Document
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 Form 10-Q
 
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2016.
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to                     .
Commission File Number: 0-7617
 
 

 UNIVEST CORPORATION OF PENNSYLVANIA
(Exact name of registrant as specified in its charter)
 
 
Pennsylvania
 
23-1886144
(State or other jurisdiction of
incorporation or 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
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).    Yes  x    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $5 par value
 
26,555,176
(Title of Class)
 
(Number of shares outstanding at July 29, 2016)
 
 

Table of Contents


UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
INDEX
 
 
 
Page Number
Part I.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 


1
Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED BALANCE SHEETS
 
(UNAUDITED)
 
 
(Dollars in thousands, except share data)
At June 30, 2016
 
At December 31, 2015
ASSETS
 
Cash and due from banks
$
36,404

 
$
32,356

Interest-earning deposits with other banks
8,286

 
28,443

Federal funds sold
48,500

 
—

Investment securities held-to-maturity (fair value $32,946 and $41,061 at June 30, 2016 and December 31, 2015, respectively)
32,885

 
40,990

Investment securities available-for-sale
254,095

 
329,770

Loans held for sale
4,657

 
4,680

Loans and leases held for investment
2,345,037

 
2,179,013

Less: Reserve for loan and lease losses
(17,153
)
 
(17,628
)
Net loans and leases held for investment
2,327,884

 
2,161,385

Premises and equipment, net
44,437

 
42,156

Goodwill
112,657

 
112,657

Other intangibles, net of accumulated amortization and fair value adjustments of $15,234 and $15,360 at June 30, 2016 and December 31, 2015, respectively
11,677

 
12,620

Bank owned life insurance
72,565

 
71,560

Funds advanced for merger settlement
98,885

 
—

Accrued interest receivable and other assets
54,685

 
42,834

Total assets
$
3,107,617

 
$
2,879,451

LIABILITIES
 
 
 
Noninterest-bearing deposits
$
689,916

 
$
541,460

Interest-bearing deposits:
 
 
 
Demand deposits
674,847

 
790,800

Savings deposits
652,129

 
607,694

Time deposits
360,192

 
454,406

Total deposits
2,377,084

 
2,394,360

Short-term borrowings
260,216

 
24,211

Subordinated notes
49,450

 
49,377

Accrued interest payable and other liabilities
51,707

 
49,929

Total liabilities
2,738,457

 
2,517,877

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $5 par value: 48,000,000 shares authorized at June 30, 2016 and December 31, 2015; 22,054,270 shares issued at June 30, 2016 and December 31, 2015; 19,557,958 and 19,530,930 shares outstanding at June 30, 2016 and December 31, 2015, respectively
110,271

 
110,271

Additional paid-in capital
121,399

 
121,280

Retained earnings
198,156

 
193,446

Accumulated other comprehensive loss, net of tax benefit
(14,370
)
 
(16,708
)
Treasury stock, at cost; 2,496,312 and 2,523,340 shares at June 30, 2016 and December 31, 2015, respectively
(46,296
)
 
(46,715
)
Total shareholders’ equity
369,160

 
361,574

Total liabilities and shareholders’ equity
$
3,107,617

 
$
2,879,451

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

2
Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands, except per share data)
2016
 
2015
 
2016
 
2015
Interest income
 
Interest and fees on loans and leases:
 
 
 
 
 
 
 
Taxable
$
22,311

 
$
21,939

 
$
44,161

 
$
43,193

Exempt from federal income taxes
1,774

 
1,579

 
3,490

 
3,163

Total interest and fees on loans and leases
24,085

 
23,518

 
47,651

 
46,356

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
1,188

 
1,104

 
2,462

 
2,138

Exempt from federal income taxes
710

 
880

 
1,444

 
1,739

Interest on federal funds sold
2

 
—

 
9

 
2

Other interest income
9

 
11

 
37

 
16

Total interest income
25,994

 
25,513

 
51,603

 
50,251

Interest expense
 
 
 
 
 
 
 
Interest on deposits
1,458

 
1,445

 
2,991

 
2,862

Interest on short-term borrowings
320

 
13

 
323

 
23

Interest on long-term borrowings
673

 
675

 
1,348

 
682

Total interest expense
2,451

 
2,133

 
4,662

 
3,567

Net interest income
23,543

 
23,380

 
46,941

 
46,684

Provision for loan and lease losses
830

 
1,141

 
1,156

 
2,215

Net interest income after provision for loan and lease losses
22,713

 
22,239

 
45,785

 
44,469

Noninterest income
 
 
 
 
 
 
 
Trust fee income
1,997

 
2,154

 
3,862

 
3,974

Service charges on deposit accounts
1,056

 
1,039

 
2,054

 
2,102

Investment advisory commission and fee income
2,759

 
2,740

 
5,428

 
5,503

Insurance commission and fee income
3,503

 
3,434

 
8,061

 
7,580

Other service fee income
1,948

 
1,833

 
3,781

 
3,431

Bank owned life insurance income
535

 
211

 
1,005

 
564

Net gain on sales of investment securities
413

 
181

 
457

 
272

Net gain on mortgage banking activities
1,711

 
1,367

 
2,929

 
2,625

Other income
197

 
392

 
498

 
731

Total noninterest income
14,119

 
13,351

 
28,075

 
26,782

Noninterest expense
 
 
 
 
 
 
 
Salaries and benefits
14,080

 
11,957

 
28,262

 
25,271

Commissions
2,363

 
2,155

 
4,258

 
3,969

Net occupancy
2,091

 
2,035

 
4,187

 
4,393

Equipment
2,116

 
1,708

 
4,004

 
3,397

Professional fees
947

 
1,066

 
1,967

 
1,873

Marketing and advertising
513

 
551

 
1,051

 
911

Deposit insurance premiums
418

 
422

 
865

 
834

Intangible expenses
996

 
893

 
1,766

 
1,679

Acquisition-related costs
1,158

 
41

 
1,372

 
507

Integration costs
27

 
110

 
33

 
1,484

Restructuring charges
—

 
1,642

 
—

 
1,642

Other expense
4,837

 
4,252

 
8,720

 
8,283

Total noninterest expense
29,546

 
26,832

 
56,485

 
54,243

Income before income taxes
7,286

 
8,758

 
17,375

 
17,008

Income taxes
2,046

 
2,292

 
4,846

 
4,426

Net income
$
5,240

 
$
6,466

 
$
12,529

 
$
12,582

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.33

 
$
0.64

 
$
0.64

Diluted
0.27

 
0.33

 
0.64

 
0.64

Dividends declared
0.20

 
0.20

 
0.40

 
0.40

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

3
Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended June 30,
(Dollars in thousands)
2016
 
2015
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
Income
$
7,286

 
$
2,046

 
$
5,240

 
$
8,758

 
$
2,292

 
$
6,466

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
2,084

 
730

 
1,354

 
(3,555
)
 
(1,244
)
 
(2,311
)
Less: reclassification adjustment for net gains on sales realized in net income
(413
)
 
(145
)
 
(268
)
 
(181
)
 
(63
)
 
(118
)
Total net unrealized gains (losses) on available-for-sale investment securities
1,671

 
585

 
1,086

 
(3,736
)
 
(1,307
)
 
(2,429
)
Net change in fair value of interest rate swaps used in cash flow hedges
(220
)
 
(77
)
 
(143
)
 
377

 
132

 
245

Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in net periodic pension costs
329

 
115

 
214

 
340

 
119

 
221

Accretion of prior service cost included in net periodic pension costs
(70
)
 
(24
)
 
(46
)
 
(70
)
 
(25
)
 
(45
)
Total defined benefit pension plans
259

 
91

 
168

 
270

 
94

 
176

Other comprehensive income (loss)
1,710

 
599

 
1,111

 
(3,089
)
 
(1,081
)
 
(2,008
)
Total comprehensive income
$
8,996

 
$
2,645

 
$
6,351

 
$
5,669

 
$
1,211

 
$
4,458

 
Six Months Ended June 30,
(Dollars in thousands)
2016
 
2015
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
Income
$
17,375

 
$
4,846

 
$
12,529

 
$
17,008

 
$
4,426

 
$
12,582

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
4,302

 
1,506

 
2,796

 
(1,397
)
 
(489
)
 
(908
)
Less: reclassification adjustment for net gains on sales realized in net income
(457
)
 
(160
)
 
(297
)
 
(272
)
 
(95
)
 
(177
)
Total net unrealized gains (losses) on available-for-sale investment securities
3,845

 
1,346

 
2,499

 
(1,669
)
 
(584
)
 
(1,085
)
Net change in fair value of interest rate swaps used in cash flow hedges
(765
)
 
(268
)
 
(497
)
 
40

 
14

 
26

Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in net periodic pension costs
658

 
230

 
428

 
681

 
239

 
442

Accretion of prior service cost included in net periodic pension costs
(141
)
 
(49
)
 
(92
)
 
(140
)
 
(49
)
 
(91
)
Total defined benefit pension plans
517

 
181

 
336

 
541

 
190

 
351

Other comprehensive income (loss)
3,597

 
1,259

 
2,338

 
(1,088
)
 
(380
)
 
(708
)
Total comprehensive income
$
20,972

 
$
6,105

 
$
14,867

 
$
15,920

 
$
4,046

 
$
11,874

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

4
Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except share and per share data)
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Total
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
19,530,930

 
$
110,271

 
$
121,280

 
$
193,446

 
$
(16,708
)
 
$
(46,715
)
 
$
361,574

Net income
—

 
—

 
—

 
12,529

 
—

 
—

 
12,529

Other comprehensive income, net of income tax
—

 
—

 
—

 
—

 
2,338

 
—

 
2,338

Cash dividends declared ($0.40 per share)
—

 
—

 
—

 
(7,819
)
 
—

 
—

 
(7,819
)
Stock issued under dividend reinvestment and employee stock purchase plans
61,281

 
—

 
25

 
—

 
—

 
1,206

 
1,231

Exercise of stock options
22,667

 
—

 
(45
)
 
—

 
—

 
422

 
377

Repurchase of cancelled restricted stock awards
(14,250
)
 
—

 
241

 
—

 
—

 
(241
)
 
—

Stock-based compensation
—

 
—

 
944

 
—

 
—

 
—

 
944

Net tax benefit on stock-based compensation
—

 
—

 
37

 
—

 
—

 
—

 
37

Purchases of treasury stock
(101,250
)
 
—

 
—

 
—

 
—

 
(2,051
)
 
(2,051
)
Restricted stock awards granted
58,580

 
—

 
(1,083
)
 
—

 
—

 
1,083

 
—

Balance at June 30, 2016
19,557,958

 
$
110,271

 
$
121,399

 
$
198,156

 
$
(14,370
)
 
$
(46,296
)
 
$
369,160

(Dollars in thousands, except share and per share data)
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Total
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
16,221,607

 
$
91,332

 
$
62,980

 
$
181,851

 
$
(14,462
)
 
$
(37,147
)
 
$
284,554

Net income
—

 
—

 
—

 
12,582

 
—

 
—

 
12,582

Other comprehensive income, net of income tax
—

 
—

 
—

 
—

 
(708
)
 
—

 
(708
)
Cash dividends declared ($0.40 per share)
—

 
—

 
—

 
(7,902
)
 
—

 
—

 
(7,902
)
Stock issued under dividend reinvestment and employee stock purchase plans
63,502

 
—

 
30

 
(1
)
 
—

 
1,221

 
1,250

Issuance of common stock, acquisition
3,787,866

 
18,939

 
57,727

 
—

 
—

 
—

 
76,666

Exercise of stock options
14,666

 
—

 
(27
)
 
—

 
—

 
268

 
241

Repurchase of cancelled restricted stock awards
(17,684
)
 
—

 
277

 
—

 
—

 
(277
)
 
—

Stock-based compensation
—

 
—

 
813

 
—

 
—

 
—

 
813

Purchases of treasury stock
(575,771
)
 
—

 
—

 
—

 
—

 
(11,310
)
 
(11,310
)
Restricted stock awards granted
65,755

 
—

 
(1,195
)
 
—

 
—

 
1,195

 
—

Balance at June 30, 2015
19,559,941

 
$
110,271

 
$
120,605

 
$
186,530

 
$
(15,170
)
 
$
(46,050
)
 
$
356,186

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

5
Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
(Dollars in thousands)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
12,529

 
$
12,582

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
1,156

 
2,215

Depreciation of premises and equipment
1,903

 
1,937

Net gain on sales of investment securities
(457
)
 
(272
)
Net gain on mortgage banking activities
(2,929
)
 
(2,625
)
Bank owned life insurance income
(1,005
)
 
(564
)
Net accretion of acquisition accounting fair value adjustments
(303
)
 
(1,316
)
Stock-based compensation
944

 
813

Intangible expenses
1,766

 
1,679

Other adjustments to reconcile net income to cash provided by operating activities
800

 
321

Deferred tax expense
1,619

 
3,537

Originations of loans held for sale
(104,668
)
 
(104,072
)
Proceeds from the sale of loans held for sale
106,685

 
104,782

Contributions to pension and other postretirement benefit plans
(121
)
 
(2,145
)
Increase in accrued interest receivable and other assets
(11,532
)
 
(3,075
)
Increase in accrued interest payable and other liabilities
1,784

 
770

Net cash provided by operating activities
8,171

 
14,567

Cash flows from investing activities:
 
 
 
Net cash paid due to acquisitions
—

 
(2,967
)
Funds advanced for merger settlement
(98,885
)
 
—

Net capital expenditures
(4,195
)
 
(2,254
)
Proceeds from maturities and calls of securities held-to-maturity
8,000

 
11,000

Proceeds from maturities and calls of securities available-for-sale
54,156

 
41,169

Proceeds from sales of securities available-for-sale
73,991

 
37,546

Purchases of investment securities available-for-sale
(48,647
)
 
(85,107
)
Net increase in loans and leases
(169,417
)
 
(106,375
)
Net decrease (increase) in interest-earning deposits
20,157

 
8,626

Net (increase) decrease in federal funds sold
(48,500
)
 
17,442

Net cash used in investing activities
(213,340
)
 
(80,920
)
Cash flows from financing activities:
 
 
 
Net (decrease) increase in deposits
(17,162
)
 
16,062

Net increase in short-term borrowings
235,752

 
19,202

Proceeds from issuance of subordinated notes
—

 
49,267

Payment of contingent consideration on acquisitions
(1,160
)
 
(880
)
Purchases of treasury stock
(2,051
)
 
(11,310
)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs
1,231

 
1,250

Proceeds from exercise of stock options, including excess tax benefits
414

 
289

Cash dividends paid
(7,807
)
 
(7,220
)
Net cash provided by financing activities
209,217

 
66,660

Net increase in cash and due from banks
4,048

 
307

Cash and due from banks at beginning of year
32,356

 
31,995

Cash and due from banks at end of period
$
36,404

 
$
32,302

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
5,033

 
$
3,152

Cash paid for income taxes, net of refunds
4,348

 
49

Non cash transactions:
 
 
 
Transfer of loans to other real estate owned
$
1,952

 
$
—

Transfer of loans to loans held for sale
—

 
4,000

Assets acquired through acquisitions
—

 
425,311

Liabilities assumed through acquisitions
—

 
389,782

Contingent consideration recorded as goodwill
—

 
1,525

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

6
Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (the Corporation or Univest) and its wholly owned subsidiaries; the Corporation’s primary subsidiary is Univest Bank and Trust Co. (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations for interim financial information. The accompanying unaudited consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary for a fair presentation of the financial statements for the interim periods presented. Certain prior period amounts have been reclassified to conform to the current-year presentation. Operating results for the six-month period ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 4, 2016.
Use of Estimates
The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include fair value measurement of investment securities available-for-sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation expense.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to require businesses and other organizations to measure the current expected credit losses (CECL) on financial assets, such as loans, net investments in leases, certain debt securities, bond insurance and other receivables. The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU. A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years for public business entities that are SEC filers, or January 1, 2020 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, it is anticipated that the allowance will increase upon adoption of CECL and that the increased allowance level will decrease regulatory capital and ratios.
In March 2016, the FASB issued an ASU to simplify and improve employee share-based payment accounting. Under the new guidance, all excess tax benefits and tax deficiencies are recognized as an income tax benefit or expense in the income statement. The additional paid-in capital pool is eliminated. Excess tax benefits and deficiencies are recognized in the period they are deducted on the income tax return. Excess tax benefits are recorded along with other income tax cash flows as an operating activity in the statement of cash flows. The recognition of excess tax benefits and deficiencies and changes to diluted earnings per share are to be applied prospectively when this ASU is adopted. For tax benefits that were not previously recognized because the related tax deduction had not reduced taxes payable, entities record a cumulative-effect adjustment in retained earnings as of the beginning of the year of adoption. The Corporation does not record deferred tax benefits on incentive stock options when expense is accrued, therefore, the Corporation will not have a cumulative-effect adjustment when this ASU is adopted. Changes to the treatment of forfeitures will not impact the Corporation as the historical assumption for forfeitures was immaterial and not taken into account

7
Table of Contents

during valuations; the Corporation has recorded forfeitures as they occurred which is consistent with the new guidance. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities, or January 1, 2017 for the Corporation. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The Corporation does not anticipate that the adoption of this ASU will have a material impact on the financial statements.
In March 2016, the FASB issued an ASU to amend the guidance for hedge accounting to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this ASU are effective for financial statements of public businesses issued for fiscal years and interim periods within those years beginning after December 15, 2016, or January 1, 2017 for the Corporation. The Corporation does not anticipate the adoption of this ASU will have any impact on the financial statements.
In February 2016, the FASB issued an ASU to revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. Disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The ASU is effective for the first interim period within annual periods beginning after December 15, 2018, or January 1, 2019, with early adoption permitted. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, the adoption of this ASU will impact the balance sheet for the recording of assets and liabilities for operating leases; any initial or continued impact of the recording of assets will have an impact on risk-based capital ratios under current regulatory guidance and possibly equity ratios.
In January 2016, the FASB issued an ASU to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The ASU will require equity investments to be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable, an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. The ASU will simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. A valuation allowance on a deferred tax asset related to available-for-sale securities will need to be included. For financial liabilities that are measured at fair value, the ASU requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument-specific credit risk. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The amendments in this ASU are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017 or January 1, 2018 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements.
In September 2015, the FASB issued an ASU simplifying the accounting for measurement-period adjustments related to business combinations. The ASU eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Under this ASU, measurement-period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. The ASU requires additional disclosures about the impact on current period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. The amendments in this ASU were effective for financial statements of public businesses issued for fiscal years and interim periods within those years beginning after December 15, 2015, or January 1, 2016 for the Corporation. The adoption of this guidance did not impact the Corporation's financial statements.
In April 2015, the FASB issued an ASU simplifying the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability shall be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The costs will continue to be amortized to interest expense using the effective interest method. The ASU was effective for financial statements of public businesses issued for fiscal years beginning after December 15, 2015, or January 1, 2016 for the Corporation. The adoption of this ASU did not impact the Corporation's balance sheet presentation as the Corporation followed this presentation consistent with the guidance in FASB Concepts Statement No. 6.

8
Table of Contents

In May 2014, the FASB issued an ASU regarding revenue from contracts with customers which clarifies the principles for recognizing revenue and develops a common standard for U.S. GAAP and International Financial Reporting Standards. The ASU establishes a core principle that would require an entity to identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. The ASU provides for improved disclosure requirements that require entities to disclose sufficient information that enables users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued an ASU clarifying the implementation guidance on the principal-versus-agent considerations in the revenue recognition standard by instructing the participants in the sale to determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. In April 2016, the FASB issued an ASU clarifying the identification of performance obligations and licensing. In May 2016, the FASB issued an ASU providing some limited improvements and practical expedients. The original effective date of the guidance relating to revenue from contracts with customers was deferred in August 2015 by one year. This guidance is now effective for fiscal years and interim periods within those years beginning after December 15, 2017, or January 1, 2018 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, it is anticipated the impact will be only related to timing.

