UNIVEST FINANCIAL Corp - Quarter Report: 2014 June (Form 10-Q)

Form 10-Q

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, 2014.

¨	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		16,218,515
(Title of Class)		(Number of shares outstanding at July 31, 2014)

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX


			Page Number
Part I.	Financial Information:

	Item 1.	Financial Statements (Unaudited)

		Consolidated Balance Sheets at June 30, 2014 and December 31, 2013		2

		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013		3

		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013		4

		Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2014 and 2013		5

		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013		6

		Notes to Consolidated Financial Statements		7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46

	Item 4.	Controls and Procedures		46

Part II.	Other Information

	Item 1.	Legal Proceedings		47

	Item 1A.	Risk Factors		47

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47

	Item 3.	Defaults Upon Senior Securities		47

	Item 4.	Mine Safety Disclosures		47

	Item 5.	Other Information		47

	Item 6.	Exhibits		48

Signatures				49

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, 2014			At December 31, 2013
ASSETS
Cash and due from banks	$	48,887		$	32,646
Interest-earning deposits with other banks		8,720			36,523
Investment securities held-to-maturity (fair value $57,499 and $66,853 at June 30, 2014 and December 31, 2013, respectively)		56,604			66,003
Investment securities available-for-sale		301,856			336,281
Loans held for sale		9,811			2,267
Loans and leases held for investment		1,586,994			1,541,484
Less: Reserve for loan and lease losses		(24,094	)		(24,494	)

Net loans and leases held for investment		1,562,900			1,516,990

Premises and equipment, net		34,048			34,129
Goodwill		64,326			57,517
Other intangibles, net of accumulated amortization and fair value adjustments of $11,674 and $10,300 at June 30, 2014 and December 31, 2013, respectively		11,494			8,178
Bank owned life insurance		61,458			60,637
Accrued interest receivable and other assets		37,148			40,388

Total assets	$	2,197,252		$	2,191,559

LIABILITIES
Noninterest-bearing deposits	$	432,399		$	411,714
Interest-bearing deposits:
Demand deposits		590,908			625,845
Savings deposits		540,697			536,150
Time deposits		268,230			270,789

Total deposits		1,832,234			1,844,498

Customer repurchase agreements		41,066			37,256
Other short-term borrowings		4,000			—
Accrued interest payable and other liabilities		33,165			29,299

Total liabilities		1,910,465			1,911,053

SHAREHOLDERS’ EQUITY
Common stock, $5 par value: 48,000,000 shares authorized at June 30, 2014 and December 31, 2013; 18,266,404 shares issued at June 30, 2014 and December 31, 2013; 16,248,495 and 16,287,812 shares outstanding at June 30, 2014 and December 31, 2013, respectively		91,332			91,332
Additional paid-in capital		61,839			62,417
Retained earnings		176,911			172,602
Accumulated other comprehensive loss, net of tax benefit		(6,648	)		(9,955	)
Treasury stock, at cost; 2,017,909 and 1,978,592 shares at June 30, 2014 and December 31, 2013, respectively		(36,647	)		(35,890	)

Total shareholders’ equity		286,787			280,506

Total liabilities and shareholders’ equity	$	2,197,252		$	2,191,559

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

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)	2014		2013			2014		2013
Interest income
Interest and fees on loans and leases:
Taxable	$	15,435	$	15,809		$	30,995	$	31,751
Exempt from federal income taxes		1,369		1,130			2,744		2,244

Total interest and fees on loans and leases		16,804		16,939			33,739		33,995

Interest and dividends on investment securities:
Taxable		1,011		1,432			2,062		2,804
Exempt from federal income taxes		893		1,044			1,839		2,070
Other interest income		17		46			31		81

Total interest income		18,725		19,461			37,671		38,950

Interest expense
Interest on deposits		969		1,155			1,961		2,395
Interest on short-term borrowings		12		15			18		32
Interest on long-term borrowings		—		183			—		472

Total interest expense		981		1,353			1,979		2,899

Net interest income		17,744		18,108			35,692		36,051
Provision for loan and lease losses		1,251		3,446			2,726		5,520

Net interest income after provision for loan and lease losses		16,493		14,662			32,966		30,531

Noninterest income
Trust fee income		1,931		1,779			3,830		3,513
Service charges on deposit accounts		1,047		1,098			2,061		2,184
Investment advisory commission and fee income		3,009		2,018			6,058		3,914
Insurance commission and fee income		2,434		2,391			5,766		4,914
Other service fee income		1,897		1,827			3,704		3,525
Bank owned life insurance income		443		413			821		917
Net gain on sales of investment securities		415		1,339			557		1,524
Net gain on mortgage banking activities		519		1,416			868		3,112
Net gain on sales of other real estate owned		—		252			—		252
Loss on termination of interest rate swap		—		(1,866	)		—		(1,866	)
Other		229		324			400		477

Total noninterest income		11,924		10,991			24,065		22,466

Noninterest expense
Salaries and benefits		10,242		9,359			20,913		19,219
Commissions		1,795		2,388			3,385		4,503
Net occupancy		1,687		1,408			3,441		2,807
Equipment		1,410		1,212			2,744		2,394
Professional fees		846		809			1,655		1,576
Marketing and advertising		581		497			942		862
Deposit insurance premiums		397		400			776		792
Intangible expenses (income)		650		(683	)		1,410		(474	)
Acquisition-related costs		516		27			559		27
Restructuring charges		—		—			—		539
Other		3,666		3,869			6,848		7,277

Total noninterest expense		21,790		19,286			42,673		39,522

Income before income taxes		6,627		6,367			14,358		13,475
Income taxes		1,547		1,537			3,552		3,247

Net income	$	5,080	$	4,830		$	10,806	$	10,228

Net income per share:
Basic	$	.31	$	.29		$	.67	$	.61
Diluted		.31		.29			.66		.61
Dividends declared		.20		.20			.40		.40

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

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended June 30,
(Dollars in thousands)	2014									2013
(Dollars in thousands)	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Income	$	6,627		$	1,547		$	5,080		$	6,367		$	1,537		$	4,830
Other comprehensive income:
Net unrealized gains (losses) on available-for-sale investment securities:
Net unrealized holding gains (losses) arising during the period		2,708			948			1,760			(9,201	)		(3,221	)		(5,980	)
Less: reclassification adjustment for net gains on sales realized in net income		(415	)		(145	)		(270	)		(1,339	)		(468	)		(871	)

Total net unrealized gains (losses) on available-for-sale investment securities		2,293			803			1,490			(10,540	)		(3,689	)		(6,851	)
Cash flow hedge derivative:
Net change in fair value of interest rate swap		—			—			—			(119	)		(42	)		(77	)
Less: reclassification adjustment for loss on termination of interest rate swap realized in net income		—			—			—			1,866			653			1,213

Total cash flow hedge derivative		—			—			—			1,747			611			1,136
Defined benefit pension plans:
Less: amortization of net actuarial loss included in net periodic pension costs		167			59			108			349			122			227
Less: accretion of prior service cost included in net periodic pension costs		(69	)		(25	)		(44	)		(63	)		(21	)		(42	)

Total defined benefit pension plans		98			34			64			286			101			185

Other comprehensive income (loss)		2,391			837			1,554			(8,507	)		(2,977	)		(5,530	)

Total comprehensive income (loss)	$	9,018		$	2,384		$	6,634		$	(2,140	)	$	(1,440	)	$	(700	)


	Six Months Ended June 30,
(Dollars in thousands)	2014									2013
(Dollars in thousands)	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Income	$	14,358		$	3,552		$	10,806		$	13,475		$	3,247		$	10,228
Other comprehensive income:
Net unrealized gains (losses) on available-for-sale investment securities:
Net unrealized holding gains (losses) arising during the period		5,458			1,911			3,547			(10,605	)		(3,712	)		(6,893	)
Less: reclassification adjustment for net gains on sales realized in net income		(557	)		(195	)		(362	)		(1,524	)		(533	)		(991	)

Total net unrealized gains (losses) on available-for-sale investment securities		4,901			1,716			3,185			(12,129	)		(4,245	)		(7,884	)
Cash flow hedge derivative:
Net change in fair value of interest rate swap		—			—			—			43			15			28
Less: reclassification adjustment for loss on termination of interest rate swap realized in net income		—			—			—			1,866			653			1,213

Total cash flow hedge derivative		—			—			—			1,909			668			1,241
Defined benefit pension plans:
Less: amortization of net actuarial loss included in net periodic pension costs		331			116			215			641			224			417
Less: accretion of prior service cost included in net periodic pension costs		(144	)		(51	)		(93	)		(127	)		(44	)		(83	)

Total defined benefit pension plans		187			65			122			514			180			334

Other comprehensive income (loss)		5,088			1,781			3,307			(9,706	)		(3,397	)		(6,309	)

Total comprehensive income	$	19,446		$	5,333		$	14,113		$	3,769		$	(150	)	$	3,919

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

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share and per share data)

Common
Shares
Outstanding

Accumulated
Other
Comprehensive
(Loss) Income

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings

Treasury
Stock

Total

Six Months Ended June 30, 2014

Balance at December 31, 2013

16,287,812

(9,955

)

91,332

62,417

172,602

(35,890

)

280,506

Net income

10,806

Other comprehensive income, net of income tax

3,307

Cash dividends declared ($0.40 per share)

(6,497

)

(6,497

)

Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs

69,628

1,360

1,387

Exercise of stock options

1,500

)

Repurchase of cancelled restricted stock awards

(13,625

)

235

(235

)

—

Stock-based compensation

514

Net tax deficiency on stock-based compensation

)

Purchases of treasury stock

(171,124

)

(3,258

)

(3,258

)

Restricted stock awards granted

74,304

(1,349

)

1,349

—

Balance at June 30, 2014

16,248,495

(6,648

)

91,332

61,839

176,911

(36,647

)

286,787


(Dollars in thousands, except per share data)	Common Shares Outstanding			Accumulated Other Comprehensive Loss			Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Total
Six Months Ended June 30, 2013
Balance at December 31, 2012		16,770,232		$	(6,920	)	$	91,332	$	62,101		$	164,823		$	(27,059	)	$	284,277
Net income													10,228						10,228
Other comprehensive loss, net of income tax benefit					(6,309	)													(6,309	)
Cash dividends declared ($0.40 per share)													(6,693	)					(6,693	)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs		79,139								5			(33	)		1,391			1,363
Repurchase of cancelled restricted stock awards		(29,533	)							519						(519	)		—
Stock-based compensation										262									262
Net tax deficiency on stock-based compensation										(11	)								(11	)
Purchases of treasury stock		(206,870	)													(3,529	)		(3,529	)
Restricted stock awards granted		70,041								(1,174	)		(92	)		1,266			—

Balance at June 30, 2013		16,683,009		$	(13,229	)	$	91,332	$	61,702		$	168,233		$	(28,450	)	$	279,588

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

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
(Dollars in thousands)	2014			2013
Cash flows from operating activities:
Net income	$	10,806		$	10,228
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		2,726			5,520
Depreciation of premises and equipment		1,502			1,470
Net gain on sales of investment securities		(557	)		(1,524	)
Net gain on mortgage banking activities		(868	)		(3,112	)
Net (gain) loss on dispositions of fixed assets		(40	)		6
Net gain on sales of other real estate owned		—			(252	)
Loss on termination of interest rate swap		—			1,866
Bank owned life insurance income		(821	)		(917	)
Stock-based compensation		514			262
Intangible expenses (income)		1,410			(474	)
Other adjustments to reconcile net income to cash provided by operating activities		1,013			855
Originations of loans held for sale		(43,642	)		(176,114	)
Proceeds from the sale of loans held for sale		45,656			180,931
Contributions to pension and other postretirement benefit plans		(112	)		(60	)
Decrease (increase) in accrued interest receivable and other assets		2,081			(3,856	)
Decrease in accrued interest payable and other liabilities		(2,072	)		(1,594	)

