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 September 30, 2008.

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.)

14 North Main Street, Souderton, Pennsylvania 18964
(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 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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		12,905,326
(Title of Class)		(Number of shares outstanding at 9/30/08)

 

 

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX

		Page Number
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007			1
Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007			2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007			3
Notes to Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3. Quantitative and Qualitative Disclosure About Market Risk			30
Item 4. Controls and Procedures			30
Part II. Other Information:
Item 1. Legal Proceedings			31
Item 1A. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Securities Holders			32
Item 5. Other Information			32
Item 6. Exhibits			32
Signatures			33
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)
		September 30, 2008				December 31, 2007
		($ in thousands, except per share data)
ASSETS
Cash and due from banks		$	33,598			$	47,135
Interest-bearing deposits with other banks			725				502
Federal funds sold			15,076				11,748
Investment securities held-to-maturity (fair value $2,705 and $1,933 at September 30, 2008 and December 31, 2007, respectively)			2,642				1,862
Investment securities available-for-sale			416,162				421,586
Loans and leases			1,441,899				1,355,442
Less: Reserve for loan and lease losses			(14,954	)			(13,086	)
Net loans and leases			1,426,945				1,342,356
Premises and equipment, net			32,791				27,977
Goodwill			44,589				44,438
Other intangibles, net of accumulated amortization of $5,049 and $4,596 at September 30, 2008 and December 31, 2007, respectively			2,229				2,643
Cash surrender value of insurance policies			45,395				46,689
Accrued interest and other assets			26,238				25,569
Total assets		$	2,046,390			$	1,972,505
LIABILITIES
Demand deposits, noninterest-bearing		$	226,606			$	226,513
Demand deposits, interest-bearing			493,497				582,528
Savings deposits			290,333				233,766
Time deposits			497,091				489,796
Total deposits			1,507,527				1,532,603
Securities sold under agreements to repurchase			77,475				94,276
Other short term debt			83,900				—
Accrued expenses and other liabilities			30,244				32,447
Long-term debt			115,249				85,584
Subordinated notes			7,125				8,250
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding junior subordinated debentures of Univest (“Trust Preferred Securities”)			20,619				20,619
Total liabilities			1,842,139				1,773,779
SHAREHOLDERS’ EQUITY
Common stock, $5 par value: 24,000,000 shares authorized at September 30, 2008 and December 31, 2007; 14,873,904 shares issued at September 30, 2008 and December 31, 2007; 12,905,326 and 12,830,609 shares outstanding at September 30, 2008 and December 31, 2007, respectively			74,370				74,370
Additional paid-in capital			22,732				22,591
Retained earnings			150,767				143,066
Accumulated other comprehensive loss, net of tax benefit			(5,587	)			(1,768	)
Unearned compensation—Restricted Stock Awards			(447	)			(380	)
Treasury stock, at cost; 1,968,578 and 2,043,295 shares at September 30, 2008 and December 31, 2007, respectively			(37,584	)			(39,153	)
Total shareholders’ equity			204,251				198,726
Total liabilities and shareholders’ equity		$	2,046,390			$	1,972,505

Note: The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See accompanying notes to the unaudited condensed consolidated financial statements.

