAS 133, for a qualifying fair value hedge, the gain or loss on the hedging instrument is recognized in earnings, and the change in fair value on the hedge item to the extent attributable to the hedged risk adjusts the carrying amount of the hedge item and is recognized in earnings.

Derivative loan commitments 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. The Corporation’s derivative loan commitments are commitments to sell loans secured by 1-to-4 family residential properties whose predominant risk characteristic is interest rate risk. The fair values of these derivative loan commitments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties.

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the balance sheet as of March 31, 2009.

		At March 31, 2009
		Asset Derivatives						Liability Derivatives
		Balance Sheet						Balance Sheet
($ in thousands)		Classification		Fair Value				Classification		Fair Value
Derivatives designated as hedging instruments under SFAS 133
Interest rate swap		Other liabilities		$	(425	)		Other liabilities		$	250
Total derivatives designated as hedging instruments under SFAS 133				$	(425	)				$	250
Derivatives not designated as hedging instruments under SFAS 133
Derivative loan commitments		Other assets		$	234					$	—
Total derivatives not designated as hedging instruments under SFAS 133				$	234					$	—
Total derivatives				$	(191	)				$	250

At March 31, 2008, there were no interest rate swaps outstanding.

On March 24, 2009, the Corporation entered into a $22.0 million notional interest rate swap, which has been classified as a fair value hedge on a commercial loan. Under the terms of the swap agreement, the Corporation will pay a fixed rate of 6.49% and receive a floating rate which is based on the one month U.S. London Interbank Borrowing Rate (“LIBOR”) with a 357 basis point spread and a termination date of April 1, 2019. The Corporation performed an assessment of the hedge at inception. At March 31, 2009, the interest rate swap had a negative fair value of $425 thousand and the hedged loan had a positive fair value adjustment of $421 thousand. The Corporation has elected to record the change in fair value of the interest rate swap and hedged loan as a component of noninterest income. The amount of ineffectiveness for the three months ended March 31, 2009 was a negative $4 thousand.

The table below presents the earnings impact of the changes in the fair value of the swaps and the hedged loan for the three months ended March 31, 2009.

		Gain/(Loss)				Gain/(Loss) on
Income Statement Classification		on Swaps				Hedged Loan
Noninterest income		$	(425	)		$	421

At March 31, 2009, the Corporation had a cash flow hedge with a notional amount of $20.0 million that had the effect of converting the variable rates on trust preferred securities to a fixed rate. The cash payment on the interest rate swap of $71 thousand for the three months ended March 31, 2009 was recorded as a component of interest expense. At March 31, 2009, the cash flow hedge had a positive fair value of $250 thousand and was determined to be highly effective in offsetting the value of the hedged items.

The table below presents derivatives in Statement 133 cash flow hedging relationships as of March 31, 2009.

		Amount of Gain
		(Loss), Net of Taxes,
		Recognized in
		Accumulated Other
		Comprehensive
($ in thousands)		Income
Interest rate swap		$	163

The table below presents derivative loan commitments under SFAS 133 as of March 31, 2009:

		Location of Gain or (Loss)		Amount of Gain or
Derivatives Not Designated as Hedging		Recognized in Income on		(Loss) Recognized in
Instruments Under SFAS 133		Derivative		Income on Derivative
Derivative loan commitments		Other noninterest income		$	234

Note 9. Fair Value Disclosures

As of January 1, 2008, the Corporation adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability. The Corporation does not currently hold any trading assets, or other financial instruments that are measured at fair value on a recurring basis that were impacted by the adoption of SFAS 157.

SFAS 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that the market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

•

Level 1—Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Assets and liabilities utilizing Level 1 inputs include: Exchange-traded equity and most U.S. Government securities.

•

Level 2—Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include: most U.S. Government agency mortgage-backed debt securities (“MBS”), corporate debt securities, corporate and municipal bonds, asset-backed securities (“ABS”), residential mortgage loans held for sale, certain commercial loans, mortgage servicing rights and derivative financial instruments.