Net cash provided by operating activities		17,596			13,235

Cash flows from investing activities:
Net cash paid due to acquisitions		(5,379	)		(2,170	)
Net capital expenditures		(1,365	)		(747	)
Proceeds from maturities and calls of securities held-to-maturity		9,000			—
Proceeds from maturities and calls of securities available-for-sale		45,258			23,467
Proceeds from sales of securities available-for-sale		30,286			35,415
Purchases of investment securities available-for-sale		(36,206	)		(56,860	)
Net increase in loans and leases		(57,562	)		(25,154	)
Net decrease in interest-earning deposits		27,920			6,519
Proceeds from sales of other real estate owned		—			2,330

Net cash provided by (used in) investing activities		11,952			(17,200	)

Cash flows from financing activities:
Net (decrease) increase in deposits		(12,264	)		7,718
Net increase (decrease) in short-term borrowings		7,309			(50,894	)
Repayment of subordinated debt		—			(375	)
Purchases of treasury stock		(3,258	)		(3,529	)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs		1,387			1,363
Proceeds from exercise of stock options		24			—
Cash dividends paid		(6,505	)		(3,357	)

Net cash used in financing activities		(13,307	)		(49,074	)

Net increase (decrease) in cash and due from banks		16,241			(53,039	)
Cash and due from banks at beginning of year		32,646			98,399

Cash and due from banks at end of period	$	48,887		$	45,360

Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,195		$	3,489
Cash paid for income taxes, net of refunds received		3,019			3,713
Non cash transactions:
Transfer of loans to other real estate owned	$	—		$	1,729
Transfer of loans to loans held for sale		8,926			—
Contingent consideration recorded as goodwill		5,470			454

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

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) 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, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. 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, 2013, which was filed with the SEC on March 4, 2014.

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 May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (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. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, or January 1, 2017 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on its financial statements; however, it is anticipated the impact will be only related to timing.

In January 2014, the FASB issued an ASU regarding reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The ASU clarifies that when an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to

local requirements of the applicable jurisdiction. The ASU was issued to eliminate diversity in practice on this topic. The amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2014, or January 1, 2015 for the Corporation. The Corporation does not anticipate the adoption of this guidance will have a material impact on its financial statements but will result in expanded disclosures effective March 31, 2015.

Note 2. Acquisitions

Valley Green Bank

On June 17, 2014, the Corporation, the Bank and Valley Green Bank (Valley Green) entered into an Agreement and Plan of Merger (Merger Agreement) pursuant to which Valley Green will be merged with and into the Bank in an all-stock transaction with an aggregate value of approximately $76 million. Headquartered in the Mt. Airy neighborhood of Philadelphia, Pennsylvania, Valley Green had approximately $370 million in assets, $329 million in loans, and $335 million in deposits at March 31, 2014 and operates three full-service banking offices and two loan production offices in the greater Philadelphia marketplace.

Under the terms of the Merger Agreement, Valley Green shareholders will receive shares of the Corporation’s common stock equal to $27.00 for each share of Valley Green stock outstanding, subject to certain adjustments depending upon the changes in the price of the Corporation’s common stock. The final exchange ratio will be based upon an average closing price of the Corporation’s common stock over the 20 consecutive trading day period ending on the day prior to the closing date.

With the assumption of Valley Green’s three branches and two loan production offices in the Philadelphia marketplace, the Corporation enters a new small business and consumer market and expands its existing lending network within southeastern Pennsylvania. Upon the closing, Valley Green will operate as a separate division of the Bank, under the Valley Green brand. The transaction is anticipated to be accretive to the Corporation’s earnings per share in the first combined year of operations.

The Merger Agreement has been approved by the Boards of Directors of the Corporation, the Bank and Valley Green and remains subject to approval by the shareholders of both companies, as well as their regulatory authorities. The transaction is expected to qualify as a tax-free reorganization for federal income tax purposes. The transaction is expected to close in the first quarter of 2015.

Girard Partners

The Corporation paid $5.4 million in cash at closing with additional contingent consideration to be paid in annual installments over the five-year period ending December 31, 2018, based on the achievement of certain levels of EBITDA (earnings before interest, taxes, depreciation and amortization). As of the effective date of the acquisition, January 1, 2014, the Corporation recorded the estimated fair value of the contingent consideration of $5.5 million in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $14.5 million cumulative over the next five years. As a result of the Girard Partners acquisition, the Corporation recorded goodwill of $6.8 million (inclusive of the contingent consideration) and customer related intangibles of $4.3 million. The goodwill is expected to be deductible for tax purposes. The customer related intangibles are being amortized over nine years using the sum-of-the-years-digits amortization method.

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, 2014 and December 31, 2013, by contractual maturity within each type:


	At June 30, 2014									At December 31, 2013
(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	$	13,160	$	240	$	—		$	13,400	$	11,148	$	122	$	—		$	11,270
After 1 year to 5 years		43,444		680		(25	)		44,099		54,855		992		(264	)		55,583

		56,604		920		(25	)		57,499		66,003		1,114		(264	)		66,853

Total	$	56,604	$	920	$	(25	)	$	57,499	$	66,003	$	1,114	$	(264	)	$	66,853

Securities Available-for-Sale
U.S. treasuries:
After 5 years to 10 years	$	4,969	$	—	$	(161	)	$	4,808	$	4,966	$	—	$	(258	)	$	4,708

		4,969		—		(161	)		4,808		4,966		—		(258	)		4,708

U.S. government corporations and agencies:
Within 1 year		—		—		—			—		5,999		16		—			6,015
After 1 year to 5 years		112,614		130		(413	)		112,331		112,989		114		(1,226	)		111,877
After 5 years to 10 years		10,747		—		(196	)		10,551		10,816		—		(560	)		10,256

		123,361		130		(609	)		122,882		129,804		130		(1,786	)		128,148

State and political subdivisions:
Within 1 year		600		2		—			602		1,564		13		—			1,577
After 1 year to 5 years		9,407		26		(20	)		9,413		5,305		14		(29	)		5,290
After 5 years to 10 years		46,951		1,458		(150	)		48,259		41,974		710		(698	)		41,986
Over 10 years		47,081		2,068		(59	)		49,090		57,899		1,227		(322	)		58,804

		104,039		3,554		(229	)		107,364		106,742		1,964		(1,049	)		107,657

Residential mortgage-backed securities:
After 5 years to 10 years		9,977		—		(143	)		9,834		10,008		5		(53	)		9,960
Over 10 years		2,280		55		—			2,335		25,721		20		(221	)		25,520

		12,257		55		(143	)		12,169		35,729		25		(274	)		35,480

Collateralized mortgage obligations:
After 1 year to 5 years		8		—		—			8		73		—		—			73
Over 10 years		6,851		41		(197	)		6,695		7,341		40		(253	)		7,128

		6,859		41		(197	)		6,703		7,414		40		(253	)		7,201

Corporate bonds:
After 1 year to 5 years		21,920		92		(137	)		21,875		18,838		52		(411	)		18,479
After 5 years to 10 years		20,950		7		(220	)		20,737		16,474		4		(1,117	)		15,361

		42,870		99		(357	)		42,612		35,312		56		(1,528	)		33,840

Money market mutual funds:
No stated maturity		4,011		—		—			4,011		16,900		—		—			16,900

		4,011		—		—			4,011		16,900		—		—			16,900

Equity securities:
No stated maturity		854		453		—			1,307		1,679		668		—			2,347

		854		453		—			1,307		1,679		668		—			2,347

Total	$	299,220	$	4,332	$	(1,696	)	$	301,856	$	338,546	$	2,883	$	(5,148	)	$	336,281

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, 2014 and December 31, 2013 do not represent other-than-temporary impairments.

Securities with a carrying value of $232.5 million and $271.1 million at June 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits and for other purposes as required by law.

The following table presents information related to sales of securities available-for-sale during the six months ended June 30, 2014 and 2013:


	Six Months Ended June 30,
(Dollars in thousands)	2014		2013
Securities available-for-sale:
Proceeds from sales	$	30,286	$	35,415
Gross realized gains on sales		557		1,524
Gross realized losses on sales		—		—
Tax expense related to net realized gains on sales		195		533

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 and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, 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 within our investment portfolio. 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, 2014 and 2013.

At June 30, 2014 and December 31, 2013, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.

The following table shows the fair value of securities that were in an unrealized loss position at June 30, 2014 and December 31, 2013 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, 2014
U.S. treasuries	$	—	$	—		$	4,808	$	(161	)	$	4,808	$	(161	)
U.S. government corporations and agencies		—		—			77,693		(609	)		77,693		(609	)
State and political subdivisions		4,177		(8	)		13,274		(221	)		17,451		(229	)
Residential mortgage-backed securities		4,731		(133	)		5,103		(10	)		9,834		(143	)
Collateralized mortgage obligations		—		—			3,891		(197	)		3,891		(197	)
Corporate bonds		10,986		(39	)		26,087		(343	)		37,073		(382	)

Total	$	19,894	$	(180	)	$	130,856	$	(1,541	)	$	150,750	$	(1,721	)

At December 31, 2013
U.S. treasuries	$	4,708	$	(258	)	$	—	$	—		$	4,708	$	(258	)
U.S. government corporations and agencies		101,813		(1,786	)		—		—			101,813		(1,786	)
State and political subdivisions		30,233		(1,049	)		—		—			30,233		(1,049	)
Residential mortgage-backed securities		29,444		(274	)		—		—			29,444		(274	)
Collateralized mortgage obligations		4,091		(253	)		—		—			4,091		(253	)
Corporate bonds		46,499		(1,792	)		—		—			46,499		(1,792	)

Total	$	216,788	$	(5,412	)	$	—	$	—		$	216,788	$	(5,412	)

Note 4. Loans and Leases

Summary of Major Loan and Lease Categories


(Dollars in thousands)	At June 30, 2014			At December 31, 2013
Commercial, financial and agricultural	$	447,993		$	422,816
Real estate-commercial		626,060			600,353
Real estate-construction		76,735			90,493
Real estate-residential secured for business purpose		35,284			37,319
Real estate-residential secured for personal purpose		162,352			149,164
Real estate-home equity secured for personal purpose		98,880			95,345
Loans to individuals		31,564			40,000
Lease financings		108,126			105,994

Total loans and leases held for investment, net of deferred income	$	1,586,994		$	1,541,484

Unearned lease income, included in the above table	$	(13,742	)	$	(14,439	)
Net deferred costs, included in the above table		2,832			2,744
Overdraft deposits included in the above table		68			62

Overdraft deposits are re-classified as loans and are included in the total loans and leases on the balance sheet.