UNIVEST CORPORATION OF PENNSYLVANIA

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		($ in thousands, except per share data)
Interest income
Interest and fees on loans and leases:
Taxable		$	20,621			$	23,626			$	62,405			$	69,610
Exempt from federal income taxes			934				1,050				2,787				3,103
Total interest and fees on loans and leases			21,555				24,676				65,192				72,713
Interest and dividends on investment securities:
Taxable			4,197				3,932				13,011				11,331
Exempt from federal income taxes			970				981				3,236				2,899
Other interest income			17				193				403				345
Total interest income			26,739				29,782				81,842				87,288
Interest expense
Interest on deposits			8,080				11,804				26,900				33,478
Interest on long-term borrowings			1,432				1,613				4,333				4,640
Interest on short-term borrowings			636				572				1,447				2,294
Total interest expense			10,148				13,989				32,680				40,412
Net interest income			16,591				15,793				49,162				46,876
Provision for loan and lease losses			3,046				456				6,342				1,733
Net interest income after provision for loan and lease losses			13,545				15,337				42,820				45,143
Noninterest income
Trust fee income			1,578				1,525				4,833				4,493
Service charges on deposit accounts			1,719				1,706				5,085				5,058
Investment advisory commission and fee income			581				647				1,838				2,012
Insurance commission and fee income			1,266				1,385				4,595				4,576
Life insurance income			241				391				2,766				1,125
Other service fee income			732				913				2,581				2,709
Net (loss) gain on sales of and impairments on securities			(692	)			259				(849	)			310
Net loss on disposition of fixed assets			(28	)			—				(33	)			(64	)
Other			89				86				231				173
Total noninterest income			5,486				6,912				21,047				20,392
Noninterest expense
Salaries and benefits			7,935				7,659				24,122				23,293
Net occupancy			1,318				1,188				3,895				3,625
Equipment			792				793				2,357				2,396
Marketing and advertising			268				255				989				663
Other			3,352				3,187				10,995				9,598
Total noninterest expense			13,665				13,082				42,358				39,575
Income before income taxes			5,366				9,167				21,509				25,960
Applicable income taxes			1,176				2,479				4,724				6,950
Net income		$	4,190			$	6,688			$	16,785			$	19,010
Net income per share:
Basic		$	0.33			$	0.52			$	1.31			$	1.47
Diluted			0.33				0.52				1.30				1.47
Dividends declared			0.20				0.20				0.60				0.60

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

UNIVEST CORPORATION OF PENNSYLVANIA

		For the Nine Months Ended
		September 30,
		2008				2007
		($ in thousands)
Cash flows from operating activities:
Net income		$	16,785			$	19,010
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses			6,342				1,733
Depreciation of premises and equipment			1,644				1,495
Realized losses (gains) on investment securities			849				(310	)
Realized losses on dispositions of fixed assets			33				64
Life insurance income			(2,766	)			(1,125	)
Other adjustments to reconcile net income to cash provided by operating activities			(854	)			(119	)
Decrease in interest receivable and other assets			6,777				668
(Decrease) increase in accrued expenses and other liabilities			(3,756	)			1,563
Net cash provided by operating activities			25,054				22,979
Cash flows from investing activities:
Net cash paid due to acquisitions, net of cash acquired			(151	)			(200	)
Net capital expenditures			(6,491	)			(2,428	)
Proceeds from maturities of securities held-to-maturity			5,322				608
Proceeds from maturities of securities available-for-sale			161,582				57,999
Proceeds from calls of securities held-to-maturity			28,800				—
Proceeds from sales and calls of securities available-for-sale			95,993				28,703
Purchases of investment securities held-to-maturity			(34,900	)			—
Purchases of investment securities available-for-sale			(258,966	)			(98,781	)
Proceeds from sales of loans and leases			5,284				2,734
Purchases of lease financings			(41,070	)			(27,287	)
Net (increase) decrease in loans and leases			(55,422	)			6,163
Purchase of bank owned life insurance			—				(8,500	)
Net increase in interest-bearing deposits			(223	)			(31	)
Net (increase) decrease in federal funds sold			(3,328	)			9,557
Net cash used in investing activities			(103,570	)			(31,463	)
Cash flows from financing activities:
Net (decrease) increase in deposits			(25,070	)			29,740
Net increase (decrease) in short-term borrowings			67,099				(22,680	)
Issuance of long-term debt			30,000				10,000
Repayment of long-term debt			—				(1,000	)
Repayment of subordinated debt			(1,125	)			(1,125	)
Purchases of treasury stock			(1,227	)			(7,065	)
Proceeds from sales of treasury stock			122				—
Stock issued under dividend reinvestment and employee stock purchase plans			1,441				1,494
Proceeds from exercise of stock options, including tax benefits			1,438				414
Cash dividends paid			(7,699	)			(7,784	)
Net cash provided by financing activities			64,979				1,994
Net decrease in cash and due from banks			(13,537	)			(6,490	)
Cash and due from banks at beginning of year			47,135				46,956
Cash and due from banks at end of period		$	33,598			$	40,466
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest		$	34,457			$	39,804
Income taxes, net of refunds received			5,893				7,568

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

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. Operating results for the nine-month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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, 2007, which has been filed with the SEC on March 6, 2008.