•

Level 3—Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include: financial instruments whose value is determined using pricing models, discounted cash-flow methodologies, or similar techniques, as well as instruments for which the fair value calculation requires significant management judgment or estimation. These assets and liabilities include: certain commercial mortgage obligations (“CMOs”) and MBS and ABS securities and certain municipal bonds.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities

Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid U.S. Treasury securities, U.S. Government sponsored enterprises, and most equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain MBS, CMOs, ABS and municipal bonds. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Investment securities classified within Level 3 include certain municipal bonds, certain ABS and other less liquid investment securities.

Hedged Loans

The fair value of hedged loans is based on a regression model which takes into consideration the changes in market value due to changes in LIBOR. Hedged loans are classified within Level 2 hierarchy.

Loans Held for Sale

The fair value of the Corporation’s loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including, interest rates, and bids or indications provided by market participants on specific loans that are actively marketed for sale. The Corporation’s loans held for sale are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale at March 31, 2009 were carried at the lower of cost or estimated fair value.

Mortgage Servicing Rights

The Corporation estimates the fair value of Mortgage Servicing Rights (“MSRs”) using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the current interest rates of the portfolios serviced. MSRs are classified within level 2 of the valuation hierarchy. MSRs are carried at the lower of amortized cost or estimated fair value.

Derivative Financial Instruments

The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Derivative financial instruments are classified within level 2 of the valuation hierarchy.

The following table presents the assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 and December 31, 2008, classified using the SFAS 157 valuation hierarchy:

		At March 31, 2009
														Assets/
														Liabilities at
($ in thousands)		Level 1				Level 2				Level 3				Fair Value
Assets:
Available-for-sale securities		$	1,980			$	400,861			$	6,239			$	409,080
Hedged loans			—				22,420				—				22,420
Mortgage servicing rights			—				526				—				526
Derivative loan commitments			—				234				—				234
Total assets		$	1,980			$	424,041			$	6,239			$	432,260
Liabilities:
Interest rate swaps		$	—			$	175			$	—			$	175
Total liabilities		$	—			$	175			$	—			$	175

		At December 31, 2008
														Assets/
														Liabilities at
($ in thousands)		Level 1				Level 2				Level 3				Fair Value
Assets:
Available-for-sale securities		$	2,908			$	430,618			$	8,132			$	441,658
Mortgage servicing rights			—				418				—				418
Total assets		$	2,908			$	431,036			$	8,132			$	442,076
Liabilities:
Interest rate swaps		$	—			$	229			$	—			$	229
Total liabilities		$	—			$	229			$	—			$	229

The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value:

		For the Three Months Ended March 31, 2009
						Total				Total
		Balance at				Unrealized				Realized				Purchases				Balance at
		December 31,				Gains or				Gains or				(Sales or				March 31,
($ in thousands)		2008				(Losses)				(Losses)				Paydowns)				2009
Available-for-sale securities:
Asset-backed securities		$	1,211			$	(3	)		$	—			$	(172	)		$	1,036
Commercial mortgage obligations			5,340				124				—				(261	)			5,203
Total Level 3 assets		$	6,551			$	121			$	—			$	(433	)		$	6,239

Realized gains or losses are recognized in the Consolidated Statement of Income. There were no realized gains or losses recognized on Level 3 assets during the three month period ended March 31, 2009.

Effective January 1, 2009, the Corporation adopted the provisions of Financial Accounting Standards Board (“FASB”) FASB Staff Position (“ FSP”) FAS 157-2 for goodwill and long-lived assets measured at fair value for impairment assessment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

The following table represents assets measured at fair value on a non-recurring basis as of March 31, 2009.