Note 2. Acquisition
Fox Chase Bancorp
On December 8, 2015, the Corporation and Fox Chase Bancorp, Inc. (Fox Chase), parent company of Fox Chase Bank, entered into an Agreement and Plan of Merger which provided for the merger of Fox Chase with and into the Corporation in a cash and stock transaction with an aggregate value of approximately $243.0 million based on the Corporation's June 30, 2016 closing share price. The transaction is expected to qualify as a tax-free reorganization for federal income tax purposes. On July 1, 2016, the Corporation completed its acquisition of Fox Chase. See Note 15, "Subsequent Event" for additional information.
In January 2016, the Corporation approved a discretionary overnight federal funds line to Fox Chase Bank at a rate of one-month LIBOR plus 0.05%. At June 30, 2016, the Corporation had outstanding federal funds sold to Fox Chase Bank of $48.5 million. During the six months ended June 30, 2016, average federal funds sold to Fox Chase Bank were $3.5 million.
During the first half of 2016, a purported Fox Chase shareholder filed a purported class action derivative complaint in the Court of Common Pleas of Montgomery County, Pennsylvania. The lawsuit named as defendants Fox Chase, each member of Fox Chase’s board of directors and Univest. The lawsuit alleged that the Fox Chase directors breached their fiduciary duties by agreeing to the merger, that the directors and executive officers had conflicts of interest related to the transaction, that the registration filed on February 26, 2016 failed to disclose material information related to the transaction, and that Univest aided and abetted the alleged breaches of fiduciary duty. During July 2016, the case was dismissed with prejudice.

    




9
Table of Contents

Note 3. Investment Securities
The following table shows the amortized cost and the estimated fair value of the held-to-maturity securities and available-for-sale securities at June 30, 2016 and December 31, 2015, by contractual maturity within each type:
 
At June 30, 2016
 
At December 31, 2015
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
$
22,879

 
$
47

 
$
—

 
$
22,926

 
$
21,047

 
$
134

 
$
—

 
$
21,181

After 1 year to 5 years
10,006

 
22

 
(8
)
 
10,020

 
19,943

 
1

 
(64
)
 
19,880


32,885

 
69

 
(8
)
 
32,946

 
40,990

 
135

 
(64
)
 
41,061

Total
$
32,885

 
$
69

 
$
(8
)
 
$
32,946

 
$
40,990

 
$
135

 
$
(64
)
 
$
41,061

Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasuries:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 1 year to 5 years
$
—

 
$
—

 
$
—

 
$
—

 
$
4,978

 
$
—

 
$
(91
)
 
$
4,887


—

 
—

 
—

 
—

 
4,978

 
—

 
(91
)
 
4,887

U.S. government corporations and agencies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
10,067

 
23

 
—

 
10,090

 
10,389

 
—

 
(29
)
 
10,360

After 1 year to 5 years
37,043

 
313

 
—

 
37,356

 
92,148

 
26

 
(378
)
 
91,796


47,110

 
336

 
—

 
47,446

 
102,537

 
26

 
(407
)
 
102,156

State and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 1 year to 5 years
16,818

 
150

 
(8
)
 
16,960

 
17,362

 
80

 
(29
)
 
17,413

After 5 years to 10 years
50,727

 
1,718

 
(11
)
 
52,434

 
47,969

 
1,188

 
(32
)
 
49,125

Over 10 years
28,133

 
1,340

 
—

 
29,473

 
34,334

 
1,160

 
—

 
35,494


95,678

 
3,208

 
(19
)
 
98,867

 
99,665

 
2,428

 
(61
)
 
102,032

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 1 year to 5 years
—

 
—

 
—

 
—

 
9,713

 
12

 
(13
)
 
9,712

After 5 years to 10 years
57

 
1

 
—

 
58

 
60

 
—

 
—

 
60

Over 10 years
3,478

 
99

 
—

 
3,577

 
3,517

 
65

 
—

 
3,582


3,535

 
100

 
—

 
3,635

 
13,290

 
77

 
(13
)
 
13,354

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over 10 years
2,930

 
—

 
(2
)
 
2,928

 
3,215

 
—

 
(82
)
 
3,133


2,930

 
—

 
(2
)
 
2,928

 
3,215

 
—

 
(82
)
 
3,133

Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
250

 
—

 
—

 
250

 
250

 
—

 
—

 
250

After 1 year to 5 years
19,032

 
241

 
(4
)
 
19,269

 
19,446

 
25

 
(158
)
 
19,313

After 5 years to 10 years
15,204

 
76

 
(3
)
 
15,277

 
10,148

 
—

 
(266
)
 
9,882

Over 10 years
60,000

 
709

 
(2,060
)
 
58,649

 
60,000

 
—

 
(2,770
)
 
57,230


94,486

 
1,026

 
(2,067
)
 
93,445

 
89,844

 
25

 
(3,194
)
 
86,675

Money market mutual funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No stated maturity
7,009

 
—

 
—

 
7,009

 
16,726

 
—

 
—

 
16,726


7,009

 
—

 
—

 
7,009

 
16,726

 
—

 
—

 
16,726

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No stated maturity
413

 
352

 
—

 
765

 
426

 
381

 
—

 
807


413

 
352

 
—

 
765

 
426

 
381

 
—

 
807

Total
$
251,161

 
$
5,022

 
$
(2,088
)
 
$
254,095

 
$
330,681

 
$
2,937

 
$
(3,848
)
 
$
329,770


Expected maturities may differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties. Unrealized losses in investment securities at June 30, 2016 and December 31, 2015 do not represent other-than-temporary impairments in management's judgment..
Securities with a carrying value of $128.4 million and $210.1 million at June 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes as required by law.

10
Table of Contents

The following table presents information related to sales of securities available-for-sale during the six months ended June 30, 2016 and 2015:
 
Six Months Ended June 30,
(Dollars in thousands)
2016
 
2015
Securities available-for-sale:
 
 
 
Proceeds from sales
$
73,991

 
$
37,546

Gross realized gains on sales
539

 
294

Gross realized losses on sales
82

 
22

Tax expense related to net realized gains on sales
160

 
95

    
Management evaluates debt securities, which are comprised of U.S. government, government sponsored agencies, municipalities, corporate bonds and other issuers, for other-than-temporary impairment by considering the current economic conditions, the length of time and the extent to which the fair value has been less than cost, market interest rates and the bond rating of each security. All of the debt securities are rated as investment grade and management believes that it will not incur any losses. The unrealized losses on the Corporation’s investments in debt securities are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers. The Corporation does not have the intent to sell the debt securities and believes it is more likely than not, that it will not have to sell the securities before recovery of their cost basis. The Corporation did not recognize any other-than-temporary impairment charges on debt securities for the six months ended June 30, 2016 and 2015.

The Corporation evaluates its equity securities for other-than-temporary impairment and recognizes other-than-temporary impairment charges when it has determined that it is probable that the fair value of certain equity securities will not recover to the Corporation’s cost basis in the individual securities within a reasonable period of time due to a decline in the financial stability of the underlying companies. Management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Corporation has the intent and ability to hold these securities until recovery of the Corporation’s cost basis occurs. The Corporation did not recognize any other-than-temporary impairment charges on its equity portfolio during the six months ended June 30, 2016 and 2015.
At June 30, 2016 and December 31, 2015, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.

11
Table of Contents

The following table shows the fair value of securities that were in an unrealized loss position at June 30, 2016 and December 31, 2015 by the length of time those securities were in a continuous loss position:
 
Less than
Twelve Months
 
Twelve Months
or Longer
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
At June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
—

 
$
—

 
$
4,997

 
$
(8
)
 
$
4,997

 
$
(8
)
Total
$
—

 
$
—

 
$
4,997

 
$
(8
)
 
$
4,997

 
$
(8
)
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
1,287

 
$
(2
)
 
$
2,622

 
$
(17
)
 
$
3,909

 
$
(19
)
Collateralized mortgage obligations
—

 
—

 
2,928

 
(2
)
 
2,928

 
(2
)
Corporate bonds
—

 
—

 
43,680

 
(2,067
)
 
43,680

 
(2,067
)
Total
$
1,287

 
$
(2
)
 
$
49,230

 
$
(2,086
)
 
$
50,517

 
$
(2,088
)
At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
12,078

 
$
(9
)
 
$
4,953

 
$
(55
)
 
$
17,031

 
$
(64
)
Total
$
12,078

 
$
(9
)
 
$
4,953

 
$
(55
)
 
$
17,031

 
$
(64
)
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
—

 
$
—

 
$
4,887

 
$
(91
)
 
$
4,887

 
$
(91
)
U.S. government corporations and agencies
72,157

 
(379
)
 
4,972

 
(28
)
 
77,129

 
(407
)
State and political subdivisions
10,251

 
(49
)
 
1,335

 
(12
)
 
11,586

 
(61
)
Residential mortgage-backed securities
4,751

 
(13
)
 
—

 
—

 
4,751

 
(13
)
Collateralized mortgage obligations
—

 
—

 
3,133

 
(82
)
 
3,133

 
(82
)
Corporate bonds
72,234

 
(2,941
)
 
10,669

 
(253
)
 
82,903

 
(3,194
)
Total
$
159,393

 
$
(3,382
)
 
$
24,996

 
$
(466
)
 
$
184,389

 
$
(3,848
)
Note 4. Loans and Leases
Summary of Major Loan and Lease Categories
 
At June 30, 2016
(Dollars in thousands)
Originated
 
Acquired
 
Total
Commercial, financial and agricultural
$
559,364

 
$
20,096

 
$
579,460

Real estate-commercial
813,925

 
113,033

 
926,958

Real estate-construction
97,967

 
2,112

 
100,079

Real estate-residential secured for business purpose
122,373

 
107,849

 
230,222

Real estate-residential secured for personal purpose
200,746

 
3,085

 
203,831

Real estate-home equity secured for personal purpose
134,170

 
10,335

 
144,505

Loans to individuals
30,880

 
306

 
31,186

Lease financings
128,796

 
—

 
128,796

Total loans and leases held for investment, net of deferred income
$
2,088,221

 
$
256,816

 
$
2,345,037

Unearned lease income, included in the above table
$
(14,539
)
 
$
—

 
$
(14,539
)
Net deferred costs, included in the above table
4,987

 
—

 
4,987

Overdraft deposits included in the above table
72

 
—

 
72



12
Table of Contents

 
At December 31, 2015
(Dollars in thousands)
Originated
 
Acquired
 
Total
Commercial, financial and agricultural
$
479,980

 
$
24,535

 
$
504,515

Real estate-commercial
759,342

 
126,550

 
885,892

Real estate-construction
91,904

 
4,637

 
96,541

Real estate-residential secured for business purpose
94,280

 
124,503

 
218,783

Real estate-residential secured for personal purpose
177,850

 
3,305

 
181,155

Real estate-home equity secured for personal purpose
125,361

 
11,594

 
136,955

Loans to individuals
29,406

 
326

 
29,732

Lease financings
125,440

 
—

 
125,440

Total loans and leases held for investment, net of deferred income
$
1,883,563

 
$
295,450

 
$
2,179,013

Unearned lease income, included in the above table
$
(13,829
)
 
$
—

 
$
(13,829
)
Net deferred costs, included in the above table
4,244

 
—

 
4,244

Overdraft deposits included in the above table
35

 
—

 
35

Overdraft deposits are re-classified as loans and are included in the total loans and leases on the balance sheet.
The carrying amount of acquired loans at June 30, 2016 totaled $256.8 million, including $942 thousand of loans acquired with deteriorated credit quality, or acquired credit impaired loans from the Valley Green Bank acquisition. Acquired credit impaired loans are accounted for in accordance with Accounting Standards Codification (ASC) Topic 310-30.
The outstanding principal balance and carrying amount for acquired credit impaired loans at June 30, 2016 and December 31, 2015 were as follows:
(Dollars in thousands)
At June 30, 2016
 
At December 31, 2015
Outstanding principal balance
$
1,814

 
$
3,551

Carrying amount
942

 
1,253

Allowance for loan losses
—

 
8


The following table presents the changes in accretable yield on acquired credit impaired loans:
(Dollars in thousands)
Six Months Ended June 30, 2016
Beginning of period
$
144

Reclassification from nonaccretable difference
133

Accretable yield amortized to interest income
(184
)
Disposals
(34
)
End of period
$
59



13
Table of Contents

Age Analysis of Past Due Loans and Leases
The following presents, by class of loans and leases, an aging of past due loans and leases, loans and leases which are current and the recorded investment in loans and leases 90 days or more past due which are accruing interest at June 30, 2016 and December 31, 2015:
(Dollars in thousands)
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days
or more
Past Due
 
Total
Past Due
 
Current
 
Acquired Credit Impaired
 
Total Loans
and Leases
Held for
Investment
 
Recorded
Investment 90
Days or more
Past Due and
Accruing
Interest
At June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
813

 
$
19

 
$
1,758

 
$
2,590

 
$
576,870

 
$
—

 
$
579,460

 
$
—

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
606

 
—

 
626

 
1,232

 
925,546

 
180

 
926,958

 
—

Construction
—

 
—

 
—

 
—

 
100,079

 
—

 
100,079

 
—

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
2,414

 
1,025

 
582

 
4,021

 
225,439

 
762

 
230,222

 
—

Residential secured for personal purpose
262

 
—

 
308

 
570

 
203,261

 
—

 
203,831

 
—

Home equity secured for personal purpose
1,094

 
40

 
687

 
1,821

 
142,684

 
—

 
144,505

 
77

Loans to individuals
168

 
54

 
155

 
377

 
30,809

 
—

 
31,186

 
155

Lease financings
1,835

 
556

 
1,077

 
3,468

 
125,328

 
—

 
128,796

 
516

Total
$
7,192

 
$
1,694

 
$
5,193

 
$
14,079

 
$
2,330,016

 
$
942

 
$
2,345,037

 
$
748

At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
864

 
$
298

 
$
4,279

 
$
5,441

 
$
498,757

 
$
317

 
$
504,515

 
$
—

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
12,103

 
—

 
1,102

 
13,205

 
872,174

 
513

 
885,892

 
—

Construction
—

 
—

 
—

 
—

 
96,541

 
—

 
96,541

 
—

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
1,406

 
2,356

 
727

 
4,489

 
213,871

 
423

 
218,783

 
—

Residential secured for personal purpose
990

 
69

 
309

 
1,368

 
179,787

 
—

 
181,155

 
—

Home equity secured for personal purpose
777

 
52

 
174

 
1,003

 
135,952

 
—

 
136,955

 
—

Loans to individuals
198

 
97

 
173

 
468

 
29,264

 
—

 
29,732

 
173

Lease financings
1,294

 
652

 
646

 
2,592

 
122,848

 
—

 
125,440

 
206

Total
$
17,632

 
$
3,524

 
$
7,410

 
$
28,566

 
$
2,149,194

 
$
1,253

 
$
2,179,013

 
$
379



14
Table of Contents

Non-Performing Loans and Leases

The following presents, by class of loans and leases, non-performing loans and leases at June 30, 2016 and December 31, 2015:
 
At June 30, 2016
 
At December 31, 2015
(Dollars in thousands)
Nonaccrual
Loans and
Leases*
 
Accruing
Troubled
Debt
Restructured
Loans and
Lease
Modifications
 
Loans and
Leases
90 Days
or more
Past Due
and
Accruing
Interest
 
Total Non-
Performing
Loans and
Leases
 
Nonaccrual
Loans and
Leases*
 
Accruing
Troubled
Debt
Restructured
Loans and
Lease
Modifications
 
Loans and
Leases
90 Days
or more
Past Due
and
Accruing
Interest
 
Total Non-
Performing
Loans and
Leases
Commercial, financial and agricultural
$
5,463

 
$
1,425

 
$
—

 
$
6,888

 
$
6,915

 
$
1,602

 
$
—

 
$
8,517

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
3,960

 
2,173

 
—

 
6,133

 
4,314

 
2,449

 
—

 
6,763

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
2,251

 
815

 
—

 
3,066

 
1,863

 
763

 
—

 
2,626

Residential secured for personal purpose
409

 
—

 
—

 
409

 
376

 
421

 
—

 
797

Home equity secured for personal purpose
620

 
—

 
77

 
697

 
275

 
—

 
—

 
275

Loans to individuals
—

 
—

 
155

 
155

 
—

 
—

 
173

 
173

Lease financings
562

 
—

 
516

 
1,078

 
440

 
10

 
206

 
656

Total
$
13,265

 
$
4,413

 
$
748

 
$
18,426

 
$
14,183

 
$
5,245

 
$
379

 
$
19,807

 * Includes nonaccrual troubled debt restructured loans and lease modifications of $1.4 million and $93 thousand at June 30, 2016 and December 31, 2015, respectively.

Credit Quality Indicators
The following tables present by class, the recorded investment in loans and leases held for investment by credit quality indicator at June 30, 2016 and December 31, 2015.
The Corporation employs a ten (10) grade risk rating system related to the credit quality of commercial loans and residential real estate loans secured for a business purpose of which the first six categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating. Loans with risk ratings of one through five are reviewed based on the relationship dollar amount with the borrower: loans with a relationship total of $2.5 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.5 million but greater than $500 thousand are reviewed annually based on the borrower’s fiscal year; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with a risk rating of six are also reviewed based on the relationship dollar amount with the borrower: loans with a relationship balance of $2.0 million or greater are reviewed quarterly; loans with a relationship balance of less than $2.0 million but greater than $500 thousand are reviewed annually; loans with a relationship balance of less than $500 thousand are reviewed only if the loan becomes 60 days or more past due. Loans with a risk rating of seven are reviewed at least quarterly, and as often as monthly, at management’s discretion. Loans with risk ratings of eight through ten are reviewed monthly.

1.
Cash Secured—No credit risk
2.
Fully Secured—Negligible credit risk
3.
Strong—Minimal credit risk
4.
Satisfactory—Nominal credit risk
5.
Acceptable—Moderate credit risk
6.
Pre-Watch—Marginal, but stable credit risk
7.
Special Mention—Potential weakness
8.
Substandard—Well-defined weakness
9.
Doubtful—Collection in-full improbable
10.
Loss—Considered uncollectible



15
Table of Contents

Commercial Credit Exposure Credit Risk by Internally Assigned Grades
The following table presents classifications for originated loans:
(Dollars in thousands)
Commercial,
Financial and
Agricultural
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Real Estate—
Residential Secured
for Business Purpose
 
Total
At June 30, 2016
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
421

 
$
—

 
$
6,335

 
$
—

 
$
6,756

3. Strong
17,282

 
2,781

 
—

 
—

 
20,063

4. Satisfactory
31,286

 
37,333

 
450

 
256

 
69,325

5. Acceptable
410,312

 
578,714

 
82,780

 
107,227

 
1,179,033

6. Pre-watch
67,282

 
129,351

 
8,188

 
10,435

 
215,256

7. Special Mention
6,297

 
19,031

 
—

 
161

 
25,489

8. Substandard
26,484

 
46,715

 
214

 
4,294

 
77,707

9. Doubtful
—

 
—

 
—

 
—

 
—

10.Loss
—

 
—

 
—

 
—

 
—

Total
$
559,364

 
$
813,925

 
$
97,967

 
$
122,373

 
$
1,593,629

At December 31, 2015
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
968

 
$
—

 
$
5,417

 
$
—

 
$
6,385

3. Strong
17,328

 
10,877

 
—

 
—

 
28,205

4. Satisfactory
36,697

 
36,023

 
450

 
9

 
73,179

5. Acceptable
328,140

 
530,766

 
72,630

 
78,659

 
1,010,195

6. Pre-watch
61,098

 
119,117

 
13,262

 
7,161

 
200,638

7. Special Mention
6,074

 
20,286

 
—

 
2,347

 
28,707

8. Substandard
29,675

 
42,273

 
145

 
6,104

 
78,197

9. Doubtful
—

 
—

 
—

 
—

 
—

10.Loss
—

 
—

 
—

 
—

 
—

Total
$
479,980

 
$
759,342

 
$
91,904

 
$
94,280

 
$
1,425,506


















16
Table of Contents

The following table presents classifications for acquired loans:
(Dollars in thousands)
Commercial,
Financial and
Agricultural
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Real Estate—
Residential Secured
for Business Purpose
 
Total
At June 30, 2016
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
1,398