Note 2. Loans and Leases

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

		At September 30,				At December 31,
($ in thousands)		2008				2007
Commercial, financial and agricultural		$	431,874			$	381,826
Real estate-commercial			393,705				393,686
Real estate-construction			146,830				134,448
Real estate-residential			311,586				310,571
Loans to individuals			59,075				72,476
Lease financings			106,216				68,100
Total gross loans and leases			1,449,286				1,361,107
Less: Unearned income			(7,387	)			(5,665	)
Total loans and leases		$	1,441,899			$	1,355,442

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								Nine Months Ended
		September 30,								September 30,
($ in thousands)		2008				2007				2008				2007
Reserve for loan and lease losses at beginning of period		$	13,713			$	13,793			$	13,086			$	13,283
Provision for loan and lease losses			3,046				456				6,342				1,733
Recoveries			134				166				351				522
Loans charged off			(1,939	)			(543	)			(4,825	)			(1,666	)
Reserve for loan and lease losses at period end		$	14,954			$	13,872			$	14,954			$	13,872

Information with respect to loans and leases that are considered to be impaired under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS 114”) at September 30, 2008 and December 31, 2007 is as follows:

		At September 30, 2008								At December 31, 2007
						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		$	5,220			$	2,496			$	4,120			$	1,755
Recorded investment in impaired loans and leases at period-end requiring no specific reserve for loan and lease losses			3,149								2,758
Recorded investment in impaired loans and leases at period-end		$	8,369							$	6,878
Recorded investment in nonaccrual and restructured loans and leases		$	8,434							$	6,878

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
($ in thousands)		2008				2007				2008				2007
Nonaccrual and restructured loans and leases at period end		$	8,434			$	7,380			$	8,434			$	7,380
Average recorded investment in impaired loans and leases			7,730				7,266				7,011				7,554
Interest income that would have been recognized under original terms			266				146				564				542

Interest income of $5 thousand was recognized on these loans for both three- and nine-month periods ended September 30, 2008 and $0 thousand for the same periods in 2007.

Note 4. Earnings Per Share

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
($ in thousands, except per share data)		2008				2007				2008				2007
Numerator:
Numerator for basic and diluted earnings per share — Income available to common shareholders		$	4,190			$	6,688			$	16,785			$	19,010
Denominator:
Denominator for basic earnings per share — weighted—average shares outstanding			12,875				12,811				12,856				12,917
Effect of dilutive securities:
Employee stock options			35				7				13				18
Denominator for diluted earnings per share — adjusted weighted-average shares outstanding			12,910				12,818				12,869				12,935
Basic earnings per share		$	0.33			$	0.52			$	1.31			$	1.47
Diluted earnings per share			0.33				0.52				1.30				1.47

Note 5. Accumulated Comprehensive Income

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

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
($ in thousands)		2008				2007				2008				2007
Net Income		$	4,190			$	6,688			$	16,785			$	19,010
Unrealized (loss) gain on available-for-sale investment securities:
Unrealized (losses) and gains arising during the period			(2,250	)			2,363				(4,617	)			574
Less: reclassification adjustment for (losses) and gains realized in net income			(450	)			169				(552	)			202
Defined benefit pension plans:
Unrealized gains (losses) arising during the period			4				(19	)			13				(135	)
Less: amortization of net gain included in net periodic pension costs			(59	)			(67	)			(177	)			(179	)
Prior service costs arising during the period			29				(7	)			87				70
Less: accretion of prior service cost included in net periodic pension costs			10				9				31				33
Total comprehensive income		$	2,472			$	8,914			$	12,966			$	19,463

Note 6. Pensions and Other Postretirement Benefits

Components of net periodic benefit cost:

		Three Months Ended September 30,
		2008				2007				2008				2007
($ in thousands)		Retirement Plans								Other Postretirement
Service cost		$	308			$	334			$	17			$	16
Interest cost			511				426				21				19
Expected return on plan assets			(471	)			(456	)			—				—
Amortization of net loss			90				100				1				3
Amortization of prior service cost			(11	)			(8	)			(5	)			(5	)
Net periodic cost		$	427			$	396			$	34			$	33