		At March 31, 2009
														Assets at
($ in thousands)		Level 1				Level 2				Level 3				Fair Value
Assets:
Acquired leases		$	—			$	—			$	5,898			$	5,898
Impaired loans and leases			—				—				217				217
		$	—			$	—			$	6,115			$	6,115

Acquired leases are measured at the time of acquisition and are based on the fair value of the collateral securing these loans. Acquired leases are classified within level 3 of the valuation hierarchy.

Impaired loans and leases include those collateral-dependent loans and leases for which the practical expedient under SFAS 114 was applied, resulting in a fair-value adjustment to the loan or lease. Impaired loans and leases are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a level 3 in the fair value hierarchy. The fair value of collateral is based on appraisals performed by qualified licensed appraisers hired by the Corporation.

Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other intangible assets. During the three months ended March 31, 2009, there were no triggering events to fair value goodwill and other intangible assets, which have not been measured since the adoption of FSP FAS 157-2.

Note 10. Recent Accounting Pronouncements

In April 2009, FASB issued FSP No. FAS 107-1, “Disclosure of Fair Value of Financial Instruments in Interim Statements” (“FAS 107-1”), and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim Financial Reporting” (“APB 28-1”) amends both SFAS No. 107 and APB Opinion No. 28 to require that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. The adoption of FAS 107-1 and APB 28-1 will result in additional disclosure about the fair value of financial instruments in connection with the Corporation’s June 30, 2009 quarterly report on Form 10-Q, but will not have a material impact on its consolidated financial statements.

In April 2009, FASB issued FSP No. FAS 115-2 and No. FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FAS115-2 and FAS 124-2”) which amends the other-than-temporary guidance (“OTTI”) for debt securities to make such guidance more operational and to improve the presentation and disclosures of OTTI for both debt and equity securities. FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The Corporation does not anticipate the adoption of FAS 115-2 and FAS 124-2 to have a material impact on its consolidated financial statements.

In April 2009, FASB issued FASB FSP No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FAS No. 141(R)-1”) which amends SFAS No. 141(R) to provide guidance in respect of initial recognition and measurement, subsequent measurement, and disclosures concerning assets and liabilities arising from pre-acquisition contingencies in a business combination. FAS No. 141(R)-1 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Corporation does not anticipate the adoption of FAS 141(R)-1 to have a material impact on its consolidated financial statements.

In April 2009, FASB issued FASB FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FAS 157-4”) which amends SFAS No. 157 to provide additional guidance for determining fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly. FAS 157-4 also provides guidance for determining whether a transaction is an orderly one. FAS 157-4 is effective prospectively for interim periods and annual years ending after June 15, 2009. The Corporation does not anticipate the adoption of FAS 157-4 to have a material impact on its consolidated financial statements.

Item 2.		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. “N/M” equates to “not meaningful”; “—” equates to “zero” or “doesn’t round to a reportable number”; and “N/A” equates to “not applicable”. Certain amounts have been reclassified to conform to the current-year presentation.)

Forward-Looking Statements

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

•

Operating, legal and regulatory risks

•

Economic, political and competitive forces impacting various lines of business

•

The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

•

Volatility in interest rates

•

Other risks and uncertainties

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

General

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

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

Executive Overview

The Corporation recorded net income for the three months ended March 31, 2009 of $3.8 million, a 42.9% decrease compared to the March 31, 2008 period. Basic and diluted net income per share decreased 42.3% and 42.3%, respectively.

Average interest-earning assets increased $39.6 million and average interest-bearing liabilities increased $46.3 million when comparing the three-month periods ended March 31, 2009 and 2008. Increased volume in commercial business, commercial real estate and construction and lease financings along with decreased rates on money market savings and time deposits were partially offset by decreased rates on commercial business loans and commercial and construction real estate loans; this contributed to a $661 thousand increase in tax-equivalent net interest income. The tax-equivalent net interest margin increased to 3.76% for the three month period ended March 31, 2009 from 3.66% when compared to the same period in 2008.