 
$
—

 
$
—

 
$
—

 
$
1,398

3. Strong
—

 
—

 
—

 
—

 
—

4. Satisfactory
1,146

 
2,162

 
—

 
—

 
3,308

5. Acceptable
14,604

 
88,291

 
2,112

 
94,424

 
199,431

6. Pre-watch
2,067

 
13,839

 
—

 
7,711

 
23,617

7. Special Mention
—

 
7,716

 
—

 
3,440

 
11,156

8. Substandard
881

 
1,025

 
—

 
2,274

 
4,180

9. Doubtful
—

 
—

 
—

 
—

 
—

10.Loss
—

 
—

 
—

 
—

 
—

Total
$
20,096

 
$
113,033

 
$
2,112

 
$
107,849

 
$
243,090

December 31, 2015
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
1,411

 
$
—

 
$
—

 
$
—

 
$
1,411

3. Strong
—

 
—

 
—

 
—

 
—

4. Satisfactory
1,181

 
3,561

 
—

 
608

 
5,350

5. Acceptable
18,446

 
102,122

 
4,637

 
113,002

 
238,207

6. Pre-watch
2,273

 
10,365

 
—

 
8,153

 
20,791

7. Special Mention
417

 
8,853

 
—

 
367

 
9,637

8. Substandard
807

 
1,649

 
—

 
2,373

 
4,829

9. Doubtful
—

 
—

 
—

 
—

 
—

10.Loss
—

 
—

 
—

 
—

 
—

Total
$
24,535

 
$
126,550

 
$
4,637

 
$
124,503

 
$
280,225

Credit Exposure—Real Estate—Residential Secured for Personal Purpose, Real Estate—Home Equity Secured for Personal Purpose, Loans to individuals, Lease Financing Credit Risk Profile by Payment Activity
The Corporation monitors the credit risk profile by payment activity for the following classifications of loans and leases: residential real estate loans secured for a personal purpose, home equity loans secured for a personal purpose, loans to individuals and lease financings. Nonperforming loans and leases are loans past due 90 days or more, loans and leases on nonaccrual of interest and troubled debt restructured loans and lease modifications. Performing loans and leases are reviewed only if the loan becomes 60 days or more past due. Nonperforming loans and leases are reviewed monthly. Performing loans and leases have a nominal to moderate risk of loss. Nonperforming loans and leases are loans or leases with a well-defined weakness and where collection in-full is unlikely.
The following table presents classifications for originated loans:
(Dollars in thousands)
Real Estate—
Residential
Secured for
Personal Purpose
 
Real Estate—
Home Equity
Secured for
Personal Purpose
 
Loans to
Individuals
 
Lease
Financing
 
Total
At June 30, 2016
 
 
 
 
 
 
 
 
 
Performing
$
200,337

 
$
133,473

 
$
30,725

 
$
127,718

 
$
492,253

Nonperforming
409

 
697

 
155

 
1,078

 
2,339

Total
$
200,746

 
$
134,170

 
$
30,880

 
$
128,796

 
$
494,592

At December 31, 2015
 
 
 
 
 
 
 
 
 
Performing
$
177,053

 
$
125,086

 
$
29,233

 
$
124,784

 
$
456,156

Nonperforming
797

 
275

 
173

 
656

 
1,901

Total
$
177,850

 
$
125,361

 
$
29,406

 
$
125,440

 
$
458,057



17
Table of Contents

The following table presents classifications for acquired loans:
(Dollars in thousands)
Real Estate—
Residential
Secured for
Personal Purpose
 
Real Estate—
Home Equity
Secured for
Personal Purpose
 
Loans to
Individuals
 
Lease
Financing
 
Total
At June 30, 2016
 
 
 
 
 
 
 
 
 
Performing
$
3,085

 
$
10,335

 
$
306

 
$
—

 
$
13,726

Nonperforming
—

 
—

 
—

 
—

 
—

Total
$
3,085

 
$
10,335

 
$
306

 
$
—

 
$
13,726

At December 31, 2015
 
 
 
 
 
 
 
 
 
Performing
$
3,305

 
$
11,594

 
$
326

 
$
—

 
$
15,225

Nonperforming
—

 
—

 
—

 
—

 
—

Total
$
3,305

 
$
11,594

 
$
326

 
$
—

 
$
15,225

Risks associated with lending activities include, among other things, the impact of changes in interest rates and economic conditions, which may adversely impact the ability of borrowers to repay outstanding loans, and impact the value of the associated collateral.
Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties and factors affecting residential real estate borrowers.
Commercial, financial and agricultural business loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business. In addition, the collateral securing the loans often depreciates over time, is difficult to appraise and liquidate and fluctuates in value based on the success of the business.
Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest). During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral. Included in real estate-construction is track development financing. Risk factors related to track development financing include the demand for residential housing and the real estate valuation market. When projects move slower than anticipated, the properties may have significantly lower values than when the original underwriting was completed, resulting in lower collateral values to support the loan. Extended time frames also cause the interest carrying cost for a project to be higher than the builder projected, negatively impacting the builder’s profit and cash flow and, therefore, their ability to make principal and interest payments.
Commercial real estate loans and residential real estate loans with a business purpose secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.
Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans secured for a business purpose are more susceptible to a risk of loss during a downturn in the business cycle. While the Corporation has strict underwriting, review, and monitoring procedures in place, these procedures cannot eliminate all of the risks related to these loans.
The Corporation focuses on both assessing the borrower’s capacity and willingness to repay and on obtaining sufficient collateral. Commercial, financial and agricultural loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the Southeastern Pennsylvania market area at conservative loan-to-value ratios and often with a guarantee of the borrowers.

18
Table of Contents

Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that any credit concentrations by borrower or industry are closely monitored.
The Corporation originates fixed-rate and adjustable-rate real estate-residential mortgage loans that are secured by the underlying 1-to-4 family residential properties for personal purposes. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.
In the real estate-home equity loan portfolio secured for a personal purpose, credit exposure is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to the Corporation’s underwriting policies. Combined loan-to-value ratios are generally limited to 80%, but increased to 85% for the Corporation’s strongest profile borrower. Other credit considerations and compensating factors may support higher combined loan-to-value ratios.
Credit risk for consumer loans is controlled by strict adherence to underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values. These loans are included within the portfolio of loans to individuals.
The primary risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations. The Corporation has strict underwriting, review, and monitoring procedures in place to mitigate this risk. Risk also lies in the residual value of the underlying equipment. Residual values are subject to judgments as to the value of the underlying equipment that can be affected by changes in economic and market conditions and the financial viability of the residual guarantors and insurers. To the extent not guaranteed or assumed by a third party, or otherwise insured against, the Corporation bears the risk of ownership of the leased assets. This includes the risk that the actual value of the leased assets at the end of the lease term will be less than the residual value. The Corporation greatly reduces this risk primarily by using $1.00 buyout leases, in which the entire cost of the leased equipment is included in the contractual payments, leaving no residual payment at the end of the lease term.

19
Table of Contents

Reserve for Loan and Lease Losses and Recorded Investment in Loans and Leases
The following presents, by portfolio segment, a summary of the activity in the reserve for loan and lease losses, the balance in the reserve for loan and lease losses disaggregated on the basis of impairment method and the recorded investment in loans and leases disaggregated on the basis of impairment method for the three and six months ended June 30, 2016 and 2015:
(Dollars in thousands)
Commercial,
Financial
and
Agricultural
 
Real Estate—
Commercial
and
Construction
 
Real Estate—
Residential
Secured for
Business
Purpose
 
Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose
 
Loans to
Individuals
 
Lease
Financings
 
Unallocated
 
Total
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,630

 
$
6,471

 
$
747

 
$
1,312

 
$
356

 
$
922

 
$
1,014

 
$
16,452

Charge-offs
(346
)
 
(179
)
 
(27
)
 
(10
)
 
(108
)
 
(160
)
 
N/A

 
(830
)
Recoveries
515

 
9

 
34

 
34

 
30

 
79

 
N/A

 
701

(Recovery of provision) provision
(11
)
 
1,070

 
(698
)
 
(34
)
 
133

 
280

 
(87
)
 
653

Provision (recovery of provision) for acquired credit impaired loans
—

 
178

 
—

 
(1
)
 
—

 
—

 
—

 
177

Ending balance
$
5,788

 
$
7,549

 
$
56

 
$
1,301

 
$
411

 
$
1,121

 
$
927

 
$
17,153

Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,712

 
$
9,648

 
$
668

 
$
1,128

 
$
365

 
$
1,013

 
$
1,400

 
$
20,934

Charge-offs*
(1,038
)
 
(1,348
)
 
(24
)
 
(107
)
 
(64
)
 
(189
)
 
N/A

 
(2,770
)
Recoveries
115

 
91

 
7

 
—

 
41

 
43

 
N/A

 
297

Provision (recovery of provision)
1,058

 
(590
)
 
(35
)
 
167

 
47

 
258

 
236

 
1,141

Ending balance
$
6,847

 
$
7,801

 
$
616

 
$
1,188

 
$
389

 
$
1,125

 
$
1,636

 
$
19,602

Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,418

 
$
6,572

 
$
763

 
$
1,575

 
$
346

 
$
1,042

 
$
912

 
$
17,628

Charge-offs
(1,827
)
 
(205
)
 
(265
)
 
(56
)
 
(184
)
 
(365
)
 
N/A

 
(2,902
)
Recoveries
965

 
16

 
53

 
51

 
63

 
123

 
N/A

 
1,271

Provision (recovery of provision)
232

 
988

 
(495
)
 
(267
)
 
186

 
321

 
15

 
980

Provision (recovery of provision) for acquired credit impaired loans
—

 
178

 
—

 
(2
)
 
—

 
—

 
—

 
176

Ending balance
$
5,788

 
$
7,549

 
$
56

 
$
1,301

 
$
411

 
$
1,121

 
$
927

 
$
17,153

Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,920

 
$
8,943

 
$
763

 
$
1,124

 
$
360

 
$
985

 
$
1,567

 
$
20,662

Charge-offs*
(1,338
)
 
(1,696
)
 
(24
)
 
(138
)
 
(248
)
 
(419
)
 
N/A

 
(3,863
)
Recoveries
225

 
156

 
13

 
1

 
89

 
104

 
N/A

 
588

Provision (recovery of provision)
1,040

 
398

 
(136
)
 
201

 
188

 
455

 
69

 
2,215

Ending balance
$
6,847

 
$
7,801

 
$
616

 
$
1,188

 
$
389

 
$
1,125

 
$
1,636

 
$
19,602

N/A – Not applicable
*Includes charge-offs of $1.3 million on two real estate construction loans for one borrower which were subsequently transferred to loans held for sale in the second quarter of 2015.

20
Table of Contents

(Dollars in thousands)
Commercial,
Financial
and
Agricultural
 
Real Estate—
Commercial
and
Construction
 
Real Estate—
Residential
Secured for
Business
Purpose
 
Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose
 
Loans to
Individuals
 
Lease
Financings
 
Unallocated
 
Total
At June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
390

 
$
4

 
$
16

 
$
—

 
$
—

 
$
—

 
N/A

 
$
410

Ending balance: collectively evaluated for impairment
5,398

 
7,545

 
40

 
1,301

 
411

 
1,121

 
927

 
16,743

Total ending balance
$
5,788

 
$
7,549

 
$
56

 
$
1,301

 
$
411

 
$
1,121

 
$
927

 
$
17,153

Loans and leases held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
12,472

 
$
26,761

 
$
3,772

 
$
1,029

 
$
—

 
$
—

 
 
 
$
44,034

Ending balance: collectively evaluated for impairment
546,892

 
885,131

 
118,601

 
333,887

 
30,880

 
128,796

 
 
 
2,044,187

Acquired non-credit impaired loans
20,096

 
114,965

 
107,087

 
13,420

 
306

 
—

 
 
 
255,874

Acquired credit impaired loans
—

 
180

 
762

 
—

 
—

 
—

 
 
 
942

Total ending balance
$
579,460

 
$
1,027,037

 
$
230,222

 
$
348,336

 
$
31,186

 
$
128,796

 
 
 
$
2,345,037

At June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
444

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
N/A

 
$
444

Ending balance: collectively evaluated for impairment
6,403

 
7,801

 
616

 
1,188

 
389

 
1,125

 
1,636

 
19,158

Total ending balance
$
6,847

 
$
7,801

 
$
616

 
$
1,188

 
$
389

 
$
1,125

 
$
1,636

 
$
19,602

Loans and leases held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
15,409

 
$
18,956

 
$
3,633

 
$
949

 
$
—

 
$
—

 
 
 
$
38,947

Ending balance: collectively evaluated for impairment
469,367

 
758,024

 
48,290

 
288,263

 
28,070

 
120,597

 
 
 
1,712,611

Acquired non-credit impaired loans
26,880

 
175,583

 
135,480

 
16,135

 
345

 
—

 
 
 
354,423

Acquired credit impaired loans
304

 
1,021

 
491

 
60

 
—

 
—

 
 
 
1,876

Total ending balance
$
511,960

 
$
953,584

 
$
187,894

 
$
305,407

 
$
28,415

 
$
120,597

 
 
 
$
2,107,857

N/A – Not applicable
Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for acquired non-impaired loans is similar to originated loans, however, the Corporation records a provision for loan loss only when the required allowance exceeds the remaining unamortized credit mark. The present value of any decreases in expected cash flows after the acquisition date of purchased impaired loans will generally result in an impairment charge recorded as a provision for loan loss, resulting in an increase to the allowance.


21
Table of Contents

Impaired Loans
The following presents, by class of loans, the recorded investment and unpaid principal balance of impaired loans , the amounts of the impaired loans for which there is not an allowance for credit losses and the amounts for which there is an allowance for credit losses at June 30, 2016 and December 31, 2015. The impaired loans exclude loans acquired with deteriorated credit quality.
 
At June 30, 2016
 
At December 31, 2015
(Dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
11,439

 
$
13,260

 
 
 
$
10,337

 
$
13,318

 
 
Real estate—commercial real estate
26,497

 
27,395

 
 
 
30,088

 
30,996

 
 
Real estate—residential secured for business purpose
3,612

 
3,903

 
 
 
4,597

 
4,717

 
 
Real estate—residential secured for personal purpose
409

 
434

 
 
 
545

 
554

 
 
Real estate—home equity secured for personal purpose
620

 
620

 
 
 
170

 
170

 
 
Total impaired loans with no allowance recorded
$
42,577

 
$
45,612

 
 
 
$
45,737

 
$
49,755

 
 
Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
1,033

 
$
1,033

 
$
390

 
$
2,544

 
$
2,544

 
$
208

Real estate—commercial real estate
264

 
264

 
4

 
—

 
—

 
—

Real estate—residential secured for business purpose
160

 
165

 
16

 
295

 
295

 
45

Real estate—residential secured for personal purpose
—

 
—

 
—

 
252

 
252

 
16

Real estate—home equity secured for personal purpose
—

 
—

 
—

 
105

 
105

 
53

Total impaired loans with an allowance recorded
$
1,457

 
$
1,462

 
$
410

 
$
3,196

 
$
3,196

 
$
322


 
At June 30, 2016
 
At December 31, 2015
(Dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
12,472

 
$
14,293

 
$
390

 
$
12,881

 
$
15,862

 
$
208

Real estate—commercial real estate
26,761

 
27,659

 
4

 
30,088

 
30,996

 
—

Real estate—residential secured for business purpose
3,772

 
4,068

 
16

 
4,892

 
5,012

 
45

Real estate—residential secured for personal purpose
409

 
434

 
—

 
797

 
806

 
16

Real estate—home equity secured for personal purpose
620

 
620

 
—

 
275

 
275

 
53

Total impaired loans
$
44,034

 
$
47,074

 
$
410

 
$
48,933

 
$
52,951

 
$
322

Impaired loans include nonaccrual loans, accruing troubled debt restructured loans and other accruing impaired loans for which it is probable that not all principal and interest payments due will be collectible in accordance with the contractual terms. These loans are individually measured to determine the amount of potential impairment. The loans are reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans’ initial effective interest rates. Impaired loans include other accruing impaired loans of $26.9 million and $30.0 million at June 30, 2016 and December 31, 2015, respectively. Specific reserves on other accruing impaired loans were $171 thousand and $186 thousand at June 30, 2016 and December 31, 2015, respectively.


22
Table of Contents

The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Therefore, interest income on accruing impaired loans is recognized using the accrual method. 
 
Three Months Ended June 30, 2016
 
Three Months Ended June 30, 2015
(Dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized*
 
Additional
Interest Income
That Would
Have Been
Recognized
Under Original
Terms
 
Average
Recorded
Investment
 
Interest
Income
Recognized*
 
Additional
Interest Income
That Would
Have Been
Recognized
Under Original
Terms
Loans held for sale
$
—

 
$
—

 
$
—

 
$
83

 
$
—

 
$
1

Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
13,387

 
74

 
78

 
15,669

 
116

 
99

Real estate—commercial real estate
27,691

 
281

 
58

 
26,093

 
306

 
82

Real estate—construction
—

 
—

 
—

 
5,621

 
—

 
76

Real estate—residential secured for business purpose
3,740

 
9

 
60

 
3,385

 
39

 
38

Real estate—residential secured for personal purpose
392

 
—

 
5

 
796

 
—

 
11

Real estate—home equity secured for personal purpose
431

 
—

 
9

 
175

 
—

 
3

Total
$
45,641

 
$
364

 
$
210

 
$
51,822

 
$
461

 
$
310

*
Includes interest income recognized on a cash basis for nonaccrual loans of $0 thousand and $18 thousand for the three months ended June 30, 2016 and 2015, respectively and interest income recognized on the accrual method for accruing impaired loans of $364 thousand and $443 thousand for the three months ended June 30, 2016 and 2015, respectively.
 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
(Dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized*
 
Additional
Interest Income
That Would
Have Been
Recognized
Under Original
Terms
 
Average
Recorded
Investment
 
Interest
Income
Recognized*
 
Additional
Interest Income
That Would
Have Been
Recognized
Under Original
Terms
Loans held for sale
$
—

 
$
—

 
$
—

 
$
47

 
$
—

 
$
1

Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
13,421

 
142

 
173

 
15,990

 
258

 
186

Real estate—commercial real estate
28,389

 
586

 
128

 
27,450

 
626

 
165

Real estate—construction
—

 
—

 
—

 
5,688

 
—

 
153

Real estate—residential secured for business purpose
4,120

 
36

 
107

 
3,291

 
68

 
54

Real estate—residential secured for personal purpose
496

 
2

 
9

 
674

 
—

 
24

Real estate—home equity secured for personal purpose
329

 
—

 
11

 
179

 
—

 
6

Total
$
46,755

 
$
766

 
$
428

 
$
53,319

 
$
952

 
$
589

*
Includes interest income recognized on a cash basis for nonaccrual loans of $7 thousand and $22 thousand for the six months ended June 30, 2016 and 2015, respectively and interest income recognized on the accrual method for accruing impaired loans of $759 thousand and $930 thousand for the six months ended June 30, 2016 and 2015, respectively.









23
Table of Contents

Troubled Debt Restructured Loans

The following presents, by class of loans, information regarding accruing and nonaccrual loans that were restructured:
 
Three Months Ended June 30, 2016
 
Three Months Ended June 30, 2015
(Dollars in thousands)
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Allowance
 
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Allowance
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
$
—

 
$
—

 
2

 
$
947

 
$
947

 
$
—

Real estate—commercial real estate
—

 
—

 
—

 
—

 
1

 
405

 
405

 
—

Real estate—residential secured for business purpose
1

 
415

 
415

 
—

 
—

 
—

 
—

 
—

Total
1

 
$
415

 
$
415

 
$
—

 
3

 
$
1,352

 
$
1,352

 
$
—

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
—

 
$
—

 
$
—

 
$
—

 
—

 
$
—

 
$
—

 
$
—

 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
(Dollars in thousands)
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Allowance
 
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Allowance
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
1

 
$
1,545

 
$
1,545

 
$
—

 
3

 
$
1,090

 
$
1,090

 
$
71

Real estate—commercial real estate
—

 
—

 
—

 
—

 
1

 
405

 
405

 
—

Real estate—residential secured for business purpose
1

 
415

 
415

 
—

 
1

 
353

 
353

 
—

Total
2

 
$
1,960

 
$
1,960

 
$
—

 
5

 
$
1,848

 
$
1,848

 
$
71

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
$
—

 
$
—

 
1

 
$
122

 
$
122

 
$
42

Total
—

 
$
—

 
$
—

 
$
—

 
1

 
$
122

 
$
122

 
$
42


The Corporation grants concessions primarily related to extensions of interest-only payment periods and an occasional payment modification. These modifications typically are for a short-term basis up to one year. The goal when restructuring a credit is to establish a reasonable period of time to provide cash flow relief to customers experiencing cash flow difficulties. Accruing troubled debt restructured loans are primarily comprised of loans on which interest is being accrued under the restructured terms, and the loans are current or less than ninety days past due.

