Annual Statements Open main menu

UNIVEST FINANCIAL Corp - Quarter Report: 2016 March (Form 10-Q)

Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 Form 10-Q
 
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2016.
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                      to                     .
Commission File Number: 0-7617
 
 

 UNIVEST CORPORATION OF PENNSYLVANIA
(Exact name of registrant as specified in its charter)
 
 
Pennsylvania
 
23-1886144
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
14 North Main Street, Souderton, Pennsylvania 18964
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (215) 721-2400
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $5 par value
 
19,616,172
(Title of Class)
 
(Number of shares outstanding at April 29, 2016)
 
 


Table of Contents


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


1

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED BALANCE SHEETS
 
(UNAUDITED)
 
 
(Dollars in thousands, except share data)
At March 31, 2016
 
At December 31, 2015
ASSETS
 
Cash and due from banks
$
31,260

 
$
32,356

Interest-earning deposits with other banks
7,287

 
28,443

Investment securities held-to-maturity (fair value $37,031 and $41,061 at March 31, 2016 and December 31, 2015, respectively)
36,932

 
40,990

Investment securities available-for-sale
292,425

 
329,770

Loans held for sale
3,818

 
4,680

Loans and leases held for investment
2,183,256

 
2,179,013

Less: Reserve for loan and lease losses
(16,452
)
 
(17,628
)
Net loans and leases held for investment
2,166,804

 
2,161,385

Premises and equipment, net
43,385

 
42,156

Goodwill
112,657

 
112,657

Other intangibles, net of accumulated amortization and fair value adjustments of $14,349 and $15,360 at March 31, 2016 and December 31, 2015, respectively
12,096

 
12,620

Bank owned life insurance
72,030

 
71,560

Accrued interest receivable and other assets
46,083

 
42,834

Total assets
$
2,824,777

 
$
2,879,451

LIABILITIES
 
 
 
Noninterest-bearing deposits
$
559,827

 
$
541,460

Interest-bearing deposits:
 
 
 
Demand deposits
748,576

 
790,800

Savings deposits
643,050

 
607,694

Time deposits
382,908

 
454,406

Total deposits
2,334,361

 
2,394,360

Customer repurchase agreements
25,851

 
24,211

Subordinated notes
49,414

 
49,377

Accrued interest payable and other liabilities
48,148

 
49,929

Total liabilities
2,457,774

 
2,517,877

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $5 par value: 48,000,000 shares authorized at March 31, 2016 and December 31, 2015; 22,054,270 shares issued at March 31, 2016 and December 31, 2015; 19,592,798 and 19,530,930 shares outstanding at March 31, 2016 and December 31, 2015, respectively
110,271

 
110,271

Additional paid-in capital
120,906

 
121,280

Retained earnings
196,827

 
193,446

Accumulated other comprehensive loss, net of tax benefit
(15,481
)
 
(16,708
)
Treasury stock, at cost; 2,461,472 and 2,523,340 shares at March 31, 2016 and December 31, 2015, respectively
(45,520
)
 
(46,715
)
Total shareholders’ equity
367,003

 
361,574

Total liabilities and shareholders’ equity
$
2,824,777

 
$
2,879,451

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

2

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended 
 March 31,
(Dollars in thousands, except per share data)
2016
 
2015
Interest income
 
Interest and fees on loans and leases:
 
 
 
Taxable
$
21,850

 
$
21,254

Exempt from federal income taxes
1,716

 
1,584

Total interest and fees on loans and leases
23,566

 
22,838

Interest and dividends on investment securities:
 
 
 
Taxable
1,274

 
1,034

Exempt from federal income taxes
734

 
859

Interest on federal funds sold
7

 
2

Other interest income
28

 
5

Total interest income
25,609

 
24,738

Interest expense
 
 
 
Interest on deposits
1,533

 
1,417

Interest on short-term borrowings
3

 
10

Interest on long-term borrowings
675

 
7

Total interest expense
2,211

 
1,434

Net interest income
23,398

 
23,304

Provision for loan and lease losses
326

 
1,074

Net interest income after provision for loan and lease losses
23,072

 
22,230

Noninterest income
 
 
 