		Nine Months Ended September 30,
		2008				2007				2008				2007
($ in thousands)		Retirement Plans								Other Postretirement
Service cost		$	933			$	1,020			$	51			$	48
Interest cost			1,468				1,274				63				58
Expected return on plan assets			(1,400	)			(1,341	)			—				—
Amortization of net loss			269				268				3				8
Amortization of prior service cost			(32	)			(35	)			(15	)			(15	)
Net periodic cost		$	1,238			$	1,186			$	102			$	99

The Corporation previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to make payments of $2.1 million for its qualified and non-qualified retirement plans and $97 thousand for its other postretirement benefit plans in 2008. As of September 30, 2008, $1.5 million and $67 thousand have been paid to participants from its qualified and non-qualified retirement plans and other postretirement plans, respectively. During the nine months ended September 30, 2008, the Corporation contributed $443 thousand and $67 thousand to its non-qualified retirement plans and other postretirement plans, respectively.

On January 1, 2008, the Corporation adopted Emerging Issues Task Force No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). Under EITF 06-4, if an agreement is to provide an employee with a death benefit in a postretirement/ termination period, the employer should recognize a liability for the future death benefit in accordance with either Statement of Financial Accounting Standard (“SFAS”) No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” or Accounting Principles Board Opinion No. 12. EITF 06-4 requires that recognition of the effects of adoption should be either by (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Corporation chose option (a) as its method of adoption for EITF 06-4.

The following table shows the incremental effect of applying EITF 06-4 on individual line items in the Consolidated Balance Sheet at January 1, 2008:

		Before								After
		Application of								Application of
($ in thousands)		EITF 06-4				Adjustments				EITF 06-4
Cash surrender value of insurance policies		$	46,689			$	123			$	46,812
Total assets			1,972,505				123				1,972,628
Accrued split-dollar life insurance payable			—				1,673				1,673
Total liabilities			1,773,779				1,673				1,775,452
Retained earnings			143,066				(1,550	)			141,516
Total shareholders’ equity			198,726				(1,550	)			197,176
Total liabilities and shareholders’ equity			1,972,505				123				1,972,628

Note 7. Income Taxes

As of January 1, 2008 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 2007 remain subject to Federal examination as well as examination by state taxing jurisdictions.

Note 8. 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, derivative contracts 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 and mortgage servicing rights.

•

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”), MBS and ABS securities; and not readily marketable equity investments.

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 equity securities that do not have readily available market prices, certain municipal bonds, certain ABS and other less liquid investment securities.

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 Company’s loans held for sale are primarily residential mortgage loan and are generally classified in Level 2 due to the observable pricing data.

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.

Assets and liabilities measured at fair value on a recurring basis, all of which were measured at fair value prior to the adoption of SFAS 157, are summarized below:

		At September 30, 2008
														Assets/
														Liabilities at
($ in thousands)		Level 1				Level 2				Level 3				Fair Value
Assets:
Available-for-sale securities		$	3,546			$	403,015			$	9,601			$	416,162
Mortgage servicing rights			—				476				—				476
Total assets		$	3,546			$	403,491			$	9,601			$	416,638
Liabilities:
Total liabilities		$	—			$	—			$	—			$	—

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 September 30, 2008
						Total				Total
						Unrealized				Realized				Purchases				Balance at
		Balance at				Gains or				Gains or				(Sales or				September 30,
($ in thousands)		June 30, 2008				(Losses)				(Losses)				Paydowns)				2008
Available-for-sale securities:
Asset-backed securities		$	1,684			$	(18	)		$	—			$	(244	)		$	1,422
Commercial mortgage obligations			7,321				(576	)			—				(147	)			6,598
Not readily marketable equity securities			1,581				—				—				—				1,581
Total Level 3 assets		$	10,586			$	(594	)		$	—			$	(391	)		$	9,601

		For the Nine Months Ended September 30, 2008
						Total				Total
		Balance at				Unrealized				Realized				Purchases				Balance at
		December 31,				Gains or				Gains or				(Sales or				September 30,
($ in thousands)		2007				(Losses)				(Losses)				Paydowns)				2008
Available-for-sale securities:
Asset-backed securities		$	1,995			$	—			$	—			$	(573	)		$	1,422
Commercial mortgage obligations			7,644				(539	)			—				(507	)			6,598
Not readily marketable equity securities			1,581				—				—				—				1,581
Total Level 3 assets		$	11,220			$	(539	)		$	—			$	(1,080	)		$	9,601

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- and nine-month periods ended September 30, 2008.