24
Table of Contents

The following presents, by class of loans, information regarding the types of concessions granted on accruing and nonaccrual loans that were restructured during the three and six months ended June 30, 2016 and 2015.
 
Interest Only Term
Extension
 
Temporary Payment
Reduction
 
Maturity Date
Extension
 
Amortization Period Extension
 
Total Concessions
Granted
(Dollars in thousands)
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
Three Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential secured for business purpose
1

 
$
415

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
1

 
$
415

Total
1

 
$
415

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
1

 
$
415

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
—

 
$
—

 
1

 
$
500

 
1

 
$
447

 
2

 
$
947

Real estate—commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
1

 
405

 
1

 
405

Total
—

 
$
—

 
—

 
$
—

 
1

 
$
500

 
2

 
$
852

 
3

 
$
1,352

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
1

 
$
1,545

 
1

 
$
1,545

Real estate—residential secured for business purpose
1

 
415

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
415

Total
1

 
$
415

 
—

 
$
—

 
—

 
$
—

 
1

 
$
1,545

 
2

 
$
1,960

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
1

 
$
143

 
1

 
$
500

 
1

 
$
447

 
3

 
$
1,090

Real estate—commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
1

 
405

 
1

 
405

Real estate—residential secured for business purpose
—

 
—

 
1

 
353

 
—

 
—

 
—

 
—

 
1

 
353

Total
—

 
$
—

 
2

 
$
496

 
1

 
$
500

 
2

 
$
852

 
5

 
$
1,848

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
1

 
$
122

 
—

 
$
—

 
—

 
$
—

 
1

 
$
122

Total
—

 
$
—

 
1

 
$
122

 
—

 
$
—

 
—

 
$
—

 
1

 
$
122

The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there were payment defaults within twelve months of the restructuring date:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
(Dollars in thousands)
Number
of Loans
 
Recorded
Investment
 
Number
of Loans
 
Recorded
Investment
 
Number
of Loans
 
Recorded
Investment
 
Number
of Loans
 
Recorded
Investment
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
—

 
$
—

 
—

 
$
—

 
—

 
$
—

 
—

 
$
—

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
—

 
$
—

 
—

 
$
—

 
1

 
$
50

 
2

 
$
200

Total
—

 
$
—

 
—

 
$
—

 
1

 
$
50

 
2

 
$
200

As a result of payment default during the first quarter of 2016, a commercial accruing troubled debt restructured loan totaling $50 thousand was placed on nonaccrual of interest status.
    

25
Table of Contents

The following presents, by class of loans, information regarding consumer mortgages collateralized by residential real estate property that are in the process of foreclosure at June 30, 2016 and December 31, 2015:
(Dollars in thousands)
At June 30, 2016
 
At December 31, 2015
Real estate-residential secured for personal purpose
$
277

 
$
313

Real estate-home equity secured for personal purpose
60

 
60

Total
$
337

 
$
373

The Corporation held no foreclosed consumer residential real estate property at June 30, 2016 and December 31, 2015.
Note 5. Goodwill and Other Intangible Assets
The Corporation has core deposit and customer-related intangibles and mortgage servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life using the present value of projected cash flows. The Corporation also has goodwill which is deemed to be an indefinite intangible asset and is not amortized.
Changes in the carrying amount of the Corporation's goodwill by business segment for the six months ended June 30, 2016 were as follows:
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Consolidated
Balance at December 31, 2015
$
78,574

 
$
15,434

 
$
18,649

 
$
112,657

Addition to goodwill from acquisitions
—

 
—

 
—

 
—

Balance at June 30, 2016
$
78,574

 
$
15,434

 
$
18,649

 
$
112,657

The following table reflects the components of intangible assets at the dates indicated:
 
At June 30, 2016
 
At December 31, 2015
(Dollars in thousands)
Gross Carrying Amount
 
Accumulated Amortization and Fair Value Adjustments
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization and Fair Value Adjustments
 
Net Carrying Amount
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Core deposit intangibles
$
1,520

 
$
401

 
$
1,119

 
$
1,520

 
$
276

 
$
1,244

Customer related intangibles
12,381

 
7,719

 
4,662

 
14,227

 
8,728

 
5,499

Mortgage servicing rights
13,010

 
7,114

 
5,896

 
12,233

 
6,356

 
5,877

Total amortized intangible assets
$
26,911

 
$
15,234

 
$
11,677

 
$
27,980

 
$
15,360

 
$
12,620

The estimated aggregate amortization expense for core deposit and customer related intangibles for the remainder of 2016 and the succeeding fiscal years is as follows:
Year
(Dollars in thousands)
Amount
Remainder of 2016
 
$
909

2017
 
1,544

2018
 
1,170

2019
 
847

2020
 
577

Thereafter
 
734

The Corporation has originated mortgage servicing rights which are included in other intangible assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method and an accelerated amortization method for loan payoffs. Mortgage servicing rights are subject to impairment testing on a quarterly basis. The aggregate fair value of these rights was $6.8 million and $8.0 million at June 30, 2016 and December 31, 2015, respectively. The fair value of mortgage servicing rights was determined using a discount rate of 10.0% at June 30, 2016, and December 31, 2015.
    


26
Table of Contents

Changes in the mortgage servicing rights balance are summarized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Beginning of period
$
5,839

 
$
5,523

 
$
5,877

 
$
5,509

Servicing rights capitalized
466

 
499

 
777

 
881

Amortization of servicing rights
(409
)
 
(326
)
 
(758
)
 
(694
)
Changes in valuation allowance
—

 
—

 
—

 
—

End of period
$
5,896

 
$
5,696

 
$
5,896

 
$
5,696

Mortgage loans serviced for others
$
889,639

 
$
832,318

 
$
889,639

 
$
832,318

There was no activity in the valuation allowance for the three and six months ended June 30, 2016 and June 30, 2015.

The estimated amortization expense of mortgage servicing rights for the remainder of 2016 and the succeeding fiscal years is as follows:
Year
(Dollars in thousands)
Amount
Remainder of 2016
 
$
559

2017
 
1,024

2018
 
846

2019
 
690

2020
 
560

Thereafter
 
2,217

Note 6. Income Taxes
At June 30, 2016 and December 31, 2015, the Corporation had no material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in noninterest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in noninterest expense in the year it is assessed and is treated as a deductible expense for tax purposes. At June 30, 2016, the Corporation’s tax years 2012 through 2015 remain subject to federal examination as well as examination by state taxing jurisdictions.
Note 7. Retirement Plans and Other Postretirement Benefits
Substantially all employees who were hired before December 8, 2009 are covered by a noncontributory retirement plan. Employees hired on or after December 8, 2009 are not eligible to participate in the noncontributory retirement plan. The Corporation also provides supplemental executive retirement benefits to certain former executives, a portion of which is in excess of limits imposed on qualified plans by federal tax law; these plans are non-qualified benefit plans. These non-qualified benefit plans are not offered to new participants; all current participants are now retired. Information on these plans are aggregated and reported under “Retirement Plans” within this footnote.
The Corporation also provides certain postretirement healthcare and life insurance benefits for retired employees. Information on these benefits is reported under “Other Postretirement Benefits” within this footnote.
The Corporation sponsors a Supplemental Non-Qualified Pension Plan which was established in 1981 prior to the existence of a 401(k) deferred salary savings plan, employee stock purchase plan and long-term incentive plans and therefore is not offered to new participants; all current participants are now retired.






27
Table of Contents

Components of net periodic benefit cost (income) were as follows: 
 
Three Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
(Dollars in thousands)
Retirement Plans
 
Other Post Retirement
Benefits
Service cost
$
170

 
$
193

 
$
11

 
$
14

Interest cost
519

 
488

 
33

 
27

Expected return on plan assets
(753
)
 
(756
)
 
—

 
—

Amortization of net actuarial loss
322

 
326

 
7

 
14

Accretion of prior service cost
(70
)
 
(70
)
 
—

 
—

Net periodic benefit cost
$
188

 
$
181

 
$
51

 
$
55

 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
(Dollars in thousands)
Retirement Plans
 
Other Post Retirement
Benefits
Service cost
$
341

 
$
386

 
$
23

 
$
29

Interest cost
1,037

 
976

 
66

 
55

Expected return on plan assets
(1,507
)
 
(1,512
)
 
—

 
—

Amortization of net actuarial loss
645

 
654

 
13

 
27

Accretion of prior service cost
(141
)
 
(140
)
 
—

 
—

Net periodic benefit cost (income)
$
375

 
$
364

 
$
102

 
$
111

The Corporation expects to make a contribution of $2.0 million to its qualified retirement plan during the third quarter of 2016. The Corporation previously disclosed in its financial statements for the year ended December 31, 2015, that it expected to make contributions of $160 thousand to its non-qualified retirement plans and $117 thousand to its other postretirement benefit plans in 2016. During the six months ended June 30, 2016, the Corporation contributed $80 thousand to its non-qualified retirement plans and $41 thousand to its other postretirement plans. During the six months ended June 30, 2016, $1.2 million was paid to participants from the retirement plans and $41 thousand was paid to participants from the other postretirement plans.
Note 8. Borrowings
Short-term borrowings consist of overnight borrowings and term borrowings with an original maturity of less than one year. Short-term borrowings are obtained from the Federal Home Loan Bank (FHLB) and correspondent banks. At June 30, 2016, short-term borrowings consisted of borrowings with the FHLB of $156.0 million, customer repurchase agreements of $24.3 million and a short-term bridge loan with a correspondent bank of $80.0 million. The bridge loan was paid off on July 1, 2016 in conjunction with the closing of the merger. At December 31, 2015, short-term borrowings consisted of customer repurchase agreements of $24.2 million.
At June 30, 2016 and December 31, 2015, the Corporation had $49.5 million and $49.4 million, respectively, of long-term subordinated notes.
On April 25, 2016, Kroll Bond Rating Agency ("KBRA") affirmed its credit rating for the Corporation and the Bank with a stable outlook. Specifically, KBRA affirmed the Corporation's senior unsecured debt rating of BBB+, subordinated debt rating of BBB and short-term rating of K2. With regard to the Bank, KBRA affirmed the Bank's deposit rating of A-, short-term debt rating of K2 and short-term deposit rating of K2 while also assigning the Bank a senior unsecured debt rating of A-.

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Note 9. Earnings per Share
The Corporation uses the two-class method to calculate earnings per share as the unvested restricted stock issued under the Corporation's equity incentive plans are participating shares with nonforfeitable rights to dividends. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars and shares in thousands, except per share data)
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
5,240

 
$
6,466

 
$
12,529

 
$
12,582

Net income allocated to unvested restricted stock
(40
)
 
(49
)
 
(98
)
 
(93
)
Net income allocated to common shares
$
5,200

 
$
6,417

 
$
12,431

 
$
12,489

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share—weighted-average shares outstanding
19,434

 
19,501

 
19,418

 
19,638

Effect of dilutive securities—employee stock options
35

 
29

 
33

 
26

Denominator for diluted earnings per share—adjusted weighted-average shares outstanding
19,469

 
19,530

 
19,451

 
19,664

Basic earnings per share
$
0.27

 
$
0.33

 
$
0.64

 
$
0.64

Diluted earnings per share
$
0.27

 
$
0.33

 
$
0.64

 
$
0.64

Average anti-dilutive options and awards excluded from computation of diluted earnings per share
619

 
567

 
603

 
555


Note 10. Accumulated Other Comprehensive (Loss) Income
The following table shows the components of accumulated other comprehensive (loss) income, net of taxes, for the periods presented:
(Dollars in thousands)
Net Unrealized
Gains (Losses) on
Available-for-Sale
Investment
Securities
 
Net Change
Related to
Derivatives Used for Cash Flow Hedges
 
Net Change
Related to
Defined Benefit
Pension Plans
 
Accumulated
Other
Comprehensive
(Loss) Income
Balance, December 31, 2015
$
(592
)
 
$
(285
)
 
$
(15,831
)
 
$
(16,708
)
Net Change
2,499

 
(497
)
 
336

 
2,338

Balance, June 30, 2016
$
1,907

 
$
(782
)
 
$
(15,495
)
 
$
(14,370
)
Balance, December 31, 2014
$
1,711

 
$
(157
)
 
$
(16,016
)
 
$
(14,462
)
Net Change
(1,085
)
 
26

 
351

 
(708
)
Balance, June 30, 2015
$
626

 
$
(131
)
 
$
(15,665
)
 
$
(15,170
)

    












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Table of Contents

The following table illustrates the amounts reclassified out of each component of accumulated comprehensive loss for the three and six months ended June 30, 2016 and 2015:
Details about Accumulated Other
Comprehensive (Loss) Income Components
 
Amount Reclassified from Accumulated
Other Comprehensive (Loss) Income
 
Affected Line Item in the
Statement of Income
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
 
 
Net unrealized holding gains on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
$
413

 
$
181

 
$
457

 
$
272

 
Net gain on sales of investment securities
 
 
413

 
181

 
457

 
272

 
Total before tax
 
 
(145
)
 
(63
)
 
(160
)
 
(95
)
 
Tax expense
 
 
$
268

 
$
118

 
$
297

 
$
177

 
Net of tax
Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
Amortization of net loss included in net periodic pension costs*
 
$
(329
)
 
$
(340
)
 
$
(658
)
 
$
(681
)
 
 
Accretion of prior service cost included in net periodic pension costs*
 
70

 
70

 
141

 
140

 
 
 
 
(259
)
 
(270
)
 
(517
)
 
(541
)
 
Total before tax
 
 
91

 
94

 
181

 
190

 
Tax benefit
 
 
$
(168
)
 
$
(176
)
 
$
(336
)
 
$
(351
)
 
Net of tax
*
These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. (See Note 7—Retirement Plans and Other Postretirement Benefits for additional details.)
Note 11. Derivative Instruments and Hedging Activities
The Corporation may use interest-rate swap agreements to modify interest rate characteristics from variable to fixed or fixed to variable in order to reduce the impact of interest rate changes on future net interest income. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. 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 accumulated other comprehensive income until the underlying forecasted transactions occur, at which time the deferred gains and losses are recognized in earnings. For a qualifying fair value hedge, the gain or loss on the hedging instrument is recognized in earnings, and the change in fair value of 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 in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument 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.
On October 24, 2014, the Corporation entered into an amortizing interest rate swap classified as a cash flow hedge with a notional amount of $20.0 million to hedge a portion of the debt financing of a pool of 10-year maturity fixed rate loans with balances totaling $29.1 million, at time of the hedge, that were originated in 2013. A brokered money market demand account with a balance exceeding the amortizing interest rate swap balance is being used for the cash flow hedge. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.10% and receives a floating rate based on the one-month LIBOR with a maturity date of November 1, 2022. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and on a recurring basis to determine that the derivative has been and is expected to continue to be highly effective in offsetting changes in cash flows of the hedged item. The Corporation expects that there will be no ineffectiveness over the life of the interest rate swap, and therefore anticipates no portion of the net loss in accumulated other comprehensive loss will be reclassified into interest expense. To the extent there is ineffectiveness, the Corporation would record the ineffectiveness in interest expense. At June 30, 2016, approximately $269 thousand in net deferred losses, net of tax, recorded in accumulated other comprehensive loss are expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2016.

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The Corporation pledges cash or securities to cover a portion of the negative fair value of the interest rate swap, as measured by the counterparty. At June 30, 2016, the notional amount of the cash flow hedge was $18.9 million, with a negative fair value of $1.2 million. The Corporation has pledged $1.3 million to the counterparty as collateral for the negative fair value.
The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at June 30, 2016 and December 31, 2015:
 
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in thousands)
Notional
Amount
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
At June 30, 2016
 
 
 
 
 
 
 
 
 
Interest rate locks with customers
$
57,601

 
Other Assets
 
$
2,432

 
 
 
$
—

Forward loan sale commitments
62,783

 
 
 
—

 
Other Liabilities
 
510

Total
$
120,384

 
 
 
$
2,432

 
 
 
$
510

At December 31, 2015
 
 
 
 
 
 
 
 
 
Interest rate locks with customers
$
34,450

 
Other Assets
 
$
1,089

 
 
 
$
—

Forward loan sale commitments
39,545

 
 
 
—

 
Other Liabilities
 
102

Total
$
73,995

 
 
 
$
1,089

 
 
 
$
102

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at June 30, 2016 and December 31, 2015:
 
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in thousands)
Notional
Amount
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
At June 30, 2016
 
 
 
 
 
 
 
 
 
Interest rate swap - cash flow hedge
$
18,921

 
 
 
$
—

 
Other Liabilities
 
$
1,203

Total
$
18,921

 

 
$
—

 

 
$
1,203

At December 31, 2015
 
 

 
 
 

 
 
Interest rate swap - cash flow hedge
$
19,269

 
 
 
$
—

 
Other Liabilities
 
$
438

Total
$
19,269

 

 
$
—

 

 
$
438

    
For the three and six months ended June 30, 2016 and 2015, the amounts included in the consolidated statements of income for derivatives not designated as hedging instruments are shown in the table below:
 
Statement of Income Classification
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Interest rate locks with customers
Net gain (loss) on mortgage banking activities
 
$
711

 
$
(312
)
 
$
1,343

 
$
137

Forward loan sale commitments
Net gain (loss) on mortgage banking activities
 
(267
)
 
305

 
(408
)
 
249

Total
 
 
$
444

 
$
(7
)
 
$
935

 
$
386


For the three and six months ended June 30, 2016 and 2015, the amounts included in the consolidated statements of income for derivatives designated as hedging instruments are shown in the table below:
 
Statement of Income Classification
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Interest rate swap—cash flow hedge—net interest payments
Interest expense
 
$
80

 
$
95

 
$
161

 
191

Net loss
 
 
$
(80
)
 
$
(95
)
 
$
(161
)
 
$
(191
)
    
    

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At June 30, 2016 and December 31, 2015, the amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments are shown in the table below:
(Dollars in thousands)
Accumulated Other
Comprehensive (Loss) Income
 
At June 30, 2016
 
At December 31, 2015
Interest rate swap—cash flow hedge
Fair value, net of taxes
 
$
(782
)
 
$
(285
)
Total
 
 
$
(782
)
 
$
(285
)

Note 12. Fair Value Disclosures
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Corporation determines the fair value of financial instruments based on the fair value hierarchy. The Corporation 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 market participants would use in pricing the asset or liability based on the best information available in the circumstances, including assumptions about risk. Three levels of inputs are used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. Transfers between levels are recognized at the end of the reporting period.
Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation can access at the measurement date. 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.
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.
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.
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, 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 U.S. Treasury securities, most equity securities and money market mutual funds. Mutual funds are registered investment companies which are valued at net asset value of shares on a market exchange at the end of each trading day. 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 instruments, which would generally be classified within Level 2 of the valuation hierarchy, include securities issued by U.S. Government sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate and municipal bonds and certain equity securities. 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.
Fair values for securities are determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does not have sufficient verifiable information to value a particular security, the Corporation will utilize valuations from another pricing service. Management has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control.
On a quarterly basis, the Corporation reviews changes, as submitted by the pricing service, in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. Additionally, on a quarterly basis, the Corporation has its security portfolio priced by a second pricing service to determine consistency with another market evaluator, except for municipal bonds which are priced by

32
Table of Contents

another service provider on a sample basis. If, upon the Corporation’s review or in comparing with another service, a material difference between pricing evaluations were to exist, the Corporation may submit an inquiry to the current pricing service regarding the data used to determine the valuation of a particular security. If the Corporation determines there is market information that would support a different valuation than from the current pricing service’s evaluation, the Corporation can submit a challenge for a change to that security’s valuation. There were no material differences in valuations noted at June 30, 2016.
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.