Trust fee income
1,865

 
1,820

Service charges on deposit accounts
998

 
1,063

Investment advisory commission and fee income
2,669

 
2,763

Insurance commission and fee income
4,558

 
4,146

Other service fee income
1,833

 
1,598

Bank owned life insurance income
470

 
353

Net gain on sales of investment securities
44

 
91

Net gain on mortgage banking activities
1,218

 
1,258

Other income
301

 
339

Total noninterest income
13,956

 
13,431

Noninterest expense
 
 
 
Salaries and benefits
14,182

 
13,314

Commissions
1,895

 
1,814

Net occupancy
2,096

 
2,358

Equipment
1,888

 
1,689

Professional fees
1,020

 
807

Marketing and advertising
538

 
360

Deposit insurance premiums
447

 
412

Intangible expenses
770

 
786

Acquisition-related costs
214

 
466

Integration costs
6

 
1,374

Other expense
3,883

 
4,031

Total noninterest expense
26,939

 
27,411

Income before income taxes
10,089

 
8,250

Income taxes
2,800

 
2,134

Net income
$
7,289

 
$
6,116

Net income per share:
 
 
 
Basic
$
0.37

 
$
0.31

Diluted
0.37

 
0.31

Dividends declared
0.20

 
0.20

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

3

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended March 31,
(Dollars in thousands)
2016
 
2015
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
Income
$
10,089

 
$
2,800

 
$
7,289

 
$
8,250

 
$
2,134

 
$
6,116

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding gains arising during the period
2,218

 
776

 
1,442

 
2,158

 
755

 
1,403

Less: reclassification adjustment for net gains on sales realized in net income
(44
)
 
(15
)
 
(29
)
 
(91
)
 
(32
)
 
(59
)
Total net unrealized gains on available-for-sale investment securities
2,174

 
761

 
1,413

 
2,067

 
723

 
1,344

Net change in fair value of interest rate swaps used in cash flow hedges
(545
)
 
(191
)
 
(354
)
 
(337
)
 
(118
)
 
(219
)
Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in net periodic pension costs
329

 
115

 
214

 
341

 
120

 
221

Accretion of prior service cost included in net periodic pension costs
(71
)
 
(25
)
 
(46
)
 
(70
)
 
(24
)
 
(46
)
Total defined benefit pension plans
258

 
90

 
168

 
271

 
96

 
175

Other comprehensive income
1,887

 
660

 
1,227

 
2,001

 
701

 
1,300

Total comprehensive income
$
11,976

 
$
3,460

 
$
8,516

 
$
10,251

 
$
2,835

 
$
7,416

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

4

Table of Contents

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

 
$
110,271

 
$
121,280

 
$
193,446

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

Net income

 

 

 
7,289

 

 

 
7,289

Other comprehensive income, net of income tax

 

 

 

 
1,227

 

 
1,227

Cash dividends declared ($0.20 per share)

 

 

 
(3,908
)
 

 

 
(3,908
)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs
30,121

 

 
8

 

 

 
609

 
617

Exercise of stock options
14,167

 

 
(27
)
 

 

 
265

 
238

Repurchase of cancelled restricted stock awards
(14,250
)
 

 
241

 

 

 
(241
)
 

Stock-based compensation

 

 
451

 

 

 

 
451

Net tax benefit on stock-based compensation

 

 
36

 

 

 

 
36

Purchases of treasury stock
(26,750
)
 

 

 

 

 
(521
)
 
(521
)
Restricted stock awards granted
58,580

 

 
(1,083
)
 

 

 
1,083

 

Balance at March 31, 2016
19,592,798

 
$
110,271

 
$
120,906

 
$
196,827

 
$
(15,481
)
 
$
(45,520
)
 
$
367,003

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

 
$
91,332

 
$
62,980

 
$
181,851

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

Net income

 

 

 
6,116

 

 

 
6,116

Other comprehensive income, net of income tax

 

 

 

 
1,300

 

 
1,300

Cash dividends declared ($0.20 per share)

 

 

 
(3,991
)
 

 

 
(3,991
)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs
35,262

 

 
18

 

 

 
677

 
695

Issuance of common stock, acquisition
3,787,866

 
18,939

 
57,727

 

 

 

 
76,666

Exercise of stock options
4,000

 

 
(7
)
 

 

 
73

 
66

Repurchase of cancelled restricted stock awards
(12,375
)
 

 
183

 

 

 
(183
)
 

Stock-based compensation

 

 
412

 

 

 

 
412

Purchases of treasury stock
(281,291
)
 

 

 

 

 
(5,424
)
 