Note 9. Related-Party Transactions

During the first quarter of 2008, Univest purchased $29.4 million in tax-free municipal bonds issued on behalf of Grand View Hospital (“GVH”). These bonds were called during the second quarter of 2008. During the third quarter of 2008, Univest purchased $1.2 million in tax-free municipal bonds issued on behalf of GVH. William S. Aichele, Chairman, President and CEO of the Corporation, and P. Gregory Shelly, Director of the Corporation, are members of the Board of Trustees for GVH.

Note 10. Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 enhances disclosures about fair value of derivative instruments and their gains or losses and the company’s objectives and strategies for using derivative instruments and whether or not they are designated as hedging instruments. SFAS 161 is effective prospectively for interim periods and fiscal years beginning after November 15, 2008. The Corporation does not anticipate the adoption of SFAS 161 to have a material impact on its consolidated financial statements.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the GAAP hierarchy). The provisions of SFAS 162 did not have a material impact on our financial condition and results of operations.

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“EITF 03-6-1”). This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two class method. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. Upon adoption, a company is required to retrospectively adjust its earnings per share data to conform to the provisions in this FSP. The provisions of EITF 03-6-1 are effective for us retroactively in the first quarter ended March 31, 2009. We are in the process of evaluating the impact of EITF 03-6-1 on the calculation and presentation of earnings per share in our consolidated financial statements.

Note 11. Other Information

On April 7, 2008 a retired key employee passed away. The Corporation held several BOLI policies on this individual for which the death benefit exceeded the cash surrender value. In the second quarter of 2008, the Corporation recorded $1.4 million of income related to these policies.

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”.)

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 nine months ended September 30, 2008 of $16.8 million, an 11.7% decrease compared to the September 30, 2007 period. Basic and diluted net income per share decreased 10.9% and 11.6%, respectively.

Average interest-earning assets increased $88.0 million and average interest-bearing liabilities increased $80.4 million when comparing the nine-month periods ended September 30, 2008 and 2007. Increased volume in other securities, obligations of state and political subdivision securities, federal funds sold and lease financings along with decreased rates on money market savings were partially offset by decreased rates on commercial business loans and commercial and construction real estate loans; this contributed to a $2.5 million increase in tax-equivalent net interest income. The tax-equivalent net interest margin remained unchanged at 3.73% for the nine-month periods ended September 30, 2008 and 2007.

Non-interest income grew 3.2%, when comparing the nine-month periods ended September 30, 2008 to 2007, primarily due to increases in trust fee income and life insurance income, which increased by $1.6 million due to additional income resulting from death benefit claims. These increases were partially offset by an impairment charge on equity investments of $928 thousand for the nine month period ended September 30, 2008.

Non-interest expense grew 7.0% primarily due to increases in salary and employee benefits, marketing and advertising expense, and other expense, which includes expense associated with a claim under a rent-a-captive arrangement and fee expense associated with student loans.

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 or decrease within 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 September 30, 2008 Versus 2007

The Corporation’s consolidated net income and earnings per share for the three months ended September 30, 2008 and 2007 were as follows:

		Three Months Ended
		September 30,								Change
($ in thousands, except per share data)		2008				2007				Amount				Percent
Net income		$	4,190			$	6,688			$	(2,498	)			(37.4	)%
Net income per share:
Basic		$	0.33			$	0.52			$	(0.19	)			(36.5	)
Diluted			0.33				0.52				(0.19	)			(36.5	)

Return on average shareholders’ equity was 8.13% and return on average assets was 0.82% for the three months ended September 30, 2008 compared to 14.01% and 1.36%, respectively, for the same period in 2007.

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 September 30, 2008 and 2007. 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 Investment/Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.