Contingent Consideration Liability
The Corporation estimates the fair value of the contingent consideration liability by using a discounted cash flow model of future contingent payments based on projected revenue related to the acquired business. The estimated fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change of estimated future contingent payments based on projected revenue of the acquired business affecting the contingent consideration liability will be recorded through noninterest expense. Changes in the original assumptions utilized at the time the acquisition closes and identified during the measurement period are recorded in accordance with ASC Topic 805 as an adjustment to goodwill. Due to the significant unobservable input related to the projected revenue, the contingent consideration liability is classified within Level 3 of the valuation hierarchy. An increase in the projected revenue may result in a higher fair value of the contingent consideration liability. Alternatively, a decrease in the projected revenue may result in a lower estimated fair value of the contingent consideration liability.
For the Sterner Insurance Associates acquisition, the potential remaining two cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $3.9 million based on the results for the twelve-month periods ended June 30, 2016 and 2017, respectively. Due to updates to the original assumptions utilized for determining the contingent consideration liability for the Sterner acquisition completed on July 1, 2014, the Corporation recorded a purchase accounting adjustment, in accordance with ASC Topic 805, in the first quarter of 2015 which resulted in an increase to the contingent consideration liability and an increase to goodwill of $1.5 million.
For the Girard Partners acquisition, the potential remaining three cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $12.9 million cumulative based on the results for the three-year periods ended December 31, 2016, 2017, and 2018, respectively. The Corporation recorded a reduction to the contingent liability during the fourth quarter of 2015 which resulted in a reduction of noninterest expense of $550 thousand. The adjustment reflected that projected revenue levels for earn-out payments in the second through fifth years post-acquisition are anticipated to be lower than originally projected.

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Table of Contents

The following table presents the assets and liabilities measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015, classified using the fair value hierarchy:
 
At June 30, 2016
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Assets/
Liabilities at
Fair Value
Assets:
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
—

 
$
47,446

 
$
—

 
$
47,446

State and political subdivisions
—

 
98,867

 
—

 
98,867

Residential mortgage-backed securities
—

 
3,635

 
—

 
3,635

Collateralized mortgage obligations
—

 
2,928

 
—

 
2,928

Corporate bonds
—

 
93,445

 
—

 
93,445

Money market mutual funds
7,009

 
—

 
—

 
7,009

Equity securities
765

 
—

 
—

 
765

Total available-for-sale securities
7,774

 
246,321

 
—

 
254,095

Interest rate locks with customers
—

 
2,432

 
—

 
2,432

Total assets
$
7,774

 
$
248,753

 
$
—

 
$
256,527

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$
—

 
$
—

 
$
5,213

 
$
5,213

Interest rate swap
—

 
1,203

 
—

 
1,203

Forward loan sale commitments
—

 
510

 
—

 
510

Total liabilities
$
—

 
$
1,713

 
$
5,213

 
$
6,926

 
At December 31, 2015
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Assets/
Liabilities at
Fair Value
Assets:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. treasuries
$
4,887

 
$
—

 
$
—

 
$
4,887

U.S. government corporations and agencies
—

 
102,156

 
—

 
102,156

State and political subdivisions
—

 
102,032

 
—

 
102,032

Residential mortgage-backed securities
—

 
13,354

 
—

 
13,354

Collateralized mortgage obligations
—

 
3,133

 
—

 
3,133

Corporate bonds
—

 
86,675

 
—

 
86,675

Money market mutual funds
16,726

 
—

 
—

 
16,726

Equity securities
807

 
—

 
—

 
807

Total available-for-sale securities
22,420

 
307,350

 
—

 
329,770

Interest rate locks with customers
—

 
1,089

 
—

 
1,089

Forward loan sale commitments
—

 
—

 
—

 
—

Total assets
$
22,420

 
$
308,439

 
$
—

 
$
330,859

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$
—

 
$
—

 
$
5,577

 
$
5,577

Interest rate swap
—

 
438

 
—

 
438

Forward loan sale commitments
—

 
102

 
—

 
102

Total liabilities
$
—

 
$
540

 
$
5,577

 
$
6,117

At June 30, 2016 and December 31, 2015, the Corporation had no assets measured at fair value on a recurring basis utilizing Level 3 inputs.

34
Table of Contents

The following table presents the change in the balance of the contingent consideration liability related to acquisitions for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the six months ended June 30, 2016 and 2015:
 
Six Months Ended June 30, 2016
(Dollars in thousands)
Balance at
December 31,
2015
 
Contingent
Consideration
from New
Acquisition
 
Payment of
Contingent
Consideration
 
Adjustment
of Contingent
Consideration
 
Balance at June 30, 2016
Sterner Insurance Associates
$
1,144

 
$
—

 
$
—

 
$
490

 
$
1,634

Girard Partners
4,241

 
—

 
900

 
238

 
3,579

John T. Fretz Insurance Agency
192

 
—

 
260

 
68

 
—

Total contingent consideration liability
$
5,577

 
$
—

 
$
1,160

 
$
796

 
$
5,213

 
Six Months Ended June 30, 2015
(Dollars in thousands)
Balance at
December 31,
2014
 
Contingent
Consideration
from New
Acquisition*
 
Payment of
Contingent
Consideration
 
Adjustment
of Contingent
Consideration
 
Balance at June 30, 2015
Sterner Insurance Associates
$
680

 
$
1,525

 
$
—

 
$
402

 
$
2,607

Girard Partners
5,503

 
$
—

 
$
620

 
$
(112
)
 
4,771

John T. Fretz Insurance Agency
358

 
—

 
260

 
80

 
178

Total contingent consideration liability
$
6,541

 
$
1,525

 
$
880

 
$
370

 
$
7,556

*Includes adjustments during the measurement period in accordance with ASC Topic 805.
The Corporation recorded an increase to the contingent liability related to Sterner Insurance Associates during the second quarter of 2016 which resulted in an increase in noninterest expense of $183 thousand. The adjustment reflected that projected revenue levels for earn-out payments in the second through third years post-acquisition are anticipated to be higher than originally projected.
The Corporation may be required to periodically measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market accounting or impairment charges of individual assets. The following table represents assets measured at fair value on a non-recurring basis at June 30, 2016 and December 31, 2015:
 
At June 30, 2016
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Assets/Liabilities at
Fair Value
Impaired loans held for investment
$
—

 
$
—

 
$
43,624

 
$
43,624

Total
$
—

 
$
—

 
$
43,624

 
$
43,624

 
At December 31, 2015
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Assets/Liabilities at
Fair Value
Impaired loans held for investment
$
—

 
$
—

 
$
48,611

 
$
48,611

Total
$
—

 
$
—

 
$
48,611

 
$
48,611


    









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Table of Contents

The following table presents assets and liabilities and off-balance sheet items not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed at June 30, 2016 and December 31, 2015. The disclosed fair values are classified using the fair value hierarchy.
 
At June 30, 2016
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Carrying
Amount
Assets:
 
 
 
 
 
 
 
 
 
Cash and short-term interest-earning assets
$
93,190

 
$
—

 
$
—

 
$
93,190

 
$
93,190

Held-to-maturity securities
—

 
32,946

 
—

 
32,946

 
32,885

Loans held for sale
—

 
4,766

 
—

 
4,766

 
4,657

Net loans and leases held for investment
—

 
—

 
2,255,667

 
2,255,667

 
2,284,260

Mortgage servicing rights
—

 
—

 
6,785

 
6,785

 
5,896

Other real estate owned
—

 
3,131

 
—

 
3,131

 
3,131

Total assets
$
93,190

 
$
40,843

 
$
2,262,452

 
$
2,396,485

 
$
2,424,019

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand and savings deposits, non-maturity
$
2,016,892

 
$
—

 
$
—

 
$
2,016,892

 
$
2,016,892

Time deposits
—

 
361,256

 
—

 
361,256

 
360,192

Total deposits
2,016,892

 
361,256

 
—

 
2,378,148

 
2,377,084

Short-term borrowings
—

 
259,971

 
—

 
259,971

 
260,216

Subordinated notes
—

 
50,250

 
—

 
50,250

 
49,450

Total liabilities
$
2,016,892

 
$
671,477

 
$
—

 
$
2,688,369

 
$
2,686,750

Off-Balance-Sheet:
 
 
 
 
 
 
 
 
 
Commitments to extend credit
$
—

 
$
(1,874
)
 
$
—

 
$
(1,874
)
 
$
—

 
At December 31, 2015
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Carrying
Amount
Assets:
 
 
 
 
 
 
 
 
 
Cash and short-term interest-earning assets
$
60,799

 
$
—

 
$
—

 
$
60,799

 
$
60,799

Held-to-maturity securities
—

 
41,061

 
—

 
41,061

 
40,990

Loans held for sale
—

 
4,708

 
—

 
4,708

 
4,680

Net loans and leases held for investment
—

 
—

 
2,099,082

 
2,099,082

 
2,112,774

Mortgage servicing rights
—

 
—

 
8,047

 
8,047

 
5,877

Other real estate owned
—

 
1,276

 
—

 
1,276

 
1,276

Total assets
$
60,799

 
$
47,045

 
$
2,107,129

 
$
2,214,973

 
$
2,226,396

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand and savings deposits, non-maturity
$
1,939,954

 
$
—

 
$
—

 
$
1,939,954

 
$
1,939,954

Time deposits
—

 
455,527

 
—

 
455,527

 
454,406

Total deposits
1,939,954

 
455,527

 
—

 
2,395,481

 
2,394,360

Short-term borrowings
—

 
22,302

 
—

 
22,302

 
24,211

Subordinated notes
$
—

 
$
50,375

 
$
—

 
$
50,375

 
$
49,377

Total liabilities
$
1,939,954

 
$
528,204

 
$
—

 
$
2,468,158

 
$
2,467,948

Off-Balance-Sheet:
 
 
 
 
 
 
 
 
 
Commitments to extend credit
$
—

 
$
(1,788
)
 
$
—

 
$
(1,788
)
 
$
—


The following valuation methods and assumptions were used by the Corporation in estimating the fair value for financial instruments measured at fair value on a non-recurring basis and financial instruments not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed:

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Table of Contents

Cash and short-term interest-earning assets: The carrying amounts reported in the balance sheet for cash and due from banks, interest-earning deposits with other banks, federal funds sold and other short-term investments approximates those assets’ fair values. Cash and short-term interest-earning assets are classified within Level 1 in the fair value hierarchy.
Held-to-maturity securities: Fair values for the held-to-maturity investment securities are estimated by using pricing models or quoted prices of securities with similar characteristics and are classified in Level 2 in the fair value hierarchy.
Loans held for sale: The fair value of the Corporation’s mortgage loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including interest rates, bids or indications provided by market participants on specific loans that are actively marketed for sale. These loans are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale are carried at the lower of cost or estimated fair value. There were no valuation adjustments for loans held for sale at June 30, 2016 and December 31, 2015.
Loans and leases held for investment: The fair values for loans and leases held for investment are estimated using discounted cash flow analyses, using a discount rate based on current interest rates at which similar loans with similar terms would be made to borrowers and include components for credit risk, operating expense and embedded prepayment options. An overall valuation adjustment is made for specific credit risks in addition to general portfolio risk and is significant to the valuation. As permitted, the fair value of the loans and leases are not based on the exit price concept as discussed in the first paragraph of this note. Loans and leases are classified within Level 3 in the fair value hierarchy.
Impaired loans held for investment: Impaired loans held for investment include those collateral-dependent loans for which the practical expedient was applied, resulting in a fair-value adjustment to the loan. Impaired loans 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 less costs to sell 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. At June 30, 2016, impaired loans held for investment had a carrying amount of $44.0 million with a valuation allowance of $410 thousand. At December 31, 2015, impaired loans held for investment had a carrying amount of $48.9 million with a valuation allowance of $322 thousand.
Mortgage servicing rights: The Corporation estimates the fair value of mortgage servicing rights 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 interest rates of the portfolios serviced. Mortgage servicing rights are classified within Level 3 of the valuation hierarchy. The Corporation reviews the mortgage servicing rights portfolio on a quarterly basis for impairment and the mortgage servicing rights are carried at the lower of amortized cost or estimated fair value. At June 30, 2016 and December 31, 2015, mortgage servicing rights had a carrying amount of $5.9 million, with no valuation allowance.
Goodwill and other identifiable assets: Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other identifiable intangible assets. During the six months ended June 30, 2016, there were no triggering events that required valuation of goodwill and other identifiable intangible assets.
Other real estate owned: The fair value of other real estate owned is estimated based upon the appraised value less costs to sell. The real estate is stated at an amount equal to the loan balance prior to foreclosure, plus costs incurred for improvements to the property but no more than the fair value of the property, less estimated costs to sell. New appraisals are generally obtained on an annual basis. Other real estate owned is classified within Level 2 of the valuation hierarchy.
Deposit liabilities: The fair values for demand and savings accounts, with no stated maturities, is the amount payable on demand at the reporting date (carrying value) and are classified within Level 1 in the fair value hierarchy. The fair values for time deposits with fixed maturities are estimated by discounting the final maturity using interest rates currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 in the fair value hierarchy.
Short-term borrowings: The fair value of short-term borrowings are estimated using current market rates for similar borrowings and are classified within Level 2 in the fair value hierarchy.
Subordinated notes: The fair value of the subordinated notes are estimated by discounting the principal balance using the treasury yield curve for the term to the call date as the Corporation has the option to call the subordinated notes. The subordinated notes are classified within Level 2 in the fair value hierarchy.
Off-balance-sheet instruments: Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing and are classified within Level 2 in the fair value hierarchy.

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Table of Contents

Note 13. Segment Reporting
At June 30, 2016, the Corporation has three reportable business segments: Banking, Wealth Management and Insurance. The Corporation determines the segments based primarily upon product and service offerings, through the types of income generated and the regulatory environment. This is strategically how the Corporation operates and has positioned itself in the marketplace. Accordingly, significant operating decisions are based upon analysis of each of these segments. At June 30, 2016, these segments meet the quantitative thresholds for separate disclosure as a business segment. Non-reportable segments include the parent holding company and intercompany eliminations, and are included in the "Other" segment.
The Corporation's Banking segment consists of commercial and consumer banking. The Wealth Management segment consists of investment advisory services, retirement plan services, trust, municipal pension services and broker/dealer services. The Insurance segment consists of commercial lines, personal lines, benefits and human resources consulting.
Each segment generates revenue from a variety of products and services it provides. Examples of products and services provided for each reportable segment are indicated below.
Ÿ
The Banking segment provides financial services to consumers, businesses and governmental units. These services include a full range of banking services such as deposit taking, loan origination and servicing, mortgage banking, other general banking services and equipment lease financing.
Ÿ
The Wealth Management segment offers trust and investment advisory services, guardian and custodian of employee benefits and other trust and brokerage services, as well as a registered investment advisory managing private investment accounts for both individuals and institutions.
Ÿ
The Insurance segment includes a full-service insurance brokerage agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions, personal insurance lines and human resources consulting.
The accounting policies, used in the disclosure of the operating segments, are the same as those described in Note 1, “Summary of Significant Accounting Policies".
The following table provides total assets by reportable operating segment as of the dates indicated.
(Dollars in thousands)
At June 30, 2016
 
At December 31, 2015
 
At June 30, 2015
Banking
$
2,925,285

 
$
2,797,746

 
$
2,701,275

Wealth Management
31,392

 
33,950

 
31,605

Insurance
25,309

 
24,436

 
25,389

Other
125,631

 
23,319

 
22,309

Consolidated assets
$
3,107,617

 
$
2,879,451

 
$
2,780,578

The following tables provide reportable segment-specific information and reconciliations to consolidated financial information for the three and six months ended June 30, 2016 and 2015.
 
Three Months Ended
 
June 30, 2016
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
25,986

 
$
1

 
$
—

 
$
7

 
$
25,994

Interest expense
2,163

 
—

 
—

 
288

 
2,451

Net interest income
23,823

 
1

 
—

 
(281
)
 
23,543

Provision for loan and lease losses
830

 
—

 
—

 
—

 
830

Noninterest income
5,610

 
4,812

 
3,620

 
77

 
14,119

Intangible expenses
66

 
304

 
626

 
—

 
996

Other noninterest expense
19,733

 
3,247

 
2,937

 
2,633

 
28,550

Intersegment (revenue) expense*
(479
)
 
211

 
268

 
—

 
—

Income (expense) before income taxes
9,283

 
1,051

 
(211
)
 
(2,837
)
 
7,286

Income tax expense (benefit)
2,291

 
395

 
(81
)
 
(559
)
 
2,046

Net income (loss)
$
6,992

 
$
656

 
$
(130
)
 
$
(2,278
)
 
$
5,240

Capital expenditures
$
1,481

 
$
9

 
$
11

 
$
515

 
$
2,016


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Table of Contents

 
Three Months Ended
 
June 30, 2015
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
25,505

 
$
—

 
$
—

 
$
8

 
$
25,513

Interest expense
2,133

 
—

 
—

 
—

 
2,133

Net interest income
23,372

 
—

 
—

 
8

 
23,380

Provision for loan and lease losses
1,141

 
—

 
—

 
—

 
1,141

Noninterest income
4,858

 
4,964

 
3,538

 
(9
)
 
13,351

Intangible expenses
73

 
85

 
735

 
—

 
893

Other noninterest expense
20,499

 
3,059

 
2,683

 
(302
)
 
25,939

Intersegment (revenue) expense*
(495
)
 
195

 
300

 
—

 
—

Income (expense) before income taxes
7,012

 
1,625

 
(180
)
 
301

 
8,758

Income tax expense (benefit)
1,814

 
623

 
(72
)
 
(73
)
 
2,292

Net income (loss)
$
5,198

 
$
1,002

 
$
(108
)
 
$
374

 
$
6,466

Capital expenditures
$
1,321

 
$
—

 
$
8

 
$
5

 
$
1,334

 
Six Months Ended
 
June 30, 2016
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
51,586

 
$
3

 
$
—

 
$
14

 
$
51,603

Interest expense
4,374

 
—

 
—

 
288

 
4,662

Net interest income
47,212

 
3

 
—

 
(274
)
 
46,941

Provision for loan and lease losses
1,156

 
—

 
—

 
—

 
1,156

Noninterest income
10,283

 
9,384

 
8,340

 
68

 
28,075

Intangible expenses
133

 
607

 
1,026

 
—

 
1,766

Other noninterest expense
38,475

 
6,305

 
6,056

 
3,883

 
54,719

Intersegment (revenue) expense*
(990
)
 
430

 
560

 
—

 
—

Income (expense) before income taxes
18,721

 
2,045

 
698

 
(4,089
)
 
17,375

Income tax expense (benefit)
4,648

 
778

 
296

 
(876
)
 
4,846

Net income (loss)
$
14,073

 
$
1,267

 
$
402

 
$
(3,213
)
 
$
12,529

Capital expenditures
$
3,320

 
$
24

 
$
21

 
$
829

 
$
4,194

 
Six Months Ended
 
June 30, 2015
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
50,235

 
$
—

 
$
—

 
$
16

 
$
50,251

Interest expense
3,567

 
—

 
—

 
—

 
3,567

Net interest income
46,668

 
—

 
—

 
16

 
46,684

Provision for loan and lease losses
2,215

 
—

 
—

 
—

 
2,215

Noninterest income
9,308

 
9,588

 
7,793

 
93

 
26,782

Intangible expenses
147

 
479

 
1,053

 
—

 
1,679

Other noninterest expense
41,721

 
6,014

 
5,352

 
(523
)
 
52,564

Intersegment (revenue) expense*
(1,029
)
 
417

 
612

 
—

 
—

Income (expense) before income taxes
12,922

 
2,678

 
776

 
632

 
17,008

Income tax expense
2,976

 
1,037

 
326

 
87

 
4,426

Net income (loss)
$
9,946

 
$
1,641

 
$
450

 
$
545

 
$
12,582

Capital expenditures
$
2,518

 
$
8

 
$
47

 
$
78

 
$
2,651

*Includes an allocation of general and administrative expenses from both the parent holding company and the Bank. Generally speaking, these expenses are allocated based upon number of employees and square footage utilized.

Note 14. Restructuring Charges
During the first quarter of 2015, the Corporation finalized a new financial center model, which is smaller in size, combines enhanced technology with personal service and provides consultive services and solutions delivered by personal bankers. These efforts led to the development of a comprehensive financial center optimization plan approved in April 2015 which includes opening new financial centers in growth markets while closing financial centers which operate in close proximity to other centers.