(5,424
)
Restricted stock awards granted
65,755

 

 
(1,195
)
 

 

 
1,195

 

Balance at March 31, 2015
19,820,824

 
$
110,271

 
$
120,118

 
$
183,976

 
$
(13,162
)
 
$
(40,809
)
 
$
360,394

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

5

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
(Dollars in thousands)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
7,289

 
$
6,116

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
326

 
1,074

Depreciation of premises and equipment
942

 
1,038

Net gain on sales of investment securities
(44
)
 
(91
)
Net gain on mortgage banking activities
(1,218
)
 
(1,258
)
Bank owned life insurance income
(470
)
 
(353
)
Net accretion of acquisition accounting fair value adjustments
(100
)
 
(543
)
Stock-based compensation
451

 
412

Intangible expenses
770

 
786

Other adjustments to reconcile net income to cash provided by operating activities
325

 
323

Deferred tax expense
905

 
1,131

Originations of loans held for sale
(44,414
)
 
(47,453
)
Proceeds from the sale of loans held for sale
46,003

 
46,141

Contributions to pension and other postretirement benefit plans
(60
)
 
(81
)
Increase in accrued interest receivable and other assets
(2,385
)
 
(166
)
Decrease in accrued interest payable and other liabilities
(1,469
)
 
(2,239
)
Net cash provided by operating activities
6,851

 
4,837

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

 
(2,967
)
Net capital expenditures
(2,177
)
 
(1,189
)
Proceeds from maturities and calls of securities held-to-maturity
4,000

 
4,000

Proceeds from maturities and calls of securities available-for-sale
18,693

 
13,575

Proceeds from sales of securities available-for-sale
53,181

 
271

Purchases of investment securities available-for-sale
(32,573
)
 
(15,134
)
Net increase in loans and leases
(7,507
)
 
(35,925
)
Net decrease (increase) in interest-earning deposits
21,156

 
(29,947
)
Net decrease in federal funds sold

 
9,099

Net cash provided by (used in) investing activities
54,773

 
(58,217
)
Cash flows from financing activities:
 
 
 
Net (decrease) increase in deposits
(59,934
)
 
7,752

Net increase in short-term borrowings
1,640

 
179

Proceeds from issuance of subordinated notes

 
49,270

Payment of contingent consideration on acquisitions
(900
)
 
(620
)
Purchases of treasury stock
(521
)
 
(5,424
)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs
617

 
695

Proceeds from exercise of stock options, including excess tax benefits
274

 
112

Cash dividends paid
(3,896
)
 
(3,237
)
Net cash (used in) provided by financing activities
(62,720
)
 
48,727

Net decrease in cash and due from banks
(1,096
)
 
(4,653
)
Cash and due from banks at beginning of year
32,356

 
31,995

Cash and due from banks at end of period
$
31,260

 
$
27,342

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
3,113

 
$
1,635

Cash paid (received) for income taxes, net of refunds
685

 
(530
)
Non cash transactions:
 
 
 
Transfer of loans to other real estate owned
$
1,797

 
$

Assets acquired through acquisitions

 
425,834

Liabilities assumed through acquisitions

 
389,907

Contingent consideration recorded as goodwill

 
1,424

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

6

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (the Corporation or Univest) and its wholly owned subsidiaries; the Corporation’s primary subsidiary is Univest Bank and Trust Co. (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations for interim financial information. The accompanying unaudited consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary for a fair presentation of the financial statements for the interim periods presented. Certain prior period amounts have been reclassified to conform to the current-year presentation. Operating results for the three-month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on March 4, 2016.
Use of Estimates
The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include fair value measurement of investment securities available-for-sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation expense.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) to simplify and improve employee share-based payment accounting. Under the new guidance, all excess tax benefits and tax deficiencies are recognized as an income tax benefit or expense in the income statement. The additional paid-in capital pool is eliminated. Excess tax benefits and deficiencies are recognized in the period they are deducted on the income tax return. Excess tax benefits are recorded along with other income tax cash flows as an operating activity in the statement of cash flows. The recognition of excess tax benefits and deficiencies and changes to diluted earnings per share are to be applied prospectively when this ASU is adopted. For tax benefits that were not previously recognized because the related tax deduction had not reduced taxes payable, entities record a cumulative-effect adjustment in retained earnings as of the beginning of the year of adoption. The Corporation does not record deferred tax benefits on incentive stock options when expense is accrued, therefore, the Corporation will not have a cumulative-effect adjustment when this ASU is adopted. Changes to the treatment of forfeitures will not impact the Corporation as the historical assumption for forfeitures was immaterial and not taken into account during valuations; the Corporation has recorded forfeitures as they occurred which is consistent with the new guidance. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities, or January 1, 2017 for the Corporation. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. The Corporation does not anticipate that the adoption of this ASU will have a material impact on the financial statements.
In March 2016, the FASB issued an ASU to amend the guidance for hedge accounting to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this ASU are effective for financial statements of public businesses issued for fiscal years and interim periods within those years beginning after December 15, 2016, or January 1, 2017 for the Corporation. The Corporation does not anticipate the adoption of this ASU will have any impact on the financial statements.
In February 2016, the FASB issued an ASU to revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. Disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical