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, 2014 and December 31, 2013:


(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Current		Total Loans and Leases Held for Investment		Recorded Investment 90 Days or more Past Due and Accruing Interest
At June 30, 2014
Commercial, financial and agricultural	$	377	$	391	$	787	$	1,555	$	446,438	$	447,993	$	—
Real estate—commercial real estate and construction:
Commercial real estate		1,363		—		923		2,286		623,774		626,060		—
Construction		—		—		7,185		7,185		69,550		76,735		—
Real estate—residential and home equity:
Residential secured for business purpose		19		59		654		732		34,552		35,284		—
Residential secured for personal purpose		492		44		256		792		161,560		162,352		—
Home equity secured for personal purpose		101		10		104		215		98,665		98,880		—
Loans to individuals		414		216		216		846		30,718		31,564		216
Lease financings		1,275		487		624		2,386		105,740		108,126		308

Total	$	4,041	$	1,207	$	10,749	$	15,997	$	1,570,997	$	1,586,994	$	524

At December 31, 2013
Commercial, financial and agricultural	$	386	$	922	$	2,904	$	4,212	$	418,604	$	422,816	$	12
Real estate—commercial real estate and construction:
Commercial real estate		148		262		4,932		5,342		595,011		600,353		—
Construction		—		—		8,742		8,742		81,751		90,493		—
Real estate—residential and home equity:
Residential secured for business purpose		87		276		161		524		36,795		37,319		—
Residential secured for personal purpose		1,370		—		617		1,987		147,177		149,164		—
Home equity secured for personal purpose		278		97		100		475		94,870		95,345		23
Loans to individuals		445		193		319		957		39,043		40,000		319
Lease financings		2,182		455		389		3,026		102,968		105,994		59

Total	$	4,896	$	2,205	$	18,164	$	25,265	$	1,516,219	$	1,541,484	$	413

Non-Performing Loans and Leases

The following presents, by class of loans and leases, non-performing loans and leases at June 30, 2014 and December 31, 2013:


	At June 30, 2014								At December 31, 2013
(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
Loans held for sale **	$	532	$	—	$	—	$	532	$	—	$	—	$	—	$	—
Loans and leases held for investment:
Commercial, financial and agricultural		3,182		1,238		—		4,420		4,253		1,329		12		5,594
Real estate—commercial real estate and construction:
Commercial real estate		3,901		2,623		—		6,524		8,091		4,271		—		12,362
Construction		7,996		2,479		—		10,475		9,159		2,307		—		11,466
Real estate—residential and home equity:
Residential secured for business purpose		927		—		—		927		224		—		—		224
Residential secured for personal purpose		783		—		—		783		1,101		—		—		1,101
Home equity secured for personal purpose		104		—		—		104		77		—		23		100
Loans to individuals		1		—		216		217		—		36		319		355
Lease financings		316		—		308		624		330		—		59		389

Total	$	17,742	$	6,340	$	524	$	24,606	$	23,235	$	7,943	$	413	$	31,591

*	Includes nonaccrual troubled debt restructured loans and lease modifications of $2.2 million and $1.6 million at June 30, 2014 and December 31, 2013, respectively.

**	Includes real estate construction loan of $532 thousand at June 30, 2014.

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, 2014 and December 31, 2013.

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 risk ratings 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 risk ratings 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

Commercial Credit Exposure Credit Risk by Internally Assigned Grades


(Dollars in thousands)	Commercial, Financial and Agricultural		Real Estate— Commercial		Real Estate— Construction		Real Estate— Residential Secured for Business Purpose		Total
At June 30, 2014
Grade:
1. Cash secured/ 2. Fully secured	$	4,533	$	1,858	$	3,489	$	—	$	9,880
3. Strong		7,574		9,135		3,954		—		20,663
4. Satisfactory		28,620		16,610		8,689		247		54,166
5. Acceptable		276,339		417,051		44,643		24,955		762,988
6. Pre-watch		66,948		115,956		4,307		4,675		191,886
7. Special Mention		13,439		12,660		2,053		1,740		29,892
8. Substandard		50,540		52,790		9,600		3,667		116,597
9. Doubtful		—		—		—		—		—
10.Loss		—		—		—		—		—

Total	$	447,993	$	626,060	$	76,735	$	35,284	$	1,186,072

At December 31, 2013
Grade:
1. Cash secured/ 2. Fully secured	$	4,763	$	2,014	$	1,682	$	—	$	8,459
3. Strong		6,051		8,515		4,300		—		18,866
4. Satisfactory		34,650		17,758		1,500		261		54,169
5. Acceptable		251,203		384,061		54,464		26,694		716,422
6. Pre-watch		84,201		113,181		16,084		5,884		219,350
7. Special Mention		10,095		19,445		—		1,841		31,381
8. Substandard		31,508		55,331		12,463		2,639		101,941
9. Doubtful		345		48		—		—		393
10.Loss		—		—		—		—		—

Total	$	422,816	$	600,353	$	90,493	$	37,319	$	1,150,981

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 improbable.


(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, 2014
Performing	$	161,569	$	98,776	$	31,347	$	107,502	$	399,194
Nonperforming		783		104		217		624		1,728

Total	$	162,352	$	98,880	$	31,564	$	108,126	$	400,922

At December 31, 2013
Performing	$	148,063	$	95,245	$	39,645	$	105,605	$	388,558
Nonperforming		1,101		100		355		389		1,945

Total	$	149,164	$	95,345	$	40,000	$	105,994	$	390,503

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 itself. 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. The Corporation has strict underwriting, review, and monitoring procedures in place, however, 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. 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 warrant higher combined loan-to-value ratios.

Credit risk for direct consumer loans is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values. 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 terms.

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, 2014 and 2013:


(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, 2014

Reserve for loan and lease losses:
Beginning balance	$	9,547		$	9,247		$	1,056		$	1,221		$	598		$	1,295		$	1,603		$	24,567
Charge-offs		(250	)		(1,251	)		(98	)		(10	)		(267	)		(143	)		N/A			(2,019	)
Recoveries		63			—			45			26			81			80			N/A			295
Provision (recovery of provision)		354			1,267			22			11			(7	)		(131	)		(265	)		1,251

Ending balance	$	9,714		$	9,263		$	1,025		$	1,248		$	405		$	1,101		$	1,338		$	24,094

Three Months Ended June 30, 2013

Reserve for loan and lease losses:
Beginning balance	$	11,883		$	8,032		$	570		$	792		$	628		$	1,358		$	1,959		$	25,222
Charge-offs		(90	)		(3,691	)		(24	)		(23	)		(224	)		(267	)		N/A			(4,319	)
Recoveries		39			42			—			1			78			209			N/A			369
(Recovery of provision) provision		(437	)		4,279			40			314			211			(88	)		(873	)		3,446

Ending balance	$	11,395		$	8,662		$	586		$	1,084		$	693		$	1,212		$	1,086		$	24,718

Six Months Ended June 30, 2014

Reserve for loan and lease losses:
Beginning balance	$	9,789		$	8,780		$	1,062		$	1,284		$	694		$	1,285		$	1,600		$	24,494
Charge-offs		(1,689	)		(1,308	)		(114	)		(90	)		(490	)		(290	)		N/A			(3,981	)
Recoveries		109			370			48			27			159			142			N/A			855
Provision (recovery of provision)		1,505			1,421			29			27			42			(36	)		(262	)		2,726

Ending balance	$	9,714		$	9,263		$	1,025		$	1,248		$	405		$	1,101		$	1,338		$	24,094

Six Months Ended June 30, 2013

Reserve for loan and lease losses:
Beginning balance	$	11,594		$	7,507		$	639		$	980		$	679		$	1,326		$	2,021		$	24,746
Charge-offs		(1,161	)		(4,073	)		(74	)		(27	)		(404	)		(426	)		N/A			(6,165	)
Recoveries		87			48			8			3			112			359			N/A			617
Provision (recovery of provision)		875			5,180			13			128			306			(47	)		(935	)		5,520

Ending balance	$	11,395		$	8,662		$	586		$	1,084		$	693		$	1,212		$	1,086		$	24,718

N/A – Not applicable


(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, 2014

Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	680	$	8	$	456	$	—	$	—	$	—	$	N/A	$	1,144
Ending balance: collectively evaluated for impairment		9,034		9,255		569		1,248		405		1,101		1,338		22,950

Total ending balance	$	9,714	$	9,263	$	1,025	$	1,248	$	405	$	1,101	$	1,338	$	24,094

Loans and leases held for investment:
Ending balance: individually evaluated for impairment	$	14,800	$	34,259	$	2,477	$	887	$	1	$	—			$	52,424
Ending balance: collectively evaluated for impairment		433,193		668,536		32,807		260,345		31,563		108,126				1,534,570

Total ending balance	$	447,993	$	702,795	$	35,284	$	261,232	$	31,564	$	108,126			$	1,586,994

At June 30, 2013

Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	230	$	—	$	—	$	—	$	—	$	—	$	N/A	$	230
Ending balance: collectively evaluated for impairment		11,165		8,662		586		1,084		693		1,212		1,086		24,488

Total ending balance	$	11,395	$	8,662	$	586	$	1,084	$	693	$	1,212	$	1,086	$	24,718

Loans and leases held for investment:
Ending balance: individually evaluated for impairment	$	3,146	$	34,471	$	169	$	730	$	38	$	—			$	38,554
Ending balance: collectively evaluated for impairment		436,761		629,956		32,160		227,381		43,560		91,621				1,461,439

Total ending balance	$	439,907	$	664,427	$	32,329	$	228,111	$	43,598	$	91,621			$	1,499,993

N/A – Not applicable

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, 2014 and December 31, 2013:


	At June 30, 2014						At December 31, 2013
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans with no related allowance recorded:
Loans held for sale	$	532	$	2,987			$	—	$	—
Loans held for investment:
Commercial, financial and agricultural		13,121		13,865				10,890		11,749
Real estate—commercial real estate		21,522		23,587				28,883		35,700
Real estate—construction		11,292		11,639				12,357		14,540
Real estate—residential secured for business purpose		901		914				224		235
Real estate—residential secured for personal purpose		783		803				131		131
Real estate—home equity secured for personal purpose		104		104				77		77
Loans to individuals		1		1				36		54

Total impaired loans with no allowance recorded	$	48,256	$	53,900			$	52,598	$	62,486

Impaired loans with an allowance recorded:
Commercial, financial and agricultural	$	1,679	$	1,679	$	680	$	3,215	$	3,272	$	2,398
Real estate—commercial real estate		1,445		1,445		8		—		—		—
Real estate—residential secured for business purpose		1,576		1,576		456		1,550		1,550		501
Real estate—residential secured for personal purpose		—		—		—		970		976		64

Total impaired loans with an allowance recorded	$	4,700	$	4,700	$	1,144	$	5,735	$	5,798	$	2,963


	At June 30, 2014						At December 31, 2013
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Total impaired loans:
Loans held for sale	$	532	$	2,987	$	—	$	—	$	—	$	—
Loans held for investment:
Commercial, financial and agricultural		14,800		15,544		680		14,105		15,021		2,398
Real estate—commercial real estate		22,967		25,032		8		28,883		35,700		—
Real estate—construction		11,292		11,639		—		12,357		14,540		—
Real estate—residential secured for business purpose		2,477		2,490		456		1,774		1,785		501
Real estate—residential secured for personal purpose		783		803		—		1,101		1,107		64
Real estate—home equity secured for personal purpose		104		104		—		77		77		—
Loans to individuals		1		1		—		36		54		—

Total impaired loans	$	52,956	$	58,600	$	1,144	$	58,333	$	68,284	$	2,963

Impaired loans includes 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. 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 included other accruing impaired loans of $29.2 million and $27.5 million at June 30, 2014 and December 31, 2013, respectively. Specific reserves on other accruing impaired loans were $674 thousand and $1.6 million at June 30, 2014 and December 31, 2013, respectively.

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, 2014						Three Months Ended June 30, 2013
(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 investment:
Commercial, financial and agricultural	$	13,296	$	124	$	51	$	2,469	$	8	$	23
Real estate—commercial real estate		23,666		253		72		21,434		147		191
Real estate—construction		12,357		41		123		15,675		28		185
Real estate—residential secured for business purpose		2,574		17		15		169		—		2
Real estate—residential secured for personal purpose		762		—		18		751		—		12
Real estate—home equity secured for personal purpose		90		—		1		6		—		—
Loans to individuals		2		—		—		38		1		—

Total	$	52,747	$	435	$	280	$	40,542	$	184	$	413

There was no interest income recognized on a cash basis for nonaccrual loans for the three months ended June 30, 2014 and 2013; includes interest income recognized on the accrual method for accruing impaired loans of $435 thousand and $184 thousand for the three months ended June 30, 2014 and 2013, respectively.