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Table of Contents

As the Corporation announced in April 2015, six financial centers were closed in September 2015 that operated in close proximity to other centers. As a result, the Corporation recorded $1.6 million in restructuring charges during the second quarter of 2015 and related to the Banking business segment.
A roll-forward of the accrued restructuring expense for the six months ended June 30, 2016 is as follows:
(Dollars in thousands)
Write-downs and retirements of fixed assets
 
Lease cancellations
 
Total
Accrued at January 1, 2016
$
228

 
$
834

 
$
1,062

Payments
—

 
(157
)
 
(157
)
Accelerated depreciation
—

 
—

 
—

Accrued at June 30, 2016
$
228

 
$
677

 
$
905

Note 15. Subsequent Events
Fox Chase Bancorp Acquisition
On July 1, 2016, the Corporation completed the merger of Fox Chase Bancorp into the Corporation and Fox Chase Bank into Univest Bank and Trust Co. Fox Chase Bank was a locally-managed institution with locations in Pennsylvania and New Jersey and headquartered in Hatboro, Pennsylvania. The Corporation's presence expanded in Bucks, Chester, Philadelphia and Montgomery counties in Pennsylvania and into Atlantic and Cape May counties in New Jersey, complementing and expanding the Corporation's existing network of financial centers. As of June 30, 2016, Fox Chase had approximately $785 million in loans, $739 million in deposits and $1.1 billion in total assets. In accordance with the terms of the Agreement and Plan of Merger, dated December 8, 2015, holders of shares of Fox Chase common stock received, in aggregate, $98.9 million in cash and 6,857,529 shares or approximately 35% of outstanding Corporation’s common stock. The transaction was valued at $243.0 million based on Corporation’s June 30, 2016 closing share price of $21.02 as quoted on NASDAQ. The results of the combined entity’s operations will be included in the Corporation's Consolidated Financial Statements from the date of acquisition.
The acquisition of Fox Chase will be accounted for as a business combination using the acquisition method of accounting, which includes estimating the fair value of assets acquired, liabilities assumed and consideration paid as of the acquisition date. These preliminary estimates will be completed during the third quarter of 2016 and will be subject to adjustments during the up to one year measurement period after the acquisition.
Subordinated Debt
On July 1, 2016, the Corporation completed the issuance of $45.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the "Notes") due 2026 in a private placement transaction to institutional accredited investors.
The net proceeds of the offering, which approximated $44.5 million, will be used for general corporate purposes and to support both organic growth as well as potential acquisitions should such opportunities arise. The Notes are expected to qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations.
The Notes bear interest at an annual fixed rate of 5.00% from the date of issuance until June 30, 2021, or any early redemption date, with the first interest payment on the Notes occurring on December 30, 2016 and semi-annually thereafter each June 30 and December 30, to but excluding June 30, 2021. From and including June 30, 2021 to but excluding the maturity date of June 30, 2026 (or any early redemption date), the Notes will bear interest at an annual rate equal to three-month LIBOR rate plus 3.90%, payable quarterly in arrears on each March 30, June 30, September 30 and December 30. Beginning with the interest payment date of June 30, 2021, the Corporation has the option on each interest payment date, subject to approval of the Federal Reserve Board, to redeem the Notes in whole or in part at a redemption price equal to 100% of the principal amount of the redeemed Notes, plus accrued and unpaid interest to the date of the redemption. The Corporation may also redeem the Notes, in whole but not in part, at any time upon the occurrence of certain tax, regulatory capital and Investment Company Act of 1940 Act events, subject in each case to the approval of the Federal Reserve.


40
Table of Contents

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. “BP” equates to “basis points”; “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 prior period 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 and section 21E of the Securities Exchange Act of 1934. 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, including those occurring in the U.S. and world financial systems
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 at 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.
Critical Accounting Policies
Management, in order to prepare the Corporation’s financial statements in conformity with U.S. generally accepted accounting principles, is required to make estimates and assumptions that affect the amounts reported in the Corporation’s financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the fair value measurement of investment securities available-for-sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation as areas with critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation’s 2015 Annual Report on Form 10-K.
General
Univest Corporation of Pennsylvania (the Corporation), is a Bank Holding Company owning all of the capital stock of Univest Bank and Trust Co. (the Bank).
The Bank is engaged in the commercial and consumer banking business and provides a full range of banking and trust services to customers. The Bank is the parent company of Delview, Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency, Univest Investments, Inc., a full-service broker-dealer and investment advisory firm and Girard Partners (Girard), a registered investment advisory firm. The Bank is also the parent company of Univest Capital, Inc., an equipment financing business, and TCG Investment Advisory, a registered investment advisor which provides discretionary investment consulting and management services. Through its wholly-owned subsidiaries, the Bank provides a variety of financial services to individuals, municipalities and businesses throughout the Bank's markets of operation.
The Corporation earns revenues primarily from the margins and fees generated from lending and depository services to customers as well as fee-based income from trust, insurance, mortgage banking and investment services to customers. The Corporation seeks to achieve adequate and reliable earnings through business growth while maintaining adequate levels of capital and liquidity and limiting exposure to credit and interest rate risk to Board of Directors 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 is in a liability sensitive position from both a short-term maturity perspective and a short-term repricing perspective, as interest rates remain at historically low levels. Despite being liability sensitive, the Corporation projects increased net interest income in rising rate scenarios as the magnitude of the asset pricing change exceeds the liability pricing change.
The Corporation seeks to establish itself as the financial provider of choice in the markets it serves. The Corporation 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 wealth management 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 customers, and by using technology to ensure that the needs of customers are understood and satisfied.
Executive Overview
The Corporation’s consolidated net income, earnings per share and return on average assets and average equity were as follows:
 
Three Months Ended 
 June 30,
 
Change
 
Six Months Ended 
 June 30,
 
Change
(Dollars in thousands, except per share data)
2016
 
2015
 
Amount
 
Percent
 
2016
 
2015
 
Amount
 
Percent
Net income
$
5,240

 
$
6,466

 
$
(1,226
)
 
(19
)%
 
$
12,529

 
$
12,582

 
$
(53
)
 
—
 %
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.33

 
$
(0.06
)
 
(18
)
 
$
0.64

 
$
0.64

 
$
—

 
—

Diluted
0.27

 
0.33

 
(0.06
)
 
(18
)
 
0.64

 
0.64

 
—

 
—

Return on average assets
0.74
%
 
0.95
%
 
(21 BP)

 
(22
)
 
0.89
%
 
0.93
%
 
(4 BP)

 
(4
)
Return on average equity
5.72
%
 
7.22
%
 
(150 BP)

 
(21
)
 
6.88
%
 
7.04
%
 
(16 BP)

 
(2
)

The Corporation reported net income of $5.2 million or $0.27 diluted earnings per share for the quarter ended June 30, 2016, a 19.0% decrease from reported net income of $6.5 million or $0.33 diluted earnings per share for the quarter ended June 30, 2015. Net income for the six months ended June 30, 2016 was $12.5 million or $0.64 diluted earnings per share, consistent with $12.6 million or $0.64 for the comparable period in the prior year. The financial results for the quarter and six months ended June 30, 2016 included $1.2 million and $1.4 million, net of tax, respectively, of acquisition-related and integration costs associated with the merger with Fox Chase Bancorp (Fox Chase), or $0.06 and $0.07, respectively, of diluted earnings per share. The quarter and six months ended June 30, 2015 included $1.2 million and $2.4 million, net of tax, respectively, of integration and acquisition-related costs and restructuring charges, or $0.05 and $0.12, respectively, of diluted earnings per share. The second quarter and year-to-date financial results do not include the financial results of Fox Chase, which the Corporation acquired on July 1, 2016.

Net interest income on a tax-equivalent basis of $24.9 million for the three months ended June 30, 2016 and $49.6 million for the six months ended June 30, 2016 was consistent with the same periods in 2015. The net interest margin on a tax-equivalent basis for the second quarter of 2016 was 3.92%, compared to 4.03% for the second quarter of 2015. Increases in net interest income from the comparable periods in the prior year, due to loan growth, were partially offset by reductions in loan rates and a decrease in the net accretion of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition (the favorable impact of the acquisition accounting adjustments was three basis points for both the three and six months ended June 30, 2016 compared to 13 basis points for both the three and six months ended June 30, 2015). Also, included in interest expense for the three months ended June 30, 2016 were $289 thousand of amortized bridge loan fees and interest expense related to the Fox Chase merger. The bridge loan was paid off on July 1, 2016 in conjunction with the closing of the merger.
The provision for loan and lease losses for the three months ended June 30, 2016 was $830 thousand, compared to $1.1 million for the same period in 2015. The provision for loan and lease losses for the six months ended June 30, 2016 was $1.2 million, down from $2.2 million for the same period in 2015 as asset quality continues to improve; both qualitative factors and historical loss factors have improved from prior periods.
Noninterest income for the three months ended June 30, 2016 was $14.1 million, an increase of $768 thousand, or 5.8% from the same period in the prior year. Noninterest income for the six months ended June 30, 2016 was $28.1 million, an increase of $1.3 million, or 4.8% from the same period in the prior year. The increases were mainly due to higher contingent insurance commission income and commercial premiums received in the first quarter of 2016, and increases in bank owned life insurance income and the net gain on mortgage banking activities.

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Noninterest expense for the three months ended June 30, 2016 was $29.5 million, an increase of $2.7 million, or 10.1% from the same period in the prior year. Noninterest expense for the six months ended June 30, 2016 was $56.5 million, an increase of $2.2 million, or 4.1% from the same period in the prior year. Salaries and benefit expense increased $2.1 million and $3.0 million for the three months and six ended June 30, 2016, respectively, primarily attributable to additional staff hired to support revenue generation across all business lines, including the expansion into Lancaster County. Noninterest expense for the three and six months ended June 30, 2016 included $1.2 million and $1.4 million, respectively, of acquisition-related and integration costs associated with the merger with Fox Chase. Noninterest expense for the three and six months ended June 30, 2015 included $1.8 million and $3.6 million, respectively, of integration and acquisition-related costs and restructuring charges.
Gross loans and leases held for investment grew $166.0 million or 7.6% from December 31, 2015. The growth in loans was primarily in commercial business, commercial real estate and residential real estate loans. Loan growth in the second quarter of 2016 resulted from new and existing customer relationships and the addition of new lenders due to continued market disruption created by other bank acquisitions. Additionally, during the second quarter the Corporation hired a lending team from Lancaster County and during the third quarter the Corporation will integrate the Fox Chase Bank lending team. Deposits declined $17.3 million, or 0.7% from December 31, 2015, primarily due to declines in public fund time deposits partially offset by growth in savings deposits and non-interest bearing demand deposits. During the second quarter of 2016, interest-bearing consumer demand deposits of approximately $92.4 million were transferred to noninterest-bearing deposits due to a product consolidation for existing customers.
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications were $13.3 million at June 30, 2016 compared to $14.2 million at December 31, 2015 and $17.7 million at June 30, 2015. Nonaccrual loans and leases as a percentage of total loans and leases held for investment were 0.57% at June 30, 2016 compared to 0.65% at December 31, 2015 and 0.84% at June 30, 2015. Net loan and lease charge-offs were $129 thousand for the three months ended June 30, 2016 compared to $2.5 million for the same period in the prior year.
The Corporation and the Bank continue to remain well-capitalized at June 30, 2016. Total risk-based capital at June 30, 2016 was 12.77% for the Corporation and 11.45% for the Bank, well in excess of the regulatory minimum for well-capitalized status of 10.00%.
Details of the changes in the various components of net income and the balance sheet are further discussed in the sections that follow.
Merger with Fox Chase Bancorp
On December 8, 2015, the Corporation and Fox Chase Bancorp, Inc. (Fox Chase), parent company of Fox Chase Bank, entered into an Agreement and Plan of Merger which provided for the merger of Fox Chase with and into the Corporation in a cash and stock transaction with an aggregate value of approximately $243.0 million based on the Corporation's June 30, 2016 closing share price. The transaction is expected to qualify as a tax-free reorganization for federal income tax purposes. The transaction is anticipated to be accretive to the Corporation's earnings per share in the first combined year of operations in 2017. On July 1, 2016, the Corporation completed its merger with Fox Chase. See Note 15, "Subsequent Event" included in the Notes to the Consolidated Financial Statements under Item 1 of this Form 10-Q for additional information.
Fox Chase had $1.1 billion in assets, $785 million in loans, and $739 million in deposits at June 30, 2016. With the assumption of Fox Chase Bank's banking offices, the Corporation's presence expands in Bucks, Chester, Philadelphia and Montgomery counties in Pennsylvania and into Cape May county in New Jersey, complementing and expanding the Corporation's existing network of financial centers.


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Table of Contents

Results of Operations
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 and six months ended June 30, 2016 and 2015. The tax-equivalent net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of net interest free funding sources represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity. 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.
Three and six months ended June 30, 2016 versus 2015
Net interest income on a tax-equivalent basis of $24.9 million for the three months ended June 30, 2016 and $49.6 million for the six months ended June 30, 2016 was consistent with the same periods in 2015. The tax-equivalent net interest margin for the three months ended June 30, 2016 was 3.92% compared to 4.03% for the three months ended June 30, 2015. The tax-equivalent net interest margin for the six months ended June 30, 2016 was 3.91% compared to 4.07% for the six months ended June 30, 2015. Increases in net interest income from the comparable periods in the prior year, due to loan growth, were partially offset by reductions in loan rates and a decrease in the net accretion of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition (the favorable impact of the acquisition accounting adjustments was three basis points for both the three and six months ended June 30, 2016 compared to 13 basis points for both the three and six months ended June 30, 2015). Also, included in interest expense for the three months ended June 30, 2016 were $289 thousand of amortized bridge loan fees and interest expense related to the Fox Chase merger. The bridge loan was paid off on July 1, 2016 in conjunction with the closing of the merger.

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Table of Contents

Table 1—Average Balances and Interest Rates—Tax-Equivalent Basis
 
Three Months Ended June 30,
 
2016
 
2015
(Dollars in thousands)
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with other banks
$
7,654

 
$
9

 
0.47
%
 
$
17,767

 
$
11

 
0.25
%
U.S. government obligations
57,776

 
176

 
1.23

 
129,482

 
351

 
1.09

Obligations of states and political subdivisions
101,241

 
1,092

 
4.34

 
109,449

 
1,354

 
4.96

Other debt and equity securities
143,475

 
1,012

 
2.84

 
136,956

 
753

 
2.21

Federal funds sold
973

 
2

 
0.83

 
825

 
—

 
—

Total interest-earning deposits, investments and federal funds sold
311,119

 
2,291

 
2.96

 
394,479

 
2,469

 
2.51

Commercial, financial and agricultural loans
436,189

 
4,132

 
3.81

 
434,251

 
4,483

 
4.14

Real estate—commercial and construction loans
898,494

 
10,106

 
4.52

 
846,318

 
9,913

 
4.70

Real estate—residential loans
557,733

 
6,141

 
4.43

 
482,796

 
5,619

 
4.67

Loans to individuals
30,301

 
408

 
5.42

 
29,149

 
389

 
5.35

Municipal loans and leases
241,507

 
2,723

 
4.53

 
204,931

 
2,431

 
4.76

Lease financings
75,450

 
1,524

 
8.12

 
69,675

 
1,535

 
8.84

Gross loans and leases
2,239,674

 
25,034

 
4.50

 
2,067,120

 
24,370

 
4.73

Total interest-earning assets
2,550,793

 
27,325

 
4.31

 
2,461,599

 
26,839

 
4.37

Cash and due from banks
32,647

 
 
 
 
 
32,624

 
 
 
 
Reserve for loan and lease losses
(16,789
)
 
 
 
 
 
(21,373
)
 
 
 
 
Premises and equipment, net
43,990

 
 
 
 
 
40,433

 
 
 
 
Other assets
243,920

 
 
 
 
 
226,685

 
 
 
 
Total assets
$
2,854,561

 
 
 
 
 
$
2,739,968

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking deposits
$
351,011

 
75

 
0.09

 
$
370,449

 
67

 
0.07

Money market savings
337,250

 
322

 
0.38

 
344,523

 
259

 
0.30

Regular savings
644,199

 
199

 
0.12

 
581,765

 
136

 
0.09

Time deposits
374,936

 
862

 
0.92

 
445,255

 
983

 
0.89

Total time and interest-bearing deposits
1,707,396

 
1,458

 
0.34

 
1,741,992

 
1,445

 
0.33

Short-term borrowings
53,874

 
320

 
2.39

 
45,525

 
13

 
0.11

Subordinated notes*
49,431

 
673

 
5.48

 
49,286

 
675

 
5.49

Total borrowings
103,305

 
993

 
3.87

 
94,811

 
688

 
2.91

Total interest-bearing liabilities
1,810,701

 
2,451

 
0.54

 
1,836,803

 
2,133

 
0.47

Noninterest-bearing deposits
633,563

 
 
 
 
 
500,225

 
 
 
 
Accrued expenses and other liabilities
41,831

 
 
 
 
 
43,786

 
 
 
 
Total liabilities
2,486,095

 
 
 
 
 
2,380,814

 
 
 
 
Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Common stock
110,271

 
 
 
 
 
110,271

 
 
 
 
Additional paid-in capital
121,070

 
 
 
 
 
120,294

 
 
 
 
Retained earnings and other equity
137,125

 
 
 
 
 
128,589

 
 
 
 
Total shareholders’ equity
368,466

 
 
 
 
 
359,154

 
 
 
 
Total liabilities and shareholders’ equity
$
2,854,561

 
 
 
 
 
$
2,739,968

 
 
 
 
Net interest income
 
 
$
24,874

 
 
 
 
 
$
24,706

 
 
Net interest spread
 
 
 
 
3.77

 
 
 
 
 
3.90

Effect of net interest-free funding sources
 
 
 
 
0.15

 
 
 
 
 
0.13

Net interest margin
 
 
 
 
3.92
%
 
 
 
 
 
4.03
%
Ratio of average interest-earning assets to average interest-bearing liabilities
140.87
%
 
 
 
 
 
134.02
%
 
 
 
 
* The interest rate on subordinated notes is calculated on a 30/360 day basis at a rate of 5.10%. The balance is net of debt issuance costs which are amortized to interest expense.
Notes:
For rate calculation purposes, average loan and lease categories include unearned discount.
Nonaccrual loans and leases have been included in the average loan and lease balances.
Loans held for sale have been included in the average loan balances.
Tax-equivalent amounts for the three months ended June 30, 2016 and 2015 have been calculated using the
Corporation’s federal applicable rate of 35%.

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Table of Contents

 
Six Months Ended June 30,
 
2016
 
2015
(Dollars in thousands)
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with other banks
$
13,637

 
$
37

 
0.55
%
 
$
13,474

 
$
16

 
0.24
%
U.S. government obligations
70,132

 
426

 
1.22

 
134,694

 
730

 
1.09

Obligations of states and political subdivisions
101,151

 
2,221

 
4.42

 
107,048

 
2,676

 
5.04

Other debt and equity securities
151,072

 
2,036

 
2.71

 
136,691

 
1,408

 
2.08

Federal funds sold
3,456

 
9

 
0.52

 
3,692

 
2

 
0.11

Total interest-earning deposits, investments and federal funds sold
339,448

 
4,729

 
2.80

 
395,599

 
4,832

 
2.46

Commercial, financial and agricultural loans
424,094

 
8,146

 
3.86

 
428,566

 
8,732

 
4.11

Real estate—commercial and construction loans
892,806

 
20,025

 
4.51

 
834,178

 
19,544

 
4.72

Real estate—residential loans
549,855

 
12,117

 
4.43

 
477,996

 
11,003

 
4.64

Loans to individuals
29,889

 
807

 
5.43

 
29,881

 
796

 
5.37

Municipal loans and leases
236,503

 
5,348

 
4.55

 
204,468

 
4,868

 
4.80

Lease financings
75,235

 
3,066

 
8.20

 
70,509

 
3,118

 
8.92

Gross loans and leases
2,208,382

 
49,509

 
4.51

 
2,045,598

 
48,061

 
4.74

Total interest-earning assets
2,547,830

 
54,238

 
4.28

 
2,441,197

 
52,893

 
4.37

Cash and due from banks
32,156

 
 
 
 
 
31,420

 
 
 
 
Reserve for loan and lease losses
(17,280
)
 
 
 
 
 
(21,231
)
 
 
 
 
Premises and equipment, net
43,431

 
 
 
 
 
40,500

 
 
 
 
Other assets
238,140

 
 
 
 
 
223,988

 
 
 
 
Total assets
$
2,844,277

 
 
 
 
 
$
2,715,874

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking deposits
$
376,586

 
159

 
0.08

 
$
358,234

 
114

 
0.06

Money market savings
349,519

 
662

 
0.38

 
359,936

 
538

 
0.30

Regular savings
635,546

 
373

 
0.12

 
572,453

 
258

 
0.09

Time deposits
396,741

 
1,797

 
0.91

 
453,270

 
1,952

 
0.87

Total time and interest-bearing deposits
1,758,392

 
2,991

 
0.34

 
1,743,893

 
2,862

 
0.33

Short-term borrowings
40,631

 
323

 
1.60

 
46,178

 
23

 
0.10

Subordinated notes *
49,412

 
1,348

 
5.49

 
25,324

 
682

 
5.43

Total borrowings
90,043

 
1,671

 
3.73

 
71,502

 
705

 
1.99

Total interest-bearing liabilities
1,848,435

 
4,662

 
0.51

 
1,815,395

 
3,567

 
0.40

Noninterest-bearing deposits
587,995

 
 
 
 
 
496,142

 
 
 
 
Accrued expenses and other liabilities
41,567

 
 
 
 
 
43,706

 
 
 
 
Total liabilities
2,477,997

 
 
 
 
 
2,355,243

 
 
 
 
Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Common stock
110,271

 
 
 
 
 
110,271

 
 
 
 
Additional paid-in capital
120,947

 
 
 
 
 
120,227

 
 
 
 
Retained earnings and other equity
135,062

 
 
 
 
 
130,133

 
 
 
 
Total shareholders’ equity
366,280

 
 
 
 
 
360,631

 
 
 
 
Total liabilities and shareholders’ equity
$
2,844,277

 
 
 
 
 
$
2,715,874

 
 
 
 
Net interest income
 
 
$
49,576

 
 
 
 
 
$
49,326

 
 
Net interest spread
 
 
 
 
3.77

 
 
 
 
 
3.97

Effect of net interest-free funding sources
 
 
 
 
0.14

 
 
 
 
 
0.10

Net interest margin
 
 
 
 
3.91
%
 
 
 
 
 
4.07
%
Ratio of average interest-earning assets to average interest-bearing liabilities
137.84
%
 
 
 
 
 
134.47
%
 
 
 
 
* The interest rate on subordinated notes is calculated on a 30/360 day basis at a rate of 5.10%. The balance is net of debt issuance costs which are amortized to interest expense.
Notes:
For rate calculation purposes, average loan and lease categories include unearned discount.
Nonaccrual loans and leases have been included in the average loan and lease balances.
Loans held for sale have been included in the average loan balances.
Tax-equivalent amounts for the six months ended June 30, 2016 and 2015 have been calculated using the
Corporation’s federal applicable rate of 35%.