7

Table of Contents

expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The ASU is effective for the first interim period within annual periods beginning after December 15, 2018, or January 1, 2019, with early adoption permitted. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, the adoption of this ASU will impact the balance sheet for the recording of assets and liabilities for operating leases; any initial or continued impact of the recording of assets will have an impact on risk-based capital ratios under current regulatory guidance and possibly equity ratios.
In January 2016, the FASB issued an ASU to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The ASU will require equity investments to be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable, an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. The ASU will simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. A valuation allowance on a deferred tax asset related to available-for-sale securities will need to be included. For financial liabilities that are measured at fair value, the ASU requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument-specific credit risk. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The amendments in this ASU are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017 or January 1, 2018 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements.
In September 2015, the FASB issued an ASU simplifying the accounting for measurement-period adjustments related to business combinations. The ASU eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Under this ASU, measurement-period adjustments are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. The ASU requires additional disclosures about the impact on current period income statement line items of adjustments that would have been recognized in prior periods if prior period information had been revised. The amendments in this ASU were effective for financial statements of public businesses issued for fiscal years and interim periods within those years beginning after December 15, 2015, or January 1, 2016 for the Corporation. The adoption of this guidance did not impact the Corporation's financial statements.
In April 2015, the FASB issued an ASU simplifying the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability shall be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The costs will continue to be amortized to interest expense using the effective interest method. The ASU was effective for financial statements of public businesses issued for fiscal years beginning after December 15, 2015, or January 1, 2016 for the Corporation. The adoption of this ASU did not impact the Corporation's balance sheet presentation as the Corporation followed this presentation consistent with the guidance in FASB Concepts Statement No. 6.
In May 2014, the FASB issued an ASU regarding revenue from contracts with customers which clarifies the principles for recognizing revenue and develops a common standard for U.S. GAAP and International Financial Reporting Standards. The ASU establishes a core principle that would require an entity to identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation. The ASU provides for improved disclosure requirements that require entities to disclose sufficient information that enables users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued an ASU clarifying the implementation guidance on the principal-versus-agent considerations in the revenue recognition standard by instructing the participants in the sale to determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. The original effective date of the guidance relating to revenue from contracts with customers was deferred in August 2015 by one year. This guidance is now effective for fiscal years and interim periods within those years beginning after December 15, 2017, or January 1, 2018 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, it is anticipated the impact will be only related to timing.


8

Table of Contents

Note 2. Acquisition
Fox Chase Bancorp
On December 8, 2015, the Corporation and Fox Chase Bancorp, Inc. (Fox Chase), parent company of Fox Chase Bank, entered into an Agreement and Plan of Merger pursuant to which Fox Chase will be merged with and into the Corporation in a cash and stock transaction with an aggregate value of approximately $239.3 million. Fox Chase had $1.1 billion in assets, $776.7 million in loans, and $815.7 million in deposits at March 31, 2016. Fox Chase's main office is in Hatboro, Pennsylvania and operates full-service banking offices in Pennsylvania and New Jersey. Upon completion, the Corporation's presence will expand in Bucks, Chester, Philadelphia and Montgomery counties in Pennsylvania and into Atlantic and Cape May counties in New Jersey, complementing and expanding the Corporation's existing network of financial centers.
Upon completion of the merger, Fox Chase shareholders will have the right to receive either $21.00 in cash, or a fixed exchange ratio of 0.9731 shares of the Corporation’s common stock, or a combination of the two, for outstanding shares of Fox Chase. The stock/cash election is subject to allocation provisions to assure that 40% of Fox Chase shares receive cash consideration and 60% of Fox Chase shares receive stock consideration. The Merger Agreement has been approved by the Boards of Directors of the Corporation, the Bank, Fox Chase and Fox Chase Bank 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 third quarter of 2016.
In January 2016, the Corporation approved a $30.0 million discretionary overnight federal funds line to Fox Chase Bank at a rate of one-month LIBOR plus 0.05%. At March 31, 2016, the Corporation had no outstanding federal funds sold to Fox Chase Bank. During the first quarter of 2016, average federal funds sold to Fox Chase Bank were $5.9 million.