Tax-equivalent net interest income increased $844 thousand for the three months ended September 30, 2008 compared to 2007 primarily due to increased volume on lease financings, increased volume on real estate—commercial and construction loans, increased volume on obligations on state and political subdivision securities, increased volume on other debt and equity securities, decreased rates on money market savings deposits and decreases in both rate and volume of certificates of deposit; partially offset by decreased volume and rates on commercial loans and decreased rates on real estate—commercial and construction loans. The decrease in rates is attributable to the 200 basis point reduction in the prime interest rate that occurred during the first quarter of 2008. 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 3.71% for the three-month periods ended September 30, 2008 and 2007, respectively. 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 3.35% for the three-months ended September 30, 2008 compared to 3.13% for the same period in 2007. The effect of net interest free funding sources decreased to 0.41% for the three months ended September 30, 2008 compared to 0.58% for the same period in 2007; 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 September 30,
		2008												2007
		Average				Income/				Avg.				Average				Income/				Avg.
($ in thousands)		Balance				Expense				Rate				Balance				Expense				Rate
Assets:
Interest-earning deposits with other banks		$	584			$	4				2.72	%		$	3,739			$	50				5.31	%
U.S. Government obligations			98,876				1,136				4.57				114,024				1,330				4.63
Obligations of state and political subdivisions			86,900				1,501				6.87				84,992				1,509				7.04
Other debt and equity securities			235,531				3,036				5.13				191,574				2,577				5.34
Federal Reserve Bank stock			1,687				25				5.90				1,687				25				5.88
Federal funds sold and securities purchased under agreement to resell			3,232				13				1.60				10,886				143				5.21
Total interest-earning deposits, investments and federal funds sold			426,810				5,715				5.33				406,902				5,634				5.49
Commercial, financial and agricultural loans			399,334				5,961				5.94				408,268				8,183				7.95
Real estate—commercial and construction loans			482,213				7,817				6.45				431,901				8,668				7.96
Real estate—residential loans			310,982				3,986				5.10				306,745				4,165				5.39
Loans to individuals			60,871				1,069				6.99				79,684				1,402				6.98
Municipal loans and leases			82,753				1,298				6.24				92,096				1,371				5.91
Lease financings			86,621				1,788				8.21				54,478				1,208				8.80
Gross loans and leases			1,422,774				21,919				6.13				1,373,172				24,997				7.22
Total interest-earning assets			1,849,584				27,634				5.94				1,780,074				30,631				6.83
Cash and due from banks			36,841												40,499
Reserve for loan and lease losses			(14,070	)											(13,894	)
Premises and equipment, net			32,533												22,204
Other assets			115,649												116,023
Total assets		$	2,020,537											$	1,944,906
Liabilities:
Interest-bearing checking deposits		$	143,774			$	114				0.32			$	135,094			$	128				0.38
Money market savings			362,864				1,725				1.89				385,243				4,009				4.13
Regular savings			286,554				1,142				1.59				222,666				1,108				1.97
Certificates of deposit			476,357				5,065				4.23				525,733				6,222				4.70
Time open and club accounts			6,905				34				1.96				27,788				337				4.81
Total time and interest-bearing deposits			1,276,454				8,080				2.52				1,296,524				11,804				3.61
Securities sold under agreements to repurchase			84,931				228				1.07				83,436				497				2.36
Other short-term debt			72,302				408				2.24				5,669				76				5.32
Long-term debt			98,678				1,055				4.25				85,755				1,028				4.76
Subordinated notes and capital securities			27,744				377				5.41				29,248				584				7.92
Total borrowings			283,655				2,068				2.90				204,108				2,185				4.25
Total interest-bearing liabilities			1,560,109				10,148				2.59				1,500,632				13,989				3.70
Demand deposits, non-interest bearing			226,948												224,474
Accrued expenses and other liabilities			28,418												30,380
Total liabilities			1,815,475												1,755,486
Shareholders’ Equity:
Common stock			74,370												74,370
Additional paid-in capital			22,647												22,508
Retained earnings and other equity			108,045												92,542
Total shareholders’ equity			205,062												189,420
Total liabilities and shareholders’ equity		$	2,020,537											$	1,944,906
Net interest income						$	17,486											$	16,642
Net interest spread											3.35												3.13
Effect of net interest-free funding sources											.41												0.58
Net interest margin											3.76	%											3.71	%
Ratio of average interest-earning assets to average interest-bearing liabilities			118.55	%											118.62	%