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Table of Contents

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 proportionately.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016 Versus 2015
 
June 30, 2016 Versus 2015
(Dollars in thousands)
Volume
Change
 
Rate
Change
 
Total
 
Volume
Change
 
Rate
Change
 
Total
Interest income:
 
 
 
 
 
 

 

 

Interest-earning deposits with other banks
$
(8
)
 
$
6

 
$
(2
)
 
$
—

 
$
21

 
$
21

U.S. government obligations
(215
)
 
40

 
(175
)
 
(383
)
 
79

 
(304
)
Obligations of states and political subdivisions
(98
)
 
(164
)
 
(262
)
 
(141
)
 
(314
)
 
(455
)
Other debt and equity securities
37

 
222

 
259

 
162

 
466

 
628

Federal funds sold
—

 
2

 
2

 
—

 
7

 
7

Interest on deposits, investments and federal funds sold
(284
)
 
106

 
(178
)
 
(362
)
 
259

 
(103
)
Commercial, financial and agricultural loans
19

 
(370
)
 
(351
)
 
(86
)
 
(500
)
 
(586
)
Real estate—commercial and construction loans
587

 
(394
)
 
193

 
1,360

 
(879
)
 
481

Real estate—residential loans
826

 
(304
)
 
522

 
1,623

 
(509
)
 
1,114

Loans to individuals
14

 
5

 
19

 
—

 
11

 
11

Municipal loans and leases
415

 
(123
)
 
292

 
741

 
(261
)
 
480

Lease financings
120

 
(131
)
 
(11
)
 
205

 
(257
)
 
(52
)
Interest and fees on loans and leases
1,981

 
(1,317
)
 
664

 
3,843

 
(2,395
)
 
1,448

Total interest income
1,697

 
(1,211
)
 
486

 
3,481

 
(2,136
)
 
1,345

Interest expense:
 
 
 
 
 
 

 

 

Interest-bearing checking deposits
(4
)
 
12

 
8

 
5

 
40

 
45

Money market savings
(5
)
 
68

 
63

 
(16
)
 
140

 
124

Regular savings
15

 
48

 
63

 
28

 
87

 
115

Time deposits
(154
)
 
33

 
(121
)
 
(245
)
 
90

 
(155
)
Interest on time and interest-bearing deposits
(148
)
 
161

 
13

 
(228
)
 
357

 
129

Short-term borrowings
2

 
305

 
307

 
(3
)
 
303

 
300

Subordinated notes
—

 
(2
)
 
(2
)
 
658

 
8

 
666

Interest on borrowings
2

 
303

 
305

 
655

 
311

 
966

Total interest expense
(146
)
 
464

 
318

 
427

 
668

 
1,095

Net interest income
$
1,843

 
$
(1,675
)
 
$
168

 
$
3,054

 
$
(2,804
)
 
$
250


Interest Income
Three and six months ended June 30, 2016 versus 2015
Interest income on a tax-equivalent basis for the three months ended June 30, 2016 was $27.3 million, an increase of $486 thousand, or 1.8% from the same period in 2015. Interest income on a tax-equivalent basis for the six months ended June 30, 2016 was $54.2 million, an increase of $1.3 million, or 2.5% from the same period in 2015. The increase was mainly due to loan growth in commercial real estate, residential real estate and municipal loans which was partially offset by decreases in loan interest rates due to re-pricing and the competitive environment. In addition, the net accretion of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition favorably impacted the yield on interest-earning assets by three basis points for the three months ended June 30, 2016 compared to 11 basis points for the same period in 2015 and by two basis points for the six months ended June 30, 2016 compared to nine basis points for the same period in 2015 .



46
Table of Contents

Interest Expense
Three and six months ended June 30, 2016 versus 2015
Interest expense for the three months ended June 30, 2016 was $2.5 million, an increase of $318 thousand or 14.9% from the same period in 2015. Interest expense for the six months ended June 30, 2016 was $4.7 million, an increase of $1.1 million or 30.7% from the same period in 2015. Included in interest expense was $289 thousand of amortized bridge loan fees and interest expense related to the Fox Chase merger incurred in the second quarter of 2016. Interest expense also included the subordinated debt issuance of $50 million on March 30, 2015; this increased year-to-date interest expense by $666 thousand over the prior year. In addition, the net amortization of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition favorably impacted the rate on interest-bearing liabilities by one basis point for both the three and six months June 30, 2016 compared to three basis points for both the three and six months ended June 30, 2015.
Provision for Loan and Lease Losses
The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Loans are also reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans’ initial effective interest rates. Any of the above criteria may cause the reserve to fluctuate. The provision for loan and lease losses for the three months ended June 30, 2016 was $830 thousand compared to $1.1 million for the same period in 2015. The provision for loan and lease losses for the six months ended June 30, 2016 was $1.2 million, down from $2.2 million for the same period in 2015 as asset quality continues to improve; both qualitative factors and historical loss factors have improved.
Noninterest Income
Noninterest income consists of trust department fee income, service charges on deposit accounts, commission income, net gains (losses) on sales of securities, net gains (losses) on mortgage banking activities, and other miscellaneous types of income. Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (Mastermoney fees), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Bank owned life insurance income represents changes in the cash surrender value of bank-owned life insurance policies, which is affected by the market value of the underlying assets, and also includes any excess proceeds from death benefit claims. The net gain on mortgage banking activities consists of gains (losses) on sales of mortgages held for sale and fair value adjustments on interest-rate locks and forward loan sale commitments. Other noninterest income includes other miscellaneous income.
The following table presents noninterest income for the periods indicated:
 
Three Months Ended 
 June 30,
 
Change
 
Six Months Ended 
 June 30,
 
Change
(Dollars in thousands)
2016
 
2015
 
Amount
 
Percent
 
2016
 
2015
 
Amount
 
Percent
Trust fee income
$
1,997

 
$
2,154

 
$
(157
)
 
(7
)%
 
$
3,862

 
$
3,974

 
$
(112
)
 
(3
)%
Service charges on deposit accounts
1,056

 
1,039

 
17

 
2

 
2,054

 
2,102

 
(48
)
 
(2
)
Investment advisory commission and fee income
2,759

 
2,740

 
19

 
1

 
5,428

 
5,503

 
(75
)
 
(1
)
Insurance commission and fee income
3,503

 
3,434

 
69

 
2

 
8,061

 
7,580

 
481

 
6

Other service fee income
1,948

 
1,833

 
115

 
6

 
3,781

 
3,431

 
350

 
10

Bank owned life insurance income
535

 
211

 
324

 
N/M

 
1,005

 
564

 
441

 
78

Net gain on sales of investment securities
413

 
181

 
232

 
N/M

 
457

 
272

 
185

 
68

Net gain on mortgage banking activities
1,711

 
1,367

 
344

 
25

 
2,929

 
2,625

 
304

 
12

Other income
197

 
392

 
(195
)
 
(50
)
 
498

 
731

 
(233
)
 
(32
)
Total noninterest income
$
14,119

 
$
13,351

 
$
768

 
6
 %
 
$
28,075

 
$
26,782

 
$
1,293

 
5
 %



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Table of Contents

Three and six months ended June 30, 2016 versus 2015
Noninterest income for the three months ended June 30, 2016 was $14.1 million, an increase of $768 thousand or 5.8% from the same period in the prior year. Noninterest income for the six months ended June 30, 2016 was $28.1 million, an increase of $1.3 million or 4.8% from the same period in the prior year. Insurance commission and fee income increased $481 thousand or 6.3% for the six months ended June 30, 2016, primarily due to an increase in contingent commission income and commercial premiums received in the first quarter of 2016. Bank owned life insurance income (BOLI) increased $324 thousand for the three months and $441 thousand for the six months ended June 30, 2016 mainly due to the purchase of policies totaling $8.0 million during the third quarter of 2015 and the transfer of policies totaling $9.8 million during 2015 to a higher yielding account structure. The net gain on mortgage banking activities increased $344 thousand for the three months and $304 thousand for the six months ended June 30, 2016, mainly due to an increase in mortgage volume during the second quarter of 2016. Funded first mortgage volume for the quarter increased $7.4 million or 12.99% compared to the same period in 2015.
Noninterest Expense
The operating costs of the Corporation are known as noninterest expense, and include, but are not limited to, salaries and benefits, commissions, occupancy, equipment, professional services, intangible expenses, acquisition-related costs, integration costs and restructuring charges and other expenses. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses, and to provide technological innovation whenever practical, as operations change or expand.
The following table presents noninterest expense for the periods indicated:
 
Three Months Ended 
 June 30,
 
Change
 
Six Months Ended 
 June 30,
 
Change
(Dollars in thousands)
2016
 
2015
 
Amount
 
Percent
 
2016
 
2015
 
Amount
 
Percent
Salaries and benefits
$
14,080

 
$
11,957

 
$
2,123

 
17
%
 
$
28,262

 
$
25,271

 
$
2,991

 
11
%
Commissions
2,363

 
2,155

 
208

 
10

 
4,258

 
3,969

 
289

 
7

Net occupancy
2,091

 
2,035

 
56

 
3

 
4,187

 
4,393

 
(206
)
 
(5
)
Equipment
2,116

 
1,708

 
408

 
24

 
4,004

 
3,397

 
607

 
18

Professional fees
947

 
1,066

 
(119
)
 
(11
)
 
1,967

 
1,873

 
94

 
5

Marketing and advertising
513

 
551

 
(38
)
 
(7
)
 
1,051

 
911

 
140

 
15

Deposit insurance premiums
418

 
422

 
(4
)
 
(1
)
 
865

 
834

 
31

 
4

Intangible expenses
996

 
893

 
103

 
12

 
1,766

 
1,679

 
87

 
5

Acquisition-related costs
1,158

 
41

 
1,117

 
N/M

 
1,372

 
507

 
865

 
N/M

Integration costs
27

 
110

 
(83
)
 
(75
)
 
33

 
1,484

 
(1,451
)
 
(98
)
Restructuring charges
—

 
1,642

 
(1,642
)
 
N/M

 
—

 
1,642

 
(1,642
)
 
N/M

Other expense
4,837

 
4,252

 
585

 
14

 
8,720

 
8,283

 
437

 
5

Total noninterest expense
$
29,546

 
$
26,832

 
$
2,714

 
10
%
 
$
56,485

 
$
54,243

 
$
2,242

 
4
%

Three and six months ended June 30, 2016 versus 2015
Noninterest expense for the three months ended June 30, 2016 was $29.5 million, an increase of $2.7 million or 10.1% from the same period in the prior year. Noninterest expense for the six months ended June 30, 2016 was $56.5 million, an increase of $2.2 million or 4.1% from the same period in the prior year. Salaries and benefit expense increased $2.1 million for the three months and $3.0 million for the six months ended June 30, 2016, primarily attributable to additional staff hired to support revenue generation across all business lines including the expansion into Lancaster County. Commissions expense increased $208 thousand for the three months and $289 thousand for the six months ended June 30, 2016, mainly due to increased production activity related to mortgage banking. Premises and equipment expenses increased $464 thousand for the three months and $401 thousand for the six months ended June 30, 2016, mainly due to increased investments in computer equipment and software. Noninterest expense for the three and six months ended June 30, 2016 included $1.2 million and $1.4 million, respectively, of acquisition-related and integration costs associated with the merger with Fox Chase. Noninterest expense for the three and six months ended June 30, 2015 included $1.8 million and $3.6 million, respectively, of integration and acquisition-related costs and restructuring charges.


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Table of Contents

Tax Provision
The provision for income taxes for the three months ended June 30, 2016 and 2015 was $2.0 million and $2.3 million, at effective rates of 28% and 26%, respectively. The provision for income taxes for the six months ended June 30, 2016 and 2015 was $4.8 million and $4.4 million at effective rates of 28% and 26%, respectively. The effective tax rates reflect the benefits of tax-exempt income from investments in municipal securities, loans and bank-owned life insurance partially offset by non-deductible merger expenses. The increase in the average effective tax rate from the prior year is mainly due to non-deductible merger expenses of $1.1 million for the three months and $1.3 million for the six months ended June 30, 2016.

Financial Condition
Assets
The following table presents assets at the dates indicated:
 
At June 30, 
 2016
 
At December 31, 
 2015
 
Change
(Dollars in thousands)
Amount
 
Percent
Cash, interest-earning deposits and federal funds sold
$
93,190

 
$
60,799

 
$
32,391

 
53
%
Investment securities
286,980

 
370,760

 
(83,780
)
 
(23
)
Loans held for sale
4,657

 
4,680

 
(23
)
 
—

Loans and leases held for investment
2,345,037

 
2,179,013

 
166,024

 
8

Reserve for loan and lease losses
(17,153
)
 
(17,628
)
 
475

 
3

Premises and equipment, net
44,437

 
42,156

 
2,281

 
5

Goodwill and other intangibles, net
124,334

 
125,277

 
(943
)
 
(1
)
Bank owned life insurance
72,565

 
71,560

 
1,005

 
1

Funds advanced for merger settlement
98,885

 
—

 
98,885

 
N/M

Accrued interest receivable and other assets
54,685

 
42,834

 
11,851

 
28

Total assets
$
3,107,617

 
$
2,879,451

 
$
228,166

 
8
%

Cash, Interest-earning Deposits and Federal Funds sold
Cash, interest-earning deposits and federal funds sold at June 30, 2016 increased $32.4 million from December 31, 2015 primarily due to an increase in federal funds sold. At June 30, 2016, the Corporation had outstanding federal funds sold to Fox Chase Bank of $48.5 million. This was partially offset by a decrease in cash at the Federal Reserve Bank.
Investment Securities
The investment portfolio is managed as part of the overall asset and liability management process to optimize income and market performance over an entire interest rate cycle while mitigating risk. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create more economically beneficial returns on these investments, and to collateralize public fund deposits. The securities portfolio consists primarily of U.S. Government agencies, municipals, residential mortgage-backed securities and corporate bonds.
Total investments at June 30, 2016 decreased $83.8 million from December 31, 2015. Sales of $74.0 million, maturities and pay-downs of $38.0 million and calls of $24.2 million were partially offset by purchases of $48.6 million and increases in the fair value of available-for-sale investment securities of $3.8 million. The increases in fair value of available-for-sale investment securities were primarily due to the decrease in long-term interest rates during 2016.
Loans and Leases
Gross loans and leases held for investment were $2.3 billion at June 30, 2016, an increase of $166.0 million or 7.6% from December 31, 2015. The growth in loans was primarily in commercial business, commercial real estate and residential real estate loans. Loan growth in the second quarter of 2016 resulted from new and existing customer relationships and the addition of new lenders due to continued market disruption created by other bank acquisitions. Additionally, during the second quarter the Corporation hired a lending team from Lancaster County and during the third quarter the Corporation will integrate the Fox Chase Bank lending team.

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Table of Contents

Asset Quality
Performance of the entire loan and lease portfolio is reviewed on a regular basis by Bank management and lending officers. A number of factors regarding the borrower, such as overall financial strength, collateral values and repayment ability, are considered in deciding what actions should be taken when determining the collectability of interest for accrual purposes.
When a loan or lease, including a loan or lease that is impaired, is classified as nonaccrual, the accrual of interest on such a loan or lease is discontinued. A loan or lease is typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest, even though the loan or lease is currently performing. A loan or lease may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan or lease is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest payments received on nonaccrual loans and leases are either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.
Loans or leases are usually restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
At June 30, 2016, the recorded investment in loans held for investment and loans held for sale that were considered to be impaired was $44.0 million. The related reserve for loan losses was $410 thousand. At December 31, 2015, the recorded investment in loans that were considered to be impaired was $48.9 million. The related reserve for loan losses was $322 thousand. Impaired loans include nonaccrual loans and leases, accruing troubled debt restructured loans and lease modifications and other accruing impaired loans for which it is probable that not all principal and interest payments due will be collectible in accordance with the contractual terms. The amount of the specific reserve needed for these credits could change in future periods subject to changes in facts and judgments related to these credits. Specific reserves have been established based on current facts and management’s judgments about the ultimate outcome of these credits. Interest income recognized on impaired loans for the six months ended June 30, 2016 and 2015 was $766 thousand and $952 thousand, respectively. For the six months ended June 30, 2016 and 2015, additional interest income that would have been recognized under the original terms for impaired loans was $428 thousand and $589 thousand, respectively.
The impaired loan balances consisted mainly of commercial real estate and commercial business loans. Commercial real estate impaired loans were $26.8 million and $30.1 million at June 30, 2016 and December 31, 2015, respectively. Commercial business impaired loans were $12.5 million and $12.9 million at June 30, 2016 and December 31, 2015, respectively. Other real estate owned was $3.1 million at June 30, 2016, compared to $1.3 million at December 31, 2015. During the first quarter of 2016, three commercial real estate properties with a total fair value of $1.6 million and land with a fair value of $203 thousand were transferred to other real estate owned. During the second quarter of 2016, one commercial real estate property with a total fair value of $155 thousand was transferred to other real estate owned.