	Six Months Ended June 30, 2014						Six Months Ended June 30, 2013
(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 investment:
Commercial, financial and agricultural	$	13,794	$	251	$	116	$	2,731	$	16	$	62
Real estate—commercial real estate		24,884		535		166		22,732		302		416
Real estate—construction		12,412		83		247		15,758		56		369
Real estate—residential secured for business purpose		2,272		33		35		178		—		5
Real estate—residential secured for personal purpose		888		—		32		773		—		24
Real estate—home equity secured for personal purpose		84		—		2		3		—		—
Loans to individuals		6		—		—		42		2		—

Total	$	54,340	$	902	$	598	$	42,217	$	376	$	876

Includes interest income recognized on a cash basis for nonaccrual loans of $23 thousand and $6 thousand for the six months ended June 30, 2014 and 2013, respectively and interest income recognized on the accrual method for accruing impaired loans of $879 thousand and $370 thousand for the six months ended June 30, 2014 and 2013, respectively.

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, 2014								Three Months Ended June 30, 2013
(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	$	1,000	$	1,000	$	—

Total		—	$	—	$	—	$	—		1	$	1,000	$	1,000	$	—

Nonaccrual Troubled Debt Restructured Loans:

Total		—	$	—	$	—	$	—		—	$	—	$	—	$	—


	Six Months Ended June 30, 2014								Six Months Ended June 30, 2013
(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	$	1,000	$	1,000	$	—

Total		—	$	—	$	—	$	—		1	$	1,000	$	1,000	$	—

Nonaccrual Troubled Debt Restructured Loans:
Real estate—commercial real estate		1	$	50	$	50	$	—		—	$	—	$	—	$	—
Real estate—residential secured for business purpose		2		688		688		—		—		—		—		—

Total		3	$	738	$	738	$	—		—	$	—	$	—	$	—

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. Our goal when restructuring a credit is to afford the customer 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.

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, 2014 and 2013.


	Interest Only Term Extension				Interest Rate Reduction				Maturity Date Extension				Total Concessions Granted
(Dollars in thousands)	No. of Loans		Amount		No. of Loans		Amount		No. of Loans		Amount		No. of Loans		Amount
Three Months Ended June 30, 2014

Accruing Troubled Debt Restructured Loans:

Total		—	$	—		—	$	—		—	$	—		—	$	—

Nonaccrual Troubled Debt Restructured Loans:

Total		—	$	—		—	$	—		—	$	—		—	$	—

Three Months Ended June 30, 2013

Accruing Troubled Debt Restructured Loans:
Commercial, financial and agricultural		1	$	1,000		—	$	—		—	$	—		1	$	1,000

Total		1	$	1,000		—	$	—		—	$	—		1	$	1,000

Nonaccrual Troubled Debt Restructured Loans:

Total		—	$	—		—	$	—		—	$	—		—	$	—

Six Months Ended June 30, 2014

Accruing Troubled Debt Restructured Loans:		—	$	—		—	$	—		—	$	—		—	$	—

Total		—	$	—		—	$	—		—	$	—		—	$	—

Nonaccrual Troubled Debt Restructured Loans:
Real estate—commercial real estate		—	$	—		1	$	50		—	$	—		1	$	50
Real estate—residential secured for business purpose		—		—		1		55		1		633		2		688

Total		—	$	—		2	$	105		1	$	633		3	$	738

Six Months Ended June 30, 2013

Accruing Troubled Debt Restructured Loans:
Commercial, financial and agricultural		1	$	1,000		—	$	—		—	$	—		1	$	1,000

Total		1	$	1,000		—	$	—		—	$	—		1	$	1,000

Nonaccrual Troubled Debt Restructured Loans:

Total		—	$	—		—	$	—		—	$	—		—	$	—

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,
	2014				2013				2014				2013
(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:
Commercial, financial and agricultural		—	$	—		—	$	—		—	$	—		3	$	230

Total		—	$	—		—	$	—		—	$	—		3	$	230

Nonaccrual Troubled Debt Restructured Loans:

Total		—	$	—		—	$	—		—	$	—		—	$	—

Note 5. Mortgage Servicing Rights

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 $7.0 million and $7.2 million at June 30, 2014 and December 31, 2013, respectively. The fair value of mortgage servicing rights was determined using discount rates ranging from 5.0% to 10.0% at both June 30, 2014 and December 31, 2013.

Changes in the mortgage servicing rights balance are summarized as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2014			2013			2014			2013
Beginning of period	$	5,406		$	4,723		$	5,519		$	4,152
Servicing rights capitalized		236			871			359			1,639
Amortization of servicing rights		(264	)		(381	)		(507	)		(812	)
Changes in valuation allowance		—			14			7			248

End of period	$	5,378		$	5,227		$	5,378		$	5,227

Mortgage loans serviced for others	$	761,413		$	705,999		$	761,413		$	705,999

Activity in the valuation allowance for mortgage servicing rights was as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2014			2013			2014			2013
Valuation allowance, beginning of period	$	(243	)	$	(263	)	$	(250	)	$	(497	)
Additions		—			—			—			—
Reductions		—			14			7			248
Direct write-downs		—			—			—			—

Valuation allowance, end of period	$	(243	)	$	(249	)	$	(243	)	$	(249	)

The estimated amortization expense of mortgage servicing rights for the remainder of 2014 and the succeeding fiscal years is as follows:


Year	(Dollars in thousands)	Amount
Remainder of 2014		$	433
2015			792
2016			679
2017			576
2018			482
Thereafter			2,416

Note 6. Income Taxes

At June 30, 2014 and December 31, 2013, 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, 2014, the Corporation’s tax years 2010 through 2013 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, a portion of which is in excess of limits imposed on qualified plans by federal tax law. These plans are non-qualified benefit plans. 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.

Information with respect to the Retirement Plans and Other Postretirement Benefits follows:

Components of net periodic benefit cost (income) were as follows:


	Three Months Ended June 30,
	2014			2013			2014		2013
(Dollars in thousands)	Retirement Plans						Other Post Retirement Benefits
Service cost	$	137		$	155		$	18	$	25
Interest cost		475			426			31		27
Expected return on plan assets		(745	)		(709	)		—		—
Amortization of net actuarial loss		165			343			2		6
Accretion of prior service cost		(71	)		(59	)		2		(4	)

Net periodic benefit (income) cost	$	(39	)	$	156		$	53	$	54


	Six Months Ended June 30,
	2014			2013			2014			2013
(Dollars in thousands)	Retirement Plans						Other Post Retirement Benefits
Service cost	$	273		$	311		$	37		$	46
Interest cost		950			857			67			56
Expected return on plan assets		(1,490	)		(1,264	)		—			—
Amortization of net actuarial loss		326			629			5			12
Accretion of prior service cost		(141	)		(118	)		(3	)		(9	)

Net periodic benefit (income) cost	$	(82	)	$	415		$	106		$	105

The Corporation previously disclosed in its financial statements for the year ended December 31, 2013, that it expected to make contributions of $162 thousand to its non-qualified retirement plans and $94 thousand to its other postretirement benefit plans in 2014. During the six months ended June 30, 2014, the Corporation contributed $66 thousand to its non-qualified retirement plans and $46 thousand to its other postretirement plans. During the six months ended June 30, 2014, $1.0 million has been paid to participants from the retirement plans and $46 thousand has been paid to participants from the other postretirement plans.

Note 8. Earnings per Share

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)	2014		2013		2014		2013
Numerator for basic and diluted earnings per share—income available to common shareholders	$	5,080	$	4,830	$	10,806	$	10,228

Denominator for basic earnings per share—weighted-average shares outstanding		16,243		16,696		16,250		16,742
Effect of dilutive securities—employee stock options and awards		86		51		86		54

Denominator for diluted earnings per share—adjusted weighted-average shares outstanding		16,329		16,747		16,336		16,796

Basic earnings per share	$	0.31	$	0.29	$	0.67	$	0.61

Diluted earnings per share	$	0.31	$	0.29	$	0.66	$	0.61

Average anti-dilutive options and awards excluded from computation of diluted earnings per share		521		668		502		661

Note 9. 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 (Losses) Gains on Available-for-Sale Investment Securities			Net Change Related to Derivative Used for Cash Flow Hedge			Net Change Related to Defined Benefit Pension Plan			Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2013	$	(1,472	)	$	—		$	(8,483	)	$	(9,955	)
Net Change		3,185			—			122			3,307

Balance, June 30, 2014	$	1,713		$	—		$	(8,361	)	$	(6,648	)

Balance, December 31, 2012	$	8,344		$	(1,241	)	$	(14,023	)	$	(6,920	)
Net Change		(7,884	)		1,241			334			(6,309	)

Balance, June 30, 2013	$	460		$	—		$	(13,689	)	$	(13,229	)

The following table illustrates the amounts reclassified out of each component of accumulated comprehensive (loss) income for the three and six months ended June 30, 2014 and 2013:




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)	2014			2013			2014			2013
Net unrealized holding gains (losses) on available-for-sale investment securities:
	$	415		$	1,339		$	557		$	1,524		Net gain on sales of investment securities

		415			1,339			557			1,524		Total before tax
		(145	)		(468	)		(195	)		(533	)	Tax expense

	$	270		$	871		$	362		$	991		Net of tax

Cash flow hedge derivative:
	$	—		$	(1,866	)	$	—		$	(1,866	)	Net loss on interest rate swap

		—			(1,866	)		—			(1,866	)	Total before tax
		—			653			—			653		Tax benefit

	$	—		$	(1,213	)	$	—		$	(1,213	)	Net of tax

Defined benefit pension plans:
Amortization of net loss included in net periodic pension costs*	$	(167	)	$	(349	)	$	(331	)	$	(641	)
Accretion of prior service cost included in net periodic pension costs*		69			63			144			127

		(98	)		(286	)		(187	)		(514	)	Total before tax
		34			101			65			180		Tax benefit

	$	(64	)	$	(185	)	$	(122	)	$	(334	)	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 10. 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.

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, 2014 and December 31, 2013:


			Derivative Assets				Derivative Liabilities
(Dollars in thousands)	Notional Amount		Balance Sheet Classification		Fair Value		Balance Sheet Classification		Fair Value
At June 30, 2014
Interest rate locks with customers	$	25,847		Other Assets	$	769		—	$	—
Forward loan sale commitments		26,721		—		—		Other Liabilities		188

Total	$	52,568			$	769			$	188

At December 31, 2013
Interest rate locks with customers	$	15,176		Other Assets	$	321		—	$	—
Forward loan sale commitments		17,425		Other Assets		25		—		—

Total	$	32,601			$	346			$	—

There were no derivatives designated as hedging instruments recorded on the consolidated balance sheets at June 30, 2014 and December 31, 2013.