Non-interest income decreased by 20.3%, when comparing the three-month periods ended March 31, 2009 to 2008, due to other-than-temporary impairment charges on equity investments of $1.2 million, a decrease in bank owned life insurance income of $634 thousand, primarily due to a death benefit recorded in the first quarter of 2008 and a loss of $130 thousand on the disposition of fixed assets. These decreases were partially offset by increases in other service fee income, investment advisory fees and the gain on sale of loans.

Non-interest expense grew 13.9% primarily due to salary and benefit expenses associated with the acquisitions of Liberty Benefits, Inc. and the Trollinger Consulting Group in December 2008, additional personnel to grow the mortgage banking business, normal base pay increases and stock-based compensation expense. Additionally, FDIC insurance premiums increased in 2009 over 2008 due to credits that were utilized by the Corporation in 2008 causing a variance of $540 thousand.

The Corporation earns its revenues primarily from the margins and fees it generates from loans and leases and depository services it provides as well as from trust, insurance and investment commissions and fees. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation maintains a relatively neutral interest rate risk profile and anticipates that an increase of 200 basis points in interest rates would not significantly impact its net interest margin.

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

Results of Operations — Three Months Ended March 31, 2009 Versus 2008

The Corporation’s consolidated net income and earnings per share for the three months ended March 31, 2009 and 2008 were as follows:

		For the Three Months Ended
		March 31,								Change
		2009				2008				Amount				Percent
Net income		$	3,836			$	6,721			$	(2,885	)			(42.9	)%
Net income per share:
Basic		$	0.30			$	0.52			$	(.22	)			(42.3	)
Diluted			0.30				0.52				(.22	)			(42.3	)

Return on average shareholders’ equity was 7.61% and return on average assets was 0.76% for the three months ended March 31, 2009, compared to 13.49% and 1.35%, respectively, for the same period in 2008.

Net Interest Income

Net interest income is the difference between interest earned on loans and leases, 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 tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the three months ended March 31, 2009 and 2008. Table 2 analyzes the changes in the 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 Committee works to maintain an adequate and stable net interest margin for the Corporation.

Tax-equivalent net interest income increased $661 thousand for the three months ended March 31, 2009 compared to 2008 primarily due to rate decreases in money market and time deposits. Decreased rates on commercial business loans and commercial real estate and commercial construction loans were partially offset by increased volumes on commercial business and commercial real estate and construction loans and lease financings. The tax-equivalent net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was 3.76% and 3.66% for the three-month periods ended March 31, 2009 and 2008. The tax-equivalent net interest spread, 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 3.47% for the three months ended March 31, 2009 compared to 3.20% for the same period in 2008. The effect of net interest free funding sources decreased to 0.29% for the three months ended March 31, 2009 compared to 0.46% for the same period in 2008; this represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.