50
Table of Contents

Table 3—Nonaccrual and Past Due Loans and Leases; Troubled Debt Restructured Loans and Lease Modifications; Other Real Estate Owned; and Related Ratios

The following table details information pertaining to the Corporation’s non-performing assets at the dates indicated:
(Dollars in thousands)
At June 30, 2016
 
At December 31, 2015
 
At June 30, 2015
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*:
 
 
 
 
 
Loans held for sale
$
—

 
$
—

 
$
4,000

Loans held for investment:
 
 
 
 
 
Commercial, financial and agricultural
5,463

 
6,915

 
5,888

Real estate—commercial
3,960

 
4,314

 
4,639

Real estate—construction
—

 
—

 
363

Real estate—residential
3,280

 
2,514

 
2,282

Lease financings
562

 
440

 
525

Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*
13,265

 
14,183

 
17,697

Accruing troubled debt restructured loans and lease modifications not included in the above
4,413

 
5,245

 
6,099

Accruing loans and leases 90 days or more past due:
 
 
 
 
 
Real estate—residential
77

 
—

 
—

Loans to individuals
155

 
173

 
149

Lease financings
516

 
206

 
138

Total accruing loans and leases, 90 days or more past due
748

 
379

 
287

Total non-performing loans and leases
18,426

 
19,807

 
24,083

Other real estate owned
3,131

 
1,276

 
955

Total nonperforming assets
$
21,557

 
$
21,083

 
$
25,038

Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment and nonaccrual loans held for sale
0.57
%
 
0.65
%
 
0.84
%
Nonperforming loans and leases / loans and leases held for investment and nonaccrual loans held for sale
0.79

 
0.91

 
1.14

Nonperforming assets / total assets
0.69

 
0.73

 
0.90

Allowance for loan and lease losses / loans and leases held for investment
0.73

 
0.81

 
0.93

Allowance for loan and lease losses / loans and leases held for investment (excluding acquired loans at period-end)
0.82

 
0.94

 
1.12

Allowance for loan and lease losses / nonaccrual loans and leases held for investment
129.31

 
124.29

 
143.11

Allowance for loan and lease losses / nonperforming loans and leases held for investment
93.09

 
89.00

 
97.60

Allowance for loan and lease losses
$
17,153

 
$
17,628

 
$
19,602

Acquired credit impaired loans
$
942

 
$
1,253

 
$
1,876

* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table
$
1,396

 
$
93

 
$
2,826


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Table of Contents

The following table provides additional information on the Corporation’s nonaccrual loans held for investment:
(Dollars in thousands)
At June 30, 2016
 
At December 31, 2015
 
At June 30, 2015
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications
$
13,265

 
$
14,183

 
$
13,697

Nonaccrual loans and leases with partial charge-offs
5,671

 
6,451

 
5,237

Life-to-date partial charge-offs on nonaccrual loans and leases
2,807

 
3,853

 
3,119

Charge-off rate of nonaccrual loans and leases with partial charge-offs
33.1
%
 
37.4
%
 
37.3
%
Specific reserves on impaired loans
$
410

 
$
322

 
$
444


Reserve for Loan and Lease Losses

Management believes the reserve for loan and lease losses is maintained at a level that is appropriate at June 30, 2016 to absorb probable losses in the loan and lease portfolio. Management’s methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan and lease loss experience, current economic conditions and trends, and the volume, growth, and composition of the portfolio.

The reserve for loan and lease loss analysis takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Impaired loans, including nonaccrual loans and leases, troubled debt restructured loans and other accruing impaired loans are evaluated individually. All other loans and leases are evaluated as pools. Based on historical loss experience and qualitative factors, loss factors are determined giving consideration to the areas noted in the preceding paragraph and applied to the pooled loan and lease categories to develop the general or allocated portion of the reserve.

The reserve for loan and lease losses is determined at the end of each quarter, and more frequently for management review purposes. Calculating the Corporation's reserve for loan and lease losses begins with the Bank's loan portfolio utilizing historical loss data as a starting point, while evaluating the impact of environmental factors in a quantitative manner as they relate to the collectability of outstanding loan obligations. The Corporation utilizes a rolling eight-quarter migration analysis and loss emergence period analysis to determine the annualized net expected loan loss experience.

Each quarter, the conditions that exist within the look-back period and loss emergence period are compared to current conditions to support a conclusion as to which qualitative adjustments are (or are not) deemed necessary for each loan portfolio segment. These factors are evaluated subjectively based on management's experience and supported by the Corporation's defined analytical metrics/drivers relative to the historical look-back period. Factors include, but are not limited to, asset quality trends, portfolio growth trends, changes in lending policies and management, economic trends, concentrations of credit risk and the impact of collateral dependent lending.

The reserve for loan and lease losses is based on management’s evaluation of the loan and lease portfolio under current economic conditions and such other factors, which deserve recognition in estimating loan and lease losses. This evaluation is inherently subjective, as it requires estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Additions to the reserve arise from the provision for loan and lease losses charged to operations or from the recovery of amounts previously charged off. Loan and lease charge-offs reduce the reserve. Loans and leases are charged off when there has been permanent impairment or when in the opinion of management the full amount of the loan or lease will not be realized. Certain impaired loans are reported at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, or for certain loans, at the present value of expected future cash flows using the loan’s initial effective interest rate.

The reserve for loan and lease losses consists of an allocated reserve and unallocated reserve categories. The allocated reserve is comprised of reserves established on specific loans and leases, and class reserves based on historical loan and lease loss experience and qualitative factors, current trends, and management assessments. The unallocated reserve supports other risk considerations not readily quantifiable through the allocated reserve metrics outlined above, as well as the inherent imprecision of the reserve for loan and lease losses model complexity. These considerations include, but are not limited to, the improving credit risk profile of performing loans individually measured for impairment, less than fully seasoned home equity portfolio metrics and reclassification of loan settlement exposures.


52
Table of Contents

The specific reserve element is based on a regular analysis of impaired commercial and real estate loans. For these loans, the specific reserve established is based on an analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.

The class reserve element is determined by an internal loan and lease grading process in conjunction with associated allowance factors. The Corporation revises the class allowance factors whenever necessary, but no less than quarterly, in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan or lease pool classification.

The Corporation maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded in categories with historical loss experience. The reserve for these off-balance sheet credits was $374 thousand and $381 thousand at June 30, 2016 and December 31, 2015, respectively.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets have been recorded on the books of the Corporation in connection with acquisitions. The Corporation has core deposit and customer-related intangibles and mortgage servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life using the present value of projected cash flows. The amortization of intangible assets was $884 thousand and $916 thousand for the three months ended June 30, 2016 and 2015, respectively. The amortization of intangible assets was $1.7 million and $1.9 million for the six months ended June 30, 2016 and 2015, respectively. The Corporation also has goodwill with a net carrying value of $112.7 million at June 30, 2016 and December 31, 2015, which is deemed to be an indefinite intangible asset and is not amortized.

The Corporation completes a goodwill impairment analysis at least on an annual basis, or more often, if events and circumstances indicate that there may be impairment. The Corporation also completes an impairment test for other identifiable intangible assets on an annual basis or more often if events and circumstances indicate there may be impairment. There was no impairment of goodwill or identifiable intangibles during the six months ended June 30, 2016 and 2015. Since the last annual impairment analysis during 2015, there have been no circumstances to indicate impairment. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.

Funds Advanced for Merger Settlement
At June 30, 2016, the Corporation had $98.9 million in funds advanced for merger settlement. These funds are for payment to the Corporation's transfer agent for settlement of the Fox Chase merger completion.
Other Assets
At June 30, 2016 and December 31, 2015, the Bank held $6.6 million in Federal Reserve Bank stock as required by the Federal Reserve Bank. The Bank is a member of the FHLB, and as such, is required to hold FHLB stock as a condition of membership as determined by the FHLB. The Bank is required to hold additional stock in the FHLB in relation to the level of outstanding borrowings. The Bank held FHLB stock of $9.5 million and $2.2 million at June 30, 2016 and December 31, 2015, respectively. Additionally, the FHLB might require its members to increase their capital stock investments. Changes in the credit ratings of the U.S. government and federal agencies, including the FHLB, could increase the borrowing costs of the FHLB and possibly have a negative impact on the FHLB operations and long-term performance. It is possible this could have an adverse effect on the value of the Corporation’s investment in FHLB stock. The Corporation determined there was no other-than-temporary impairment of the investment in FHLB stock. Therefore, at June 30, 2016, the FHLB stock is recorded at cost.

Liabilities
The following table presents liabilities at the dates indicated:
(Dollars in thousands)
At June 30, 2016
 
At December 31, 2015
 
Change
Amount
 
Percent
Deposits
$
2,377,084

 
$
2,394,360

 
$
(17,276
)
 
(1
)%
Short-term borrowings
260,216

 
24,211

 
236,005

 
N/M

Long-term borrowings
49,450

 
49,377

 
73

 
—

Accrued interest payable and other liabilities
51,707

 
49,929

 
1,778

 
4

Total liabilities
$
2,738,457

 
$
2,517,877

 
$
220,580

 
9
 %


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Table of Contents

Deposits
Total deposits declined $17.3 million or 0.7% from December 31, 2015. Declines in public fund time deposits were partially offset by growth in savings deposits and non-interest bearing demand deposits. During the second quarter of 2016, interest-bearing consumer demand deposits of approximately $92.4 million were transferred to noninterest-bearing deposits due to a product consolidation for existing customers.
Borrowings
Short-term borrowings increased by $236.0 million from December 31, 2015. Short-term borrowings at June 30, 2016 included borrowings from the FHLB of $156.0 million which were primarily used to fund loan growth. In addition, short-term borrowings included a bridge loan with a correspondent bank of $80.0 million which was paid off on July 1, 2016 in conjunction with the closing of the Fox Chase merger.
Shareholders’ Equity
The following table presents total shareholders’ equity at the dates indicated:
(Dollars in thousands)
At June 30, 2016
 
At December 31, 2015
 
Change
Amount
 
Percent
Common stock
$
110,271

 
$
110,271

 
$
—

 
—
%
Additional paid-in capital
121,399

 
121,280

 
119

 
—

Retained earnings
198,156

 
193,446

 
4,710

 
2

Accumulated other comprehensive loss
(14,370
)
 
(16,708
)
 
2,338

 
14

Treasury stock
(46,296
)
 
(46,715
)
 
419

 
1

Total shareholders’ equity
$
369,160

 
$
361,574

 
$
7,586

 
2
%

The increase in shareholder's equity at June 30, 2016 of $7.6 million from December 31, 2015 was primarily related to a $4.7 million increase to retained earnings. Retained earnings at June 30, 2016 were impacted by the six months of net income of $12.5 million partially offset by cash dividends declared of $7.8 million. Accumulated other comprehensive loss decreased by $2.3 million mainly attributable to increases in the fair value of available-for-sale investment securities.

Capital Adequacy
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Capital adequacy guidelines, and additionally for the Bank the prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined), or leverage ratio.

In July 2013, the federal bank regulatory agencies adopted final rules revising the agencies’ capital adequacy guidelines and prompt corrective action rules, designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The new minimum capital requirements were effective on January 1, 2015. Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer requirements phase in over a four-year period beginning January 1, 2016.
The Corporation adopted the new Basel III regulatory capital rules during the first quarter of 2015 under the transition rules, primarily relating to regulatory deductions and adjustments impacting common equity tier 1 capital and tier 1 capital, to be phased in over a three-year period beginning January 1, 2015. Under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. During 2016, the Corporation and the Bank must hold a capital

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Table of Contents

conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than .625% of total risk-weighted assets in order to avoid limitations on capital distributions. Total risk-based capital at June 30, 2016 was 12.77% for the Corporation and 11.45% for the Bank, well in excess of the regulatory minimum for well-capitalized status of 10%. The regulatory capital ratios for the Corporation and the Bank at June 30, 2016 were well in excess of the regulatory minimum requirements including the capital conservation buffer requirements.

Table 4—Regulatory Capital
The Corporation's and Bank's actual and required capital ratios as of June 30, 2016 and December 31, 2015 under BASEL III regulatory capital rules were as follows.
 
Actual
 
For Capital Adequacy
Purposes
 
To Be Well-Capitalized
Under Prompt
Corrective Action
Provisions
(Dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount  
 
Ratio  
At June 30, 2016
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
$
338,914

 
12.77
%
 
$
212,241

 
8.00
%
 
$
265,301

 
10.00
%
Bank
301,063

 
11.45

 
210,267

 
8.00

 
262,834

 
10.00

Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
271,658

 
10.24

 
159,180

 
6.00

 
212,241

 
8.00

Bank
283,257

 
10.78

 
157,701

 
6.00

 
210,267

 
8.00

Tier 1 Common Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
271,658

 
10.24

 
119,385

 
4.50

 
172,446

 
6.50

Bank
283,257

 
10.78

 
118,275

 
4.50

 
170,842

 
6.50

Tier 1 Capital (to Average Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
271,658

 
9.90

 
109,708

 
4.00

 
137,134

 
5.00

Bank
283,257

 
10.44

 
108,553

 
4.00

 
135,691

 
5.00

At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
$
334,757

 
13.35
%
 
$
200,613

 
8.00
%
 
$
250,766

 
10.00
%
Bank
300,527

 
12.09

 
198,816

 
8.00

 
248,521

 
10.00

Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
267,098

 
10.65

 
150,460

 
6.00

 
200,613

 
8.00

Bank
282,245

 
11.36

 
149,112

 
6.00

 
198,816

 
8.00

Tier 1 Common Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
267,098

 
10.65

 
112,845

 
4.50

 
162,998

 
6.50

Bank
282,245

 
11.36

 
111,834

 
4.50

 
161,538

 
6.50

Tier 1 Capital (to Average Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
267,098

 
9.69

 
110,227

 
4.00

 
137,783

 
5.00

Bank
282,245

 
10.31

 
109,480

 
4.00

 
136,850

 
5.00

At June 30, 2016 and December 31, 2015, management believes that the Corporation and the Bank continued to meet all capital adequacy requirements to which they are subject. The Corporation, like other bank holding companies, currently is required to maintain Tier 1 Capital and Total Capital equal to at least 6.0% and 8.0%, respectively, of total risk-weighted assets (including various off-balance-sheet items). The Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. During 2016, the Corporation and the Bank must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than .625% of total risk-weighted assets in order to avoid limitations on capital distributions. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, Tier 1 and Total Capital ratios must be at least 8.0% and 10.0% on a risk-adjusted basis, respectively. At June 30, 2016, the Bank is categorized as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the

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Bank’s category. The Corporation will continue to analyze the impact of the new rules as it grows and as the capital conservation buffer requirements are phased in.

Asset/Liability Management
The primary functions of Asset/Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers and corporate needs. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates.
The Corporation uses both interest-sensitivity gap analysis and simulation modeling to quantify exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year and two-year horizon. The simulation uses existing portfolio rate and re-pricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayment speeds on loans, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is in a liability sensitive position from both a short-term maturity perspective and a short-term re-pricing perspective, as interest rates remain at historically low levels. Despite being liability sensitive, the Corporation projects increased net interest income in rising rate scenarios as the magnitude of the asset pricing change exceeds the liability pricing change.

Liquidity
The Corporation, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans and deposit withdrawals. The Corporation manages liquidity risk by measuring and monitoring liquidity sources and estimated funding needs. The Corporation has a contingency funding plan in place to address liquidity needs in the event of an institution-specific or a systemic financial crisis.
Sources of Funds
Core deposits and customer repurchase agreements have historically been the most significant funding sources for the Corporation. These deposits and repurchase agreements are primarily generated from a base of consumer, business and public customers primarily located in Bucks, Montgomery and Philadelphia counties, Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, credit unions, savings institutions, mutual funds, security dealers and others.
The Corporation supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the Bank’s investment portfolio and bear interest at current money market mutual fund rates. This funding source is subject to changes in the asset allocations of the trust accounts.

The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $829.2 million. At June 30, 2016 and December 31, 2015, overnight and short-term borrowings with the FHLB were $156.0 million and $0 million, respectively. At June 30, 2016 and December 31, 2015, the Bank had outstanding short-term letters of credit with the FHLB totaling $178.1 million and $170.2 million, respectively, which were utilized to collateralize public funds deposits. The maximum borrowing capacity with the FHLB changes as a function of qualifying collateral assets as well as the FHLB’s internal credit rating of the Bank, and the amount of funds received may be reduced by additional required purchases of FHLB stock.
The Corporation has a $10.0 million line of credit with a correspondent bank. At June 30, 2016, the Corporation had no outstanding borrowings under this line. At June 30, 2016, the Corporation had a short-term bridge loan with a correspondent bank of $80.0 million.
The Corporation, through the Bank, maintains federal fund lines with several correspondent banks totaling $262.0 million and $122.0 million at June 30, 2016 and December 31, 2015, respectively. At June 30, 2016 and December 31, 2015, the Corporation had no outstanding federal funds purchased with these correspondent banks. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.

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The Corporation, through the Bank, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At June 30, 2016 and December 31, 2015, the Corporation had no outstanding borrowings under this line.
Cash Requirements
The Corporation has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The most significant contractual obligation, in both the under and over one year time period, is for the Bank to repay certificates of deposit. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its financial center network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market.
Commitments to extend credit are the Bank’s most significant commitment in both the under and over one year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.
Recent Accounting and Tax Pronouncements
For information regarding recent accounting pronouncements, refer to Footnote 1, “Summary of Significant Accounting Policies” of this Form 10-Q.
On July 11, 2016 the Pennsylvania State General Assembly passed, and the Governor signed, amendments to the Tax Reform Code (TRC) providing revenues to support the new spending package. The TRC bill makes significant changes to the Bank Shares Tax (BST). The final BST agreement includes a .95 percent rate (an increase of 6 basis points over the current .89 percent rate) with no retroactivity, as well as clarification language codified into law that allows both Method 1 and Method 2 receipts apportionment, and maintains the deductibility of goodwill. This will impact the Bank's Shares Tax recognized in 2017. Based on current pro forma combined financial statements for the Bank and Fox Chase Bank, this would increase the 2017 Bank Shares Tax by approximately $270 thousand, or a negative impact to net income of $174 thousand.


Item 3.
Quantitative and Qualitative Disclosures About Market Risk
No material changes in the Corporation’s market risk or market strategy occurred during the current period. A detailed discussion of market risk is provided in the Corporation's Annual Report on Form 10-K for the period ended December 31, 2015.

Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended June 30, 2016 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
Management is not aware of any litigation that would have a material adverse effect on the consolidated balance sheet or statement of income of the Corporation. There are no material proceedings pending other than the ordinary routine litigation incident to the business of the Corporation. In addition, there are no material proceedings pending or known to be threatened or contemplated against the Corporation or the Bank by government authorities.

Item 1A.
Risk Factors
There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors.” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information on repurchases by the Corporation of its common stock under the Corporation's Board approved program.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
April 1 – 30, 2016
—

 
$
—

 
—

 
1,080,246

May 1 – 31, 2016
—

 
—

 
—

 
1,080,246

June 1 – 30, 2016
—

 
—

 
—

 
1,080,246

Total
—

 
$
—

 
—

 
 
 
1.
Transactions are reported as of trade dates.
2.
On October 23, 2013, the Corporation’s Board of Directors approved a new stock repurchase plan for the repurchase of up to 800,000 shares, or approximately 5% of the shares outstanding. On May 27, 2015, the Corporation's Board of Directors approved an increase of 1,000,000 shares available for repurchase under the Corporation's share repurchase program, or approximately 5% of the Corporation's common stock outstanding as of May 27, 2015. The repurchased shares limit is net of normal treasury activity such as purchases to fund the dividend reinvestment, employee stock purchase and equity compensation plans. The program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.

Item 3.
Defaults Upon Senior Securities
None.

Item 4.
Mine Safety Disclosures
Not Applicable.

Item 5.
Other Information
None.

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Item 6.
Exhibits
 
a.
Exhibits
 
 
 
 
 
 
 
Exhibit 2.1
 
Agreement and Plan of Merger by and between Univest Corporation of Pennsylvania and Fox Chase Bancorp, Inc. dated as of December 8, 2015 is incorporated by reference to Exhibit 2.1 of Form 8-K, filed with the SEC on December 11, 2015.
 
 
 
 
 
Exhibit 3.1
 
Amended and Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of Form 8-K, filed with the SEC on April 22, 2015.
 
 
 
 
 
Exhibit 3.2
 
Amended By-Laws effective January 1, 2015 are incorporated by reference to Exhibit 3.2 of Form 8-K, filed with the SEC on January 2, 2015.
 
 
 
 
 
Exhibit 10.1
 
Form of Change in Control Agreement dated February 26, 2016 between Univest Corporation of Pennsylvania, Univest Bank and Trust Co. and certain executive officers is incorporated by reference to Form 8-K, filed with the SEC on March 2, 2016.
 
 
 
 
 
Exhibit 31.1

 
Certification of Jeffrey M. Schweitzer, President and Chief Executive Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Exhibit 31.2
 
Certification of Roger S. Deacon, Senior Executive Vice President and Chief Financial Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Exhibit 32.1
 
Certification of Jeffrey M. Schweitzer, President and Chief Executive Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Exhibit 32.2
 
Certification of Roger S. Deacon, Senior Executive Vice President and Chief Financial Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Exhibit 101.INS
 
XBRL Instance Document
 
 
 
 
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Univest Corporation of Pennsylvania
 
(Registrant)
 
 
Date: August 8, 2016
/s/ Jeffrey M. Schweitzer
 
Jeffrey M. Schweitzer
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date: August 8, 2016
/s/ Roger S. Deacon
 
Roger S. Deacon
Senior Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


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