For the three and six months ended June 30, 2014 and 2013, 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)	Statement of Income Classification	2014			2013			2014			2013
Interest rate locks with customers	Net gain (loss) on mortgage banking activities	$	350		$	(1,549	)	$	448		$	(1,611	)
Forward loan sale commitments	Net (loss) gain on mortgage banking activities		(200	)		994			(213	)		826

Total		$	150		$	(555	)	$	235		$	(785	)

For the three and six months ended June 30, 2014 and 2013, 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)	Statement of Income Classification	2014		2013			2014		2013
Interest rate swap—cash flow hedge—loss on termination	Net loss on termination of interest rate swap	$	—	$	(1,866	)	$	—	$	(1,866	)
Interest rate swap—cash flow hedge—interest payments	Interest expense		—		9			—		124
Interest rate swap—cash flow hedge—ineffectiveness	Interest expense		—		—			—		—

Net loss		$	—	$	(1,875	)	$	—	$	(1,990	)

Note 11. 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 its 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 the

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 close of business at period end. 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 have not 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 an annual 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 another service provider on a sample basis. If, upon the Corporation’s review or in comparing with another servicer, a material difference between pricing evaluations were to exist, the Corporation may submit an inquiry to its current pricing service regarding the data used to make the valuation of a particular security. If the Corporation determines it has market information that would support a different valuation than its current pricing service’s evaluation it can submit a challenge for a change to that security’s valuation. There were no material differences in valuations noted at June 30, 2014.

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 in the discount rate or 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. 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 Girard Partners acquisition, the potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $14.5 million cumulative over the five-year period ending December 31, 2018.

For the John T. Fretz Insurance Agency acquisition, the remaining potential future cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $620 thousand cumulative over the two-year period ending April 30, 2016.

For the Javers Group acquisition, the Corporation recorded a reduction to the contingent liability during the second quarter of 2013 which resulted in a reduction of other noninterest expense of $959 thousand. The adjustment reflects that revenue levels necessary for an earn-out payment in the first year post-acquisition were not met and that revenue growth levels necessary to qualify for subsequent years’ earn-out payments to be made are remote. Therefore, as of June 30, 2014, the fair value of this contingent consideration liability is $0. The Javers’ original contingent consideration arrangement ranged from $0 to a maximum of $1.7 million cumulative over the three-year period ending June 30, 2015.

The following table presents the assets and liabilities measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013, classified using the fair value hierarchy:

At June 30, 2014

(Dollars in thousands)

Level 1

Level 2

Level 3

Assets/
Liabilities at
Fair Value

Assets:

Available-for-sale securities:

U.S. treasuries

4,808

—

4,808

U.S. government corporations and agencies

—

122,882

—

122,882

State and political subdivisions

—

107,364

—

107,364

Residential mortgage-backed securities

—

12,169

—

12,169

Collateralized mortgage obligations

—

6,703

—

6,703

Corporate bonds

—

42,612

—

42,612

Money market mutual funds

4,011

—

4,011

Equity securities

1,307

—

1,307

Total available-for-sale securities

10,126

291,730

—

301,856

Interest rate locks with customers

—

769

—

769

Total assets

10,126

292,499

—

302,625

Liabilities:

Contingent consideration liability

—

6,187

Forward loan sale commitments

—

188

—

188

Total liabilities

—

188

6,187

6,375


	At December 31, 2013
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/ Liabilities at Fair Value
Assets:
Available-for-sale securities:
U.S. treasuries	$	4,708	$	—	$	—	$	4,708
U.S. government corporations and agencies		—		128,148		—		128,148
State and political subdivisions		—		107,657		—		107,657
Residential mortgage-backed securities		—		35,480		—		35,480
Collateralized mortgage obligations		—		7,201		—		7,201
Corporate bonds		—		33,840		—		33,840
Money market mutual funds		16,900		—		—		16,900
Equity securities		2,347		—		—		2,347

Total available-for-sale securities		23,955		312,326		—		336,281
Interest rate locks with customers		—		321		—		321
Forward loan sale commitments		—		25		—		25

Total assets	$	23,955	$	312,672	$	—	$	336,627

Liabilities:
Contingent consideration liability	$	—	$	—	$	501	$	501

Total liabilities	$	—	$	—	$	501	$	501

At June 30, 2014 and December 31, 2013, the Corporation had no assets measured at fair value on a recurring basis utilizing Level 3 inputs.

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, 2014 and 2013:

Six Months Ended June 30, 2014

(Dollars in thousands)

Balance at
December 31,
2013

Contingent
Consideration
from New
Acquisition

Payment of
Contingent
Consideration

Adjustment
of Contingent
Consideration

Balance at
June 30,
2014

Girard Partners

—

5,470

—

384

5,854

John T. Fretz Insurance Agency

501

—

310

142

333

Total contingent consideration liability

501

5,470

310

526

6,187


	Six Months Ended June 30, 2013
(Dollars in thousands)	Balance at December 31, 2012		Contingent Consideration from New Acquisition		Payment of Contingent Consideration		Adjustment of Contingent Consideration			Balance at June 30, 2013
Javers Group	$	903	$	—	$	—	$	(903	)	$	—
John T. Fretz Insurance Agency		—		454		—		11			465

Total contingent consideration liability	$	903	$	454	$	—	$	(892	)	$	465

The Corporation may be required periodically to 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, 2014 and December 31, 2013:

At June 30, 2014

(Dollars in thousands)

Level 1

Level 2

Level 3

Assets/Liabilities at
Fair Value

Impaired loans held for investment

—

51,280

Total

—

51,280


	At December 31, 2013
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value
Impaired loans held for investment	$	—	$	—	$	55,370	$	55,370

Total	$	—	$	—	$	55,370	$	55,370

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, 2014 and December 31, 2013. The disclosed fair values are classified using the fair value hierarchy.

At June 30, 2014

(Dollars in thousands)

Level 1

Level 2

Level 3

Fair
Value

Carrying
Amount

Assets:

Cash and short-term interest-earning assets

57,607

—

57,607

Held-to-maturity securities

—

57,499

—

57,499

56,604

Loans held for sale

—

9,816

532

10,348

9,811

Net loans and leases held for investment

—

1,524,160

1,511,620

Mortgage servicing rights

—

6,989

5,378

Other real estate owned

—

1,650

—

1,650

Total assets

57,607

68,965

1,531,681

1,658,253

1,642,670

Liabilities:

Deposits:

Demand and savings deposits, non-maturity

1,564,004

—

1,564,004

Time deposits

—

270,978

—

270,978

268,230

Total deposits

1,564,004

270,978

—

1,834,982

1,832,234

Short-term borrowings

—

45,066

—

45,066

Total liabilities

1,564,004

316,044

—

1,880,048

1,877,300

Off-Balance-Sheet:

Commitments to extend credit

—

(1,381

)

—

(1,381

)

—


	At December 31, 2013
(Dollars in thousands)	Level 1		Level 2			Level 3		Fair Value			Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	69,169	$	—		$	—	$	69,169		$	69,169
Held-to-maturity securities		—		66,853			—		66,853			66,003
Loans held for sale		—		2,267			—		2,267			2,267
Net loans and leases held for investment		—		—			1,477,945		1,477,945			1,461,620
Mortgage servicing rights		—		7,188			—		7,188			5,519
Other real estate owned		—		1,650			—		1,650			1,650

Total assets	$	69,169	$	77,958		$	1,477,945	$	1,625,072		$	1,606,228

Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	1,573,709	$	—		$	—	$	1,573,709		$	1,573,709
Time deposits		—		268,909			—		268,909			270,789

Total deposits		1,573,709		268,909			—		1,842,618			1,844,498
Short-term borrowings		—		35,687			—		35,687			37,256

Total liabilities	$	1,573,709	$	304,596		$	—	$	1,878,305		$	1,881,754

Off-Balance-Sheet:
Commitments to extend credit	$	—	$	(1,357	)	$	—	$	(1,357	)	$	—

The following valuation methods and assumptions were used by the Corporation in estimating its 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:

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, 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. At June 30, 2014, credit card loans totaling $8.4 million and a nonaccrual real estate construction loan for $532 thousand were transferred to loans held for sale. The credit card loans were valued at the principal amount and a premium based on the agreement of sale. The fair value of the non-accrual construction loan was measured based on the value of the collateral securing the loan less costs to sell and is classified within Level 3 in the fair value hierarchy. 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, 2014 and December 31, 2013.

Loans and leases held for investment: The fair values for loans 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, 2014, impaired loans held for investment had a carrying amount of $52.4 million with a valuation allowance of $1.1 million. At December 31, 2013, impaired loans held for investment had a carrying amount of $58.3 million with a valuation allowance of $3.0 million.

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 were classified within Level 2 of the valuation hierarchy at December 31, 2013. The Corporation’s valuation model has not changed from December 31, 2013; however, management’s assessment of the inputs has resulted in mortgage servicing rights being classified within Level 3 of the valuation hierarchy at June 30, 2014. 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, 2014, mortgage servicing rights had a carrying amount of $5.6 million with a valuation allowance of $243 thousand. At December 31, 2013, mortgage servicing rights had a carrying amount of $5.8 million with a valuation allowance of $250 thousand.

Goodwill and other identifiable intangible 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, 2014, 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 its 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 customer repurchase agreements and federal funds purchased are estimated using current market rates for similar borrowings and 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.

Note 12. Subsequent Event

On July 1, 2014, the Corporation and its insurance subsidiary, Univest Insurance, Inc., completed the acquisition of Sterner Insurance Associates, Inc., a full service firm providing insurance and consultative risk management solutions to individuals and businesses throughout the Lehigh Valley, Berks, Bucks and Montgomery counties.

The Corporation paid $3.9 million in cash and assumed liabilities of $940 thousand at closing with additional contingent consideration to be paid in annual installments over the three-year period ending June 30, 2017, based on the achievement of certain levels of revenue growth and EBITDA (earnings before interest, taxes, depreciation and amortization). At the acquisition date, the Corporation recorded the estimated fair value of the contingent consideration of $635 thousand in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $5.7 million cumulative over the next three years. As a result of the Sterner Insurance acquisition, the Corporation recorded goodwill of $3.4 million (inclusive of the contingent consideration) and customer related intangibles of $1.6 million. The goodwill is expected to be deductible for tax purposes. The customer related intangibles are being amortized over nine years using the sum-of-the-years-digits amortization method.

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 amounts have been reclassified to conform to the current-year presentation.)

Forward-Looking Statements

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

•

Operating, legal and regulatory risks

•

Economic, political and competitive forces impacting various lines of business

•

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

•

Volatility in interest rates

•

Other risks and uncertainties, 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 2013 Annual Report on Form 10-K.

General

Univest Corporation of Pennsylvania (the Corporation), is a Bank Holding Company. It owns all of the capital stock of Univest Bank and Trust Co. (the Bank).

The Bank is engaged in the general commercial and consumer banking business and provides a full range of banking and trust services to its 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 acquired in January 2014. 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 its markets of operation.

Executive Overview

The Corporation’s consolidated net income, earnings per share and returns 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)	2014			2013			Amount		Percent			2014			2013			Amount		Percent
Net income	$	5,080		$	4,830		$	250		5	%	$	10,806		$	10,228		$	578		6	%
Net income per share:
Basic	$	0.31		$	0.29		$	0.02		7		$	0.67		$	0.61		$	0.06		10
Diluted		0.31			0.29			0.02		7			0.66			0.61			0.05		8
Return on average assets		0.94	%		0.86	%		8 BP		9			1.00	%		0.92	%		8 BP		9
Return on average equity		7.14	%		6.81	%		33 BP		5			7.67	%		7.24	%		43 BP		6

Net interest income on a tax-equivalent basis of $19.0 million for the three months ended June 30, 2014 decreased $316 thousand, or 2% compared to the same period in 2013. The net interest margin on a tax-equivalent basis for the second quarter of 2014 was 3.86%, an increase of 8 basis points compared to 3.78% for the second quarter of 2013. Net interest income on a tax-equivalent basis of $38.2 million for the six months ended June 30, 2014 decreased $210 thousand, or 1% compared to the same period in 2013. The tax-equivalent net interest margin for the six months ended June 30, 2014 was 3.91% compared to 3.80% for the same period in the prior year.