Table 1 — Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

		For the Three Months Ended March 31,
		2009												2008
		Average				Income/				Average				Average				Income/				Average
		Balance				Expense				Rate				Balance				Expense				Rate
Assets:
Interest-earning deposits with other banks		$	3,333			$	3				0.37	%		$	700			$	5				2.87	%
U.S. Government obligations			94,844				982				4.20				102,777				1,242				4.86
Obligations of states and political subdivisions			100,450				1,712				6.91				93,113				1,551				6.70
Other debt and equity securities			224,701				2,834				5.11				245,643				3,146				5.15
Federal funds sold			233				—				—				33,339				257				3.10
Total interest-earning deposits, investments and federal funds sold			423,561				5,531				5.30				475,572				6,201				5.24
Commercial, financial and agricultural loans			396,127				4,567				4.68				357,138				6,235				7.02
Real estate-commercial and construction loans			502,111				7,278				5.88				475,094				8,340				7.06
Real estate-residential loans			310,926				3,718				4.85				307,157				4,130				5.41
Loans to individuals			53,275				941				7.16				69,332				1,223				7.09
Municipal loans and leases			85,899				1,315				6.21				81,490				1,271				6.27
Lease financings			97,819				2,044				8.47				64,373				1,438				8.98
Gross loans and leases			1,446,157				19,863				5.57				1,354,584				22,637				6.72
Total interest-earning assets			1,869,718				25,394				5.51				1,830,156				28,838				6.34
Cash and due from banks			31,184												35,621
Reserve for loan and lease losses			(13,669	)											(12,946	)
Premises and equipment, net			32,495												29,215
Other assets			140,237												123,636
Total assets		$	2,059,965											$	2,005,682
Liabilities:
Interest-bearing checking deposits		$	155,147				87				0.23			$	139,567				125				0.36
Money market savings			327,777				644				0.80				487,601				3,648				3.01
Regular savings			319,497				779				0.99				247,266				1,088				1.77
Time deposits			541,795				4,902				3.67				474,464				5,446				4.62
Total time and interest-bearing deposits			1,344,216				6,412				1.93				1,348,898				10,307				3.07
Securities sold under agreements to repurchase			75,513				118				0.63				81,257				293				1.45
Other short-term borrowings			74,762				361				1.96				7,786				63				3.25
Long-term debt			83,967				838				4.05				92,675				1,011				4.39
Subordinated notes and capital securities			26,998				328				4.93				28,535				488				6.88
Total borrowings			261,240				1,645				2.55				210,253				1,855				3.55
Total interest-bearing liabilities			1,605,456				8,057				2.04				1,559,151				12,162				3.14
Demand deposits, non-interest bearing			211,748												216,795
Accrued expenses and other liabilities			38,217												29,297
Total liabilities			1,855,421												1,805,243
Shareholders’ Equity:
Common stock			74,370												74,370
Additional paid-in capital			22,793												22,627
Retained earnings and other equity			107,381												103,442
Total shareholders’ equity			204,544												200,439
Total liabilities and shareholders’ equity		$	2,059,965											$	2,005,682
Net interest income						$	17,337											$	16,676
Net interest spread											3.47												3.20
Effect of net interest-free funding sources											0.29												0.46
Net interest margin											3.76	%											3.66	%
Ratio of average interest-earning assets to average interest-bearing liabilities			116.46	%											117.38	%

Table 2 — Analysis of Changes in Net Interest Income

The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest income for the periods 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.

		The Three Months Ended March 31,
		2009 Versus 2008
		Volume				Rate
		Change				Change				Total
Interest income:
Interest-earning deposits with other banks		$	2			$	(4	)		$	(2	)
U.S. Government obligations			(91	)			(169	)			(260	)
Obligations of states and political subdivisions			112				49				161
Other debt and equity securities			(288	)			(24	)			(312	)
Federal funds sold			(257	)			—				(257	)
Interest on deposits, investments and federal funds sold			(522	)			(148	)			(670	)
Commercial, financial and agricultural loans and leases			410				(2,078	)			(1,668	)
Real estate-commercial and construction loans			332				(1,394	)			(1,062	)
Real estate-residential loans			16				(428	)			(412	)
Loans to individuals			(294	)			12				(282	)
Municipal loans			56				(12	)			44
Lease financings			688				(82	)			606
Interest and fees on loans and leases			1,208				(3,982	)			(2,774	)
Total interest income			686				(4,130	)			(3,444	)
Interest expense:
Interest-bearing checking deposits			7				(45	)			(38	)
Money market savings			(325	)			(2,679	)			(3,004	)
Regular savings			171				(480	)			(309	)
Time deposits			577				(1,121	)			(544	)
Interest on time and interest-bearing deposits			430				(4,325	)			(3,895	)
Securities sold under agreement to repurchase			(9	)			(166	)			(175	)
Other short-term borrowings			323				(25	)			298
Long-term debt			(95	)			(78	)			(173	)
Subordinated notes and capital securities			(22	)			(138	)			(160	)
Interest on borrowings			197				(407	)			(210	)
Total interest expense			627				(4,732	)			(4,105	)
Net interest income		$	59			$	602			$	661