The provision for loan and lease losses for the three months ended June 30, 2014 was $1.3 million, a decrease of $2.2 million, or 64% compared to the same period in 2013. The provision for loan and lease losses was $2.7 million for the six months ended June 30, 2014, a decrease of $2.8 million, or 51% compared to the same period in 2013.

Noninterest income for the three months ended June 30, 2014 was $11.9 million, an increase of $933 thousand, or 8% from the comparable period in the prior year. Non-interest income for the six months ended June 30, 2014 was $24.1 million, an increase of $1.6 million, or 7% from the comparable period in the prior year.

Non-interest expense for the three months ended June 30, 2014 was $21.8 million, an increase of $2.5 million, or 13% from the comparable period in the prior year. Non-interest expense for the six months ended June 30, 2014 was $42.7 million, an increase of $3.2 million, or 8% from the comparable period in the prior year.

Gross loans and leases held for investment grew $45.5 million, or 3% from December 31, 2013. Deposits declined $12.3 million, or 1% from December 31, 2013.

Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications, decreased to $17.7 million at June 30, 2014, from $23.2 million at December 31, 2013 and $25.2 million at June 30, 2013. Nonaccrual loans and leases as a percentage of total loans and leases (held for investment and nonaccrual loans held for sale) was 1.12% at June 30, 2014 compared to 1.51% at December 31, 2013 and 1.68% at June 30, 2013. Net loan and lease charge-offs were $1.7 million and $3.1 million for the three and six months ended June 30, 2014, respectively, down $2.2 million and $2.4 million, respectively, from the same periods in 2013.

Valley Green Bank

On June 17, 2014, the Corporation, the Bank and Valley Green Bank (Valley Green) entered into an Agreement and Plan of Merger (Merger Agreement) pursuant to which Valley Green will be merged with and into the Bank in an all-stock transaction with an aggregate value of approximately $76 million. Headquartered in the Mt. Airy neighborhood of Philadelphia, Valley Green had approximately $370 million in assets, $329 million in loans, and $335 million in deposits at March 31, 2014 and operates three full-service banking offices and two loan production offices in the greater Philadelphia marketplace.

With the assumption of Valley Green’s three branches and two loan production offices in the Philadelphia marketplace, the Corporation enters a new and highly attractive small business and consumer market and expands its existing lending network within southeastern Pennsylvania. Upon the closing, Valley Green will operate as a separate division of the Bank, under the Valley Green brand. The transaction is anticipated to be accretive to the Corporation’s earnings per share in the first combined year of operations, with earnings accretion greater than 10% in year two.

Girard Partners

On January 27, 2014, the Corporation completed the acquisition of Girard Partners, a registered investment advisory firm with more than $500 million in assets under management. The Corporation increased its assets under management to over $3.0 billion at the acquisition date and expanded its advisory capabilities. The Corporation paid $5.4 million in cash at closing with additional contingent consideration to be paid in annual installments over the five-year period ending December 31, 2018, based on the achievement of certain levels of EBITDA (earnings before interest, taxes, depreciation and amortization). As of the effective date of the acquisition, January 1, 2014, the Corporation recorded the estimated fair value of the contingent consideration of $5.5 million in other liabilities. The potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $14.5 million cumulative over the next five years. As a result of the Girard acquisition, the Corporation recorded goodwill of $6.8 million (inclusive of the contingent consideration) and customer related intangibles of $4.3 million.

Details of the changes in the various components of net income and the balance sheet are further discussed in the sections that follow.

The Corporation earns its revenues primarily from the margins and fees it generates from the lending and depository services it provides 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 by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board of Directors approved levels. 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 an asset sensitive position, as interest rates remain at historically low levels; however, the Corporation anticipates further increases in interest rates over the longer term, which it expects would benefit its net interest margin.

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

Results of Operations

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, 2014 and 2013. 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, 2014 versus 2013

Net interest income on a tax-equivalent basis for the three months ended June 30, 2014 was $19.0 million, a decrease of $316 thousand, or 2% compared to the same period in 2013. Net interest income on a tax-equivalent basis for the six months ended June 30, 2014 was $38.2 million, a decrease of $210 thousand, or 1% compared to the same period in 2013. The decline in net interest income from the prior year was primarily attributable to a reduction in lower yielding investment securities. This decline was partially offset by the redemption of the Corporation’s trust preferred securities and the termination of the related interest rate swap during the second quarter of 2013, maturities of higher yielding time deposits and a decline in the rate paid on time deposits. The tax-equivalent net interest margin for the three months ended June 30, 2014 increased 8 basis points to 3.86% from 3.78% for the three months ended June 30, 2013. The tax-equivalent net interest margin for the six months ended June 30, 2014 increased 11 basis points to 3.91% from 3.80% for the six months ended June 30, 2013.

Table 1—Average Balances and Interest Rates—Tax-Equivalent Basis


	Three Months Ended June 30,
	2014								2013
(Dollars in thousands)	Average Balance			Income/ Expense		Average Rate			Average Balance			Income/ Expense		Average Rate
Assets:
Interest-earning deposits with other banks	$	25,164		$	17		0.27	%	$	71,290		$	46		0.26	%
U.S. government obligations		127,631			316		0.99			178,110			488		1.10
Obligations of states and political subdivisions		107,021			1,373		5.15			122,503			1,606		5.26
Other debt and equity securities		142,318			695		1.96			194,541			944		1.95

Total interest-earning deposits and investments		402,134			2,401		2.39			566,444			3,084		2.18

Commercial, financial and agricultural loans		404,252			3,973		3.94			403,490			4,355		4.33
Real estate—commercial and construction loans		594,929			6,798		4.58			574,288			6,846		4.78
Real estate—residential loans		284,931			2,524		3.55			252,443			2,436		3.87
Loans to individuals		35,770			551		6.18			42,295			601		5.70
Municipal loans and leases		175,952			2,112		4.81			137,382			1,743		5.09
Lease financings		70,459			1,589		9.05			68,411			1,571		9.21

Gross loans and leases		1,566,293			17,547		4.49			1,478,309			17,552		4.76

Total interest-earning assets		1,968,427			19,948		4.06			2,044,753			20,636		4.05

Cash and due from banks		31,071								32,282
Reserve for loan and lease losses		(25,086	)							(26,229	)
Premises and equipment, net		34,355								32,611
Other assets		170,290								167,881

Total assets	$	2,179,057							$	2,251,298

Liabilities:
Interest-bearing checking deposits	$	311,660			42		0.05		$	264,897			37		0.06
Money market savings		280,693			68		0.10			322,808			78		0.10
Regular savings		537,526			79		0.06			537,410			78		0.06
Time deposits		267,610			780		1.17			302,896			962		1.27

Total time and interest-bearing deposits		1,397,489			969		0.28			1,428,011			1,155		0.32

Short-term borrowings		45,429			12		0.11			100,632			15		0.06
Subordinated notes and capital securities		—			—		—			20,619			183		3.56

Total borrowings		45,429			12		0.11			121,251			198		0.65

Total interest-bearing liabilities		1,442,918			981		0.27			1,549,262			1,353		0.35

Noninterest-bearing deposits		422,057								384,089
Accrued expenses and other liabilities		28,593								33,456

Total liabilities		1,893,568								1,966,807

Shareholders’ Equity:
Common stock		91,332								91,332
Additional paid-in capital		65,367								64,680
Retained earnings and other equity		128,790								128,479

Total shareholders’ equity		285,489								284,491

Total liabilities and shareholders’ equity	$	2,179,057							$	2,251,298

Net interest income				$	18,967							$	19,283

Net interest spread							3.79								3.70
Effect of net interest-free funding sources							0.07								0.08

Net interest margin							3.86	%							3.78	%

Ratio of average interest-earning assets to average interest-bearing liabilities		136.42	%							131.98	%


	Six Months Ended June 30,
	2014								2013
(Dollars in thousands)	Average Balance			Income/ Expense		Average Rate			Average Balance			Income/ Expense		Average Rate
Assets:
Interest-earning deposits with other banks	$	25,283		$	31		0.25	%	$	59,882		$	81		0.27	%
U.S. government obligations		129,457			647		1.01			176,269			965		1.10
Obligations of states and political subdivisions		107,386			2,829		5.31			122,097			3,185		5.26
Other debt and equity securities		146,919			1,415		1.94			197,722			1,839		1.88

Total interest-earning deposits and investments		409,045			4,922		2.43			555,970			6,070		2.20

Commercial, financial and agricultural loans		398,246			7,871		3.99			420,865			9,031		4.33
Real estate—commercial and construction loans		593,007			13,686		4.65			559,657			13,504		4.87
Real estate—residential loans		283,475			5,082		3.62			254,926			4,891		3.87
Loans to individuals		37,200			1,135		6.15			42,537			1,197		5.67
Municipal loans and leases		175,553			4,233		4.86			135,924			3,459		5.13
Lease financings		70,883			3,221		9.16			67,251			3,128		9.38

Gross loans and leases		1,558,364			35,228		4.56			1,481,160			35,210		4.79

Total interest-earning assets		1,967,409			40,150		4.12			2,037,130			41,280		4.09

Cash and due from banks		30,513								32,278
Reserve for loan and lease losses		(25,206	)							(25,740	)
Premises and equipment, net		34,303								32,827
Other assets		168,803								165,777

Total assets	$	2,175,822							$	2,242,272

Liabilities:
Interest-bearing checking deposits	$	312,658			85		0.05		$	254,550			73		0.06
Money market savings		284,874			135		0.10			324,235			158		0.10
Regular savings		540,301			158		0.06			536,063			154		0.06
Time deposits		268,277			1,583		1.19			313,381			2,010		1.29

Total time and interest-bearing deposits		1,406,110			1,961		0.28			1,428,229			2,395		0.34

Short-term borrowings		42,546			18		0.09			101,533			32		0.06
Subordinated notes and capital securities		—			—		—			20,799			472		4.58

Total borrowings		42,546			18		0.09			122,332			504		0.83

Total interest-bearing liabilities		1,448,656			1,979		0.28			1,550,561			2,899		0.38

Noninterest-bearing deposits		415,446								372,936
Accrued expenses and other liabilities		27,681								33,754

Total liabilities		1,891,783								1,957,251

Shareholders’ Equity:
Common stock		91,332								91,332
Additional paid-in capital		65,319								64,700
Retained earnings and other equity		127,388								128,989

Total shareholders’ equity		284,039								285,021

Total liabilities and shareholders’ equity	$	2,175,822							$	2,242,272

Net interest income				$	38,171							$	38,381

Net interest spread							3.84								3.71
Effect of net interest-free funding sources							0.07								0.09

Net interest margin							3.91	%							3.80	%

Ratio of average interest-earning assets to average interest-bearing liabilities		135.81	%							131.38	%

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 and six months ended June 30, 2014 and 2013 have been calculated using the Corporation’s federal applicable rate of 35%.

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 June 30, 2014 Versus 2013									Six Months Ended June 30, 2014 Versus 2013
(Dollars in thousands)	Volume Change			Rate Change			Total			Volume Change			Rate Change			Total
Interest income:
Interest-earning deposits with other banks	$	(31	)	$	2		$	(29	)	$	(44	)	$	(6	)	$	(50	)
U.S. government obligations		(127	)		(45	)		(172	)		(243	)		(75	)		(318	)
Obligations of states and political subdivisions		(200	)		(33	)		(233	)		(386	)		30			(356	)
Other debt and equity securities		(254	)		5			(249	)		(482	)		58			(424	)

Interest on deposits and investments		(612	)		(71	)		(683	)		(1,155	)		7			(1,148	)

Commercial, financial and agricultural loans		8			(390	)		(382	)		(471	)		(689	)		(1,160	)
Real estate—commercial and construction loans		242			(290	)		(48	)		798			(616	)		182
Real estate—residential loans		298			(210	)		88			522			(331	)		191
Loans to individuals		(98	)		48			(50	)		(158	)		96			(62	)
Municipal loans and leases		469			(100	)		369			964			(190	)		774
Lease financings		46			(28	)		18			167			(74	)		93

Interest and fees on loans and leases		965			(970	)		(5	)		1,822			(1,804	)		18

Total interest income		353			(1,041	)		(688	)		667			(1,797	)		(1,130	)

Interest expense:
Interest-bearing checking deposits		10			(5	)		5			22			(10	)		12
Money market savings		(10	)		—			(10	)		(23	)		—			(23	)
Regular savings		1			—			1			4			—			4
Time deposits		(108	)		(74	)		(182	)		(278	)		(149	)		(427	)

Interest on time and interest-bearing deposits		(107	)		(79	)		(186	)		(275	)		(159	)		(434	)

Short-term borrowings		(11	)		8			(3	)		(24	)		10			(14	)
Subordinated notes and capital securities		(183	)		—			(183	)		(472	)		—			(472	)

Interest on borrowings		(194	)		8			(186	)		(496	)		10			(486	)

Total interest expense		(301	)		(71	)		(372	)		(771	)		(149	)		(920	)

Net interest income	$	654		$	(970	)	$	(316	)	$	1,438		$	(1,648	)	$	(210	)

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 and six months ended June 30, 2014 and 2013 have been calculated using the Corporation’s federal applicable rate of 35%.

Interest Income

Three and six months ended June 30, 2014 versus 2013

Interest income on a tax-equivalent basis for the three months ended June 30, 2014 was $19.9 million, a decrease of $688 thousand, or 3% from the same period in 2013. Interest income on a tax-equivalent basis for the six months ended June 30, 2014 was $40.2 million, a decrease of $1.1 million, or 3% from the same period in 2013. The decrease was primarily due to lower rates on loans and a reduction in lower yielding investment securities partially offset by loan growth. The lower rates on loans were primarily in the business, commercial real estate and residential real estate loan categories due to re-pricing and the competitive environment. The growth in loans occurred mainly in commercial real estate, residential real estate and municipal loans and leases.

Interest Expense

Three and six months ended June 30, 2014 versus 2013

Interest expense for the three months ended June 30, 2014 was $981 thousand, a decrease of $372 thousand, or 27% from the comparable period in 2013. Interest expense for the six months ended June 30, 2014 was $2.0 million, a decrease of $920 thousand, or 32% from the comparable period in 2013. The decrease was mainly attributable to

the redemption of the Corporation’s trust preferred securities and termination of the related interest rate swap during 2013, maturities of higher yielding time deposits and a decline in rates paid on time deposits. The average rate paid on borrowings declined by 54 basis points and 74 basis points for the three and six months ended June 30, 2014, respectively. The average rate paid on time deposits declined by 10 basis points for both the three and six months ended June 30, 2014. For the six months ended June 30, 2014, the Corporation experienced decreases in average time deposits of $45.1 million and money market savings of $39.4 million partially offset by increases in average interest-bearing checking of $58.1 million. The increase in interest-bearing checking deposits was primarily due to a product change for existing business and municipal customers which resulted in $68.1 million of customer repurchase agreements, classified as borrowings, being transferred to interest-bearing demand deposits during the second quarter of 2013.

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 was $1.3 million for the three months ended June 30, 2014, down $2.2 million from the same period in the prior year. The provision for loan and lease losses was $2.7 million for the six months ended June 30, 2014, down $2.8 million from the same period in the prior year. The decreases in the loan and lease provision were mainly due to a decline in collateral value in the second quarter of 2013 for a commercial real estate borrower.

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, net gains (losses) on sales and write-downs of other real estate owned, loss on termination of interest rate swap 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 (loss) 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)	2014		2013			Amount			Percent			2014		2013			Amount			Percent
Trust fee income	$	1,931	$	1,779		$	152			9	%	$	3,830	$	3,513		$	317			9	%
Service charges on deposit accounts		1,047		1,098			(51	)		(5	)		2,061		2,184			(123	)		(6	)
Investment advisory commission and fee income		3,009		2,018			991			49			6,058		3,914			2,144			55
Insurance commission and fee income		2,434		2,391			43			2			5,766		4,914			852			17
Other service fee income		1,897		1,827			70			4			3,704		3,525			179			5
Bank owned life insurance income		443		413			30			7			821		917			(96	)		(10	)
Net gain on sales of investment securities		415		1,339			(924	)		(69	)		557		1,524			(967	)		(63	)
Net gain on mortgage banking activities		519		1,416			(897	)		(63	)		868		3,112			(2,244	)		(72	)
Net gain on sales of other real estate owned		—		252			(252	)		N/M			—		252			(252	)		N/M
Loss on termination of interest rate swap		—		(1,866	)		1,866			N/M			—		(1,866	)		1,866			N/M
Other		229		324			(95	)		(29	)		400		477			(77	)		(16	)

Total noninterest income	$	11,924	$	10,991		$	933			8		$	24,065	$	22,466		$	1,599			7

Three and six months ended June 30, 2014 versus 2013

Non-interest income for the three months ended June 30, 2014 was $11.9 million, an increase of $933 thousand or 8% from the comparable period in the prior year. Non-interest income for the six months ended June 30, 2014 was $24.1 million, an increase of $1.6 million or 7% from the comparable period in the prior year. Investment advisory commission and fee income increased $991 thousand for the three months and $2.1 million for the six months ended June 30, 2014, primarily due to the acquisition of Girard effective January 1, 2014. Insurance commission and fee income increased $852 thousand for the six months ended June 30, 2014, primarily due to an increase in contingency revenues during the first quarter of 2014 and the acquisition of the John T. Fretz Insurance Agency on May 1, 2013. These favorable increases were partially offset by a decrease in the net gain on mortgage banking activities of $897 thousand for the three months and $2.2 million for the six months ended June 30, 2014. In 2014, higher interest rates have reduced refinance activity and purchase activity remains sluggish. This lead to a 72% decline in funded first mortgage volume for the second quarter of 2014 and a 75% decline for the six months ended June 30, 2014, from the comparable periods in 2013. The net gain on sales of securities decreased $924 thousand for the three months and $967 thousand for the six months ended June 30, 2014 from the comparable periods in 2013. In addition, the three and six months ended June 30, 2013 included a $1.9 million loss on the termination of an interest rate swap which was used as a hedge of trust preferred securities.

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 and professional services 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)	2014		2013			Amount			Percent			2014		2013			Amount			Percent
Salaries and benefits	$	10,242	$	9,359		$	883			9	%	$	20,913	$	19,219		$	1,694			9	%
Commissions		1,795		2,388			(593	)		(25	)		3,385		4,503			(1,118	)		(25	)
Net occupancy		1,687		1,408			279			20			3,441		2,807			634			23
Equipment		1,410		1,212			198			16			2,744		2,394			350			15
Professional services		846		809			37			5			1,655		1,576			79			5
Marketing and advertising		581		497			84			17			942		862			80			9
Deposit insurance premiums		397		400			(3	)		(1	)		776		792			(16	)		(2	)
Intangible expenses (income)		650		(683	)		1,333			N/M			1,410		(474	)		1,884			N/M
Acquisition-related costs		516		27			489			N/M			559		27			532			N/M
Restructuring charges		—		—			—			—			—		539			(539	)		N/M
Other		3,666		3,869			(203	)		(5	)		6,848		7,277			(429	)		(6	)

Total noninterest expense	$	21,790	$	19,286		$	2,504			13		$	42,673	$	39,522		$	3,151			8

Three and six months ended June 30, 2014 versus 2013

Non-interest expense for the three months ended June 30, 2014 was $21.8 million, an increase of $2.5 million or 13% from the comparable period in the prior year. Non-interest expense for the six months ended June 30, 2013 was $42.7 million, an increase of $3.2 million or 8% from the comparable period in the prior year. Salaries and benefit expense increased $883 thousand for the three months and $1.7 million for the six months ended June 30, 2014, primarily attributable to the Girard acquisition and lower deferred loan origination costs. Intangible expenses increased by $1.3 million for the three months and $1.9 million for the six months ended June 30, 2014, mainly due to the Girard acquisition and the reduction to the contingent consideration liability related to the Javers acquisition which resulted in a reduction of expense of $959 thousand during the second quarter of 2013. Premises and equipment expenses increased $477 thousand for three months and $984 thousand for the six months ended June 30, 2014 mainly due to increased costs related to computer equipment and software, snow removal, a new leased office location in the Lehigh Valley and the Girard acquisition. Acquisition-related costs for the second quarter of 2014 totaling $516 thousand were attributable to the pending Valley Green Bank acquisition and the Sterner Insurance acquisition. These unfavorable variances were partially offset by a decrease in commission expense of $593 thousand for the three months and $1.1 million for the six months ended June 30, 2014 mainly due to the decline in mortgage banking activity. In addition, non-interest expense during the first quarter of 2013 included restructuring charges of $539 thousand.

Tax Provision

The provision for income taxes for the both the three months ended June 30, 2014 and 2013 was $1.5 million, at effective rates of 23% and 24%, respectively. The provision for income taxes for the six months ended June 30, 2014 and 2013 was $3.6 million and $3.2 million, at effective rates of 25% and 24%, respectively. The effective tax rates reflect the benefits of tax-exempt income from investments in municipal securities, loans and bank-owned life insurance.

Financial Condition

Assets

The following table presents assets at the dates indicated:


	At June 30, 2014			At December 31, 2013			Change
(Dollars in thousands)	At June 30, 2014			At December 31, 2013			Amount			Percent
Cash and interest-earning deposits	$	57,607		$	69,169		$	(11,562	)		(17	)%
Investment securities		358,460			402,284			(43,824	)		(11	)
Loans held for sale		9,811			2,267			7,544			N/M
Loans and leases held for investment		1,586,994			1,541,484			45,510			3
Reserve for loan and lease losses		(24,094	)		(24,494	)		400			2
Premises and equipment, net		34,048			34,129			(81	)		—
Goodwill and other intangibles, net		75,820			65,695			10,125			15
Bank owned life insurance		61,458			60,637			821			1
Accrued interest receivable and other assets		37,148			40,388			(3,240	)		(8	)

Total assets	$	2,197,252		$	2,191,559		$	5,693			—

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 funds deposits. The securities portfolio consists primarily of U.S. Government agencies, municipals, residential mortgage-backed securities and corporate bonds.

Total investments at June 30, 2014 decreased $43.8 million from December 31, 2013. Sales of $30.3 million, maturities and pay-downs of $46.7 million and calls of $7.5 million, were partially offset by purchases of $36.2 million and increases in the fair value of available-for-sale investment securities of $4.9 million. The increases in fair value of available-for-sale investment securities were primarily due to the decrease in long-term interest rates during the first quarter of 2014.

Loans and Leases

Gross loans and leases held for investment at June 30, 2014 increased $45.5 million or 3% from December 31, 2013. The growth in loans occurred mainly in business loans of $25.2 million, commercial real estate loans of $9.9 million and residential real estate loans of $16.7 million as economic conditions have slowly improved. While we are beginning to see increases in lending activity, household income and spending levels remain sluggish.

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, 2014, the recorded investment in loans held for investment that were considered to be impaired was $52.4 million. The related reserve for loan losses was $1.1 million. At December 31, 2013, the recorded investment in loans that were considered to be impaired was $58.3 million. The related reserve for loan losses was $3.0 million. 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. For the six months ended June 30, 2014 and 2013, additional interest income that would have been recognized under the original terms for impaired loans was $598 thousand and $876 thousand. Interest income recognized for the six months ended June 30, 2014 and 2013 was $902 thousand and $376 thousand, respectively.

The impaired loan balances consisted mainly of commercial real estate, construction and business loans. The $5.4 million decrease in impaired loans from December 31, 2013 was mainly due to the sale of a non-accrual commercial real estate loan for $2.5 million, the payoff of a commercial real estate loan for $1.3 million and the partial charge-offs of two related commercial real estate loans totaling $1.3 million. Impaired loans at June 30, 2014 included one large credit which went on nonaccrual during the third quarter of 2009 and is comprised of three separate facilities to a local commercial real estate developer/home builder, aggregating to $7.8 million. During the second quarter of 2014, one of the facilities was transferred to loans held for sale for $532 thousand. This credit incurred $1.3 million in charge-offs during the second quarter of 2014, primarily attributable to updated assessments of residential building lots securing the loans. There is no specific allowance on this credit as the credit was secured with sufficient estimated collateral. The borrower does not have the resources to develop these properties; therefore, the properties must be sold. Other real estate owned was $1.7 million at June 30, 2014, unchanged from December 31, 2013.

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, 2014			At December 31, 2013			At June 30, 2013
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*:
Loans held for sale	$	532		$	—		$	—
Loans held for investment:
Commercial, financial and agricultural		3,182			4,253			1,708
Real estate—commercial		3,901			8,091			8,726
Real estate—construction		7,996			9,159			13,531
Real estate—residential		1,814			1,402			899
Loans to individuals		1			—			—
Lease financings		316			330			343

Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*		17,742			23,235			25,207
Accruing troubled debt restructured loans and lease modifications not included in the above		6,340			7,943			13,696
Accruing loans and leases 90 days or more past due:
Commercial, financial and agricultural		—			12			—
Real estate—residential		—			23			295
Loans to individuals		216			319			190
Lease financings		308			59			36

Total accruing loans and leases, 90 days or more past due		524			413			521

Total non-performing loans and leases		24,606			31,591			39,424
Other real estate owned		1,650			1,650			1,650

Total nonperforming assets	$	26,256		$	33,241		$	41,074

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		1.12	%		1.51	%		1.68	%
Nonperforming loans and leases / loans and leases held for investment and nonaccrual loans held for sale		1.55			2.05			2.63
Nonperforming assets / total assets		1.19			1.52			1.82
Allowance for loan and lease losses / loans and leases held for investment		1.52			1.59			1.65
Allowance for loan and lease losses / nonaccrual loans and leases held for investment		140.00			105.42			98.06
Allowance for loan and lease losses / nonperforming loans and leases held for investment		100.08			77.53			62.70
Allowance for loan and lease losses	$	24,094		$	24,494		$	24,718
* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table	$	2,225		$	1,583		$	503

The following table provides additional information on the Corporation’s nonaccrual loans held for investment:


(Dollars in thousands)	At June 30, 2014			At December 31, 2013			At June 30, 2013
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications	$	17,210		$	23,235		$	25,207
Nonaccrual loans and leases with partial charge-offs		6,293			8,958			11,058
Life-to-date partial charge-offs on nonaccrual loans and leases		2,852			9,120			7,250
Charge-off rate of nonaccrual loans and leases with partial charge-offs		31.2	%		50.4	%		39.6	%
Specific reserves on impaired loans	$	1,144		$	2,963		$	230

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, 2014 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 losses is determined through a monthly evaluation of reserve adequacy. This 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. Loss factors are updated quarterly. Historical loss experience is comprised of losses aggregated over eight quarters. Management also reviews the activity within the reserve to determine what actions, if any, should be taken to address differences between estimated and actual losses. Any of the above factors may cause the provision to fluctuate.

The reserve for loan 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, current trends, and management assessments. The unallocated reserve is based on both general economic conditions and other risk factors in the Corporation’s individual markets and portfolios.

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 $325 thousand and $319 thousand at June 30, 2014 and December 31, 2013, 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 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 $697 thousand and $611 thousand for the three months ended June 30, 2014 and 2013, respectively. The amortization of intangible assets was $1.4 million and $1.2 million for the six months ended June 30, 2014 and 2013, respectively. The Corporation also has goodwill with a net carrying value of $64.3 million at June 30, 2014 and $57.5 million at December 31, 2013, which is deemed to be an indefinite intangible asset and is not amortized. The increase in goodwill of $6.8 million was related to the Girard acquisition.

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 and no material impairment of identifiable intangibles during the three months ended June 30, 2014 and 2013. Since the last annual impairment analysis during 2013, 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.

Other Assets

At June 30, 2014 and December 31, 2013, the Bank held $3.3 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 $2.7 million and $3.2 million at June 30, 2014 and December 31, 2013, respectively. Additionally, the FHLB might require its members to increase its capital stock requirement. 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 its operations and long-term performance. It is possible this could have an adverse effect on the value of the Corporation’s investment in the FHLB stock. The Corporation determined there was no other-than-temporary impairment of its investment in FHLB stock. Therefore, at June 30, 2014, the FHLB stock is recorded at cost.

Liabilities

The following table presents liabilities at the dates indicated:


(Dollars in thousands)	At June 30, 2014		At December 31, 2013		Change
(Dollars in thousands)	At June 30, 2014		At December 31, 2013		Amount			Percent
Deposits	$	1,832,234	$	1,844,498	$	(12,264	)		(1	)%
Short-term borrowings		45,066		37,256		7,810			21
Accrued expenses and other liabilities		33,165		29,299		3,866			13

Total liabilities	$	1,910,465	$	1,911,053	$	(588	)		—

Deposits

Total deposits declined $12.3 million or 1% from December 31, 2013, primarily due to a decrease in public funds which was partially offset by an increase in non-interest bearing demand deposits.

Borrowings

Short-term borrowings at June 30, 2014, consisted of customer repurchase agreements on an overnight basis totaling $41.0 million and federal funds purchased of $4.0 million.

Shareholders’ Equity

The following table presents total shareholders’ equity at the dates indicated:


(Dollars in thousands)	At June 30, 2014			At December 31, 2013			Change
(Dollars in thousands)	At June 30, 2014			At December 31, 2013			Amount			Percent
Common stock	$	91,332		$	91,332		$	—			—	%
Additional paid-in capital		61,839			62,417			(578	)		(1	)
Retained earnings		176,911			172,602			4,309			2
Accumulated other comprehensive loss		(6,648	)		(9,955	)		3,307			33
Treasury stock		(36,647	)		(35,890	)		(757	)		(2	)

Total shareholders’ equity	$	286,787		$	280,506		$	6,281			2

Retained earnings at June 30, 2014 were impacted by the six months of net income of $10.8 million partially offset by cash dividends declared of $6.5 million. Accumulated other comprehensive loss decreased primarily due to increases in the fair value of available-for-sale investment securities. Treasury stock increased primarily due to the purchase of 110,758 treasury shares, totaling $2.0 million under its 2013 Board approved share repurchase program partially offset by the issuance of restricted stock.

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).

Table 4—Regulatory Capital


	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, 2014:
Total Capital (to Risk-Weighted Assets):
Corporation	$	249,536		13.26	%	$	150,551		8.00	%	$	188,189		10.00	%
Bank		232,381		12.47			149,059		8.00			186,324		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation		225,794		12.00			75,276		4.00			112,913		6.00
Bank		209,073		11.22			74,530		4.00			111,795		6.00
Tier 1 Capital (to Average Assets):
Corporation		225,794		10.72			84,277		4.00			105,346		5.00
Bank		209,073		9.98			83,791		4.00			104,739		5.00

At December 31, 2013:
Total Capital (to Risk-Weighted Assets):
Corporation	$	256,329		13.90	%	$	147,568		8.00	%	$	184,460		10.00	%
Bank		238,336		13.06			145,991		8.00			182,489		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation		232,946		12.63			73,784		4.00			110,676		6.00
Bank		215,497		11.81			72,995		4.00			109,493		6.00
Tier 1 Capital (to Average Assets):
Corporation		232,946		10.85			85,876		4.00			107,346		5.00
Bank		215,497		10.11			85,277		4.00			106,597		5.00

At June 30, 2014 and December 31, 2013, 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 (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit). The Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and Total Capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. At June 30, 2014, 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 Bank’s category.

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 July 2013 final rules generally implement higher minimum capital requirements, add a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. The new minimum capital to risk-adjusted assets requirements include a common equity Tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a Tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”). 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 final rules permit institutions, other than certain large institutions, to elect to continue to treat certain components of accumulated other comprehensive income as permitted under the current general risk-based capital rules, and not reflect unrealized gains and losses on available-for-sale securities in common equity Tier 1 calculations. The new minimum capital requirements are effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016. The Corporation and the Bank will continue to analyze these rules and their effects on the business, operations and capital levels of the Corporation and the Bank.

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 its exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year horizon. The simulation uses existing portfolio rate and re-pricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is in an asset sensitive position, as interest rates remain at historically low levels; however, the Corporation anticipates increases in interest rates over the longer term, which it expects would benefit its net interest margin.

Liquidity

The Corporation, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans and deposit withdrawals. The Corporation manages its liquidity risk by measuring and monitoring its liquidity sources and estimated funding needs. The Corporation has a contingency funding plan in place to address liquidity needs in the event of an institution-specific or a systemic financial crisis.

Sources of Funds

Core deposits and customer repurchase agreements have historically been the most significant funding sources for the Corporation. These deposits and repurchase agreements are generated from a base of consumer, business and public customers primarily located in Bucks and Montgomery counties, Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, 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 $486.7 million. At June 30, 2014 and December 31, 2013, there were no outstanding borrowings with the FHLB. At June 30, 2014 and December 31, 2013, the Bank had outstanding short-term letters of credit with the FHLB totaling $27.0 million and $35.0 million, respectively, which were utilized to collateralize seasonal 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 Bank maintains federal fund lines with several correspondent banks totaling $82.0 million at June 30, 2014 and December 31, 2013. At June 30, 2014, outstanding federal funds purchased totaled $4.0 million. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.

The Corporation, through the Bank, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At June 30, 2014 and December 31, 2013, 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 its certificates of deposit. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its branch network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market.

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 Pronouncements

For information regarding recent accounting pronouncements, refer to Footnote 1, “Summary of Significant Accounting Policies” of this Form 10-Q.

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 Registrant’s Annual Report on Form 10-K for the period ended December 31, 2013.

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, 2014.

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, 2014 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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 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, 2013.

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 during the three months ended June 30, 2014 under its 2013 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, 2014		87	$	20.25		87		689,242
May 1 – 31, 2014		—		—		—		689,242
June 1 – 30, 2014		—		—		—		689,242

Total		87	$	20.25		87

1.	Transactions are reported as of trade dates.

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. 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.

Item 6.

Exhibits


a.	Exhibits

	Exhibit 3.1	Amended and Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of Form 10-K, filed with the Securities and Exchange Commission (the SEC) on March 4, 2014.

	Exhibit 3.2	Amended By-Laws are incorporated by reference to Exhibit 3.2 of Form 10-K, filed with the SEC on March 4, 2014.

	Exhibit 4.1	Shareholder Rights Agreement dated September 30, 2011 is incorporated by reference to Exhibit 4.1 of Form 8-K, filed with the SEC on October 6, 2011.

	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 Michael S. Keim, Executive Vice President and Chief Financial Officer, 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 Michael S. Keim, 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

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, 2014		/s/ Jeffrey M. Schweitzer
		Jeffrey M. Schweitzer, President and
		Chief Executive Officer
		(Principal Executive Officer)

Date: August 8, 2014		/s/ Michael S. Keim
		Michael S. Keim, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)