9

Table of Contents

Note 3. Investment Securities
The following table shows the amortized cost and the estimated fair value of the held-to-maturity securities and available-for-sale securities at March 31, 2016 and December 31, 2015, by contractual maturity within each type:
 
At March 31, 2016
 
At December 31, 2015
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
$
26,924

 
$
114

 
$

 
$
27,038

 
$
21,047

 
$
134

 
$

 
$
21,181

After 1 year to 5 years
10,008

 
26

 
(41
)
 
9,993

 
19,943

 
1

 
(64
)
 
19,880


36,932

 
140

 
(41
)
 
37,031

 
40,990

 
135

 
(64
)
 
41,061

Total
$
36,932

 
$
140

 
$
(41
)
 
$
37,031

 
$
40,990

 
$
135

 
$
(64
)
 
$
41,061

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

 
$

 
$

 
$

 
$
4,978

 
$

 
$
(91
)
 
$
4,887



 

 

 

 
4,978

 

 
(91
)
 
4,887

U.S. government corporations and agencies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
10,278

 
2

 

 
10,280

 
10,389

 

 
(29
)
 
10,360

After 1 year to 5 years
57,085

 
302

 

 
57,387

 
92,148

 
26

 
(378
)
 
91,796


67,363

 
304

 

 
67,667

 
102,537

 
26

 
(407
)
 
102,156

State and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 1 year to 5 years
17,125

 
134

 
(12
)
 
17,247

 
17,362

 
80

 
(29
)
 
17,413

After 5 years to 10 years
50,335

 
1,382

 
(17
)
 
51,700

 
47,969

 
1,188

 
(32
)
 
49,125

Over 10 years
32,560

 
1,301

 

 
33,861

 
34,334

 
1,160

 

 
35,494


100,020

 
2,817

 
(29
)
 
102,808

 
99,665

 
2,428

 
(61
)
 
102,032

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 1 year to 5 years
4,920

 
6

 

 
4,926

 
9,713

 
12

 
(13
)
 
9,712

After 5 years to 10 years
59

 
1

 

 
60

 
60

 

 

 
60

Over 10 years
3,497

 
91

 

 
3,588

 
3,517

 
65

 

 
3,582


8,476

 
98

 

 
8,574

 
13,290

 
77

 
(13
)
 
13,354

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over 10 years
3,080

 

 
(24
)
 
3,056

 
3,215

 

 
(82
)
 
3,133


3,080

 

 
(24
)
 
3,056

 
3,215

 

 
(82
)
 
3,133

Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
250

 

 

 
250

 
250

 

 

 
250

After 1 year to 5 years
18,862

 
142

 
(44
)
 
18,960

 
19,446

 
25

 
(158
)
 
19,313

After 5 years to 10 years
15,122

 
95

 
(63
)
 
15,154

 
10,148

 

 
(266
)
 
9,882

Over 10 years
60,000

 
857

 
(3,218
)
 
57,639

 
60,000

 

 
(2,770
)
 
57,230


94,234

 
1,094

 
(3,325
)
 
92,003

 
89,844

 
25

 
(3,194
)
 
86,675

Money market mutual funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No stated maturity
17,563

 

 

 
17,563

 
16,726

 

 

 
16,726


17,563

 

 

 
17,563

 
16,726

 

 

 
16,726

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No stated maturity
426

 
328

 

 
754

 
426

 
381

 

 
807


426

 
328

 

 
754

 
426

 
381

 

 
807

Total
$
291,162

 
$
4,641

 
$
(3,378
)
 
$
292,425

 
$
330,681

 
$
2,937

 
$
(3,848
)
 
$
329,770


Expected maturities may differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties. Unrealized losses in investment securities at March 31, 2016 and December 31, 2015 do not represent other-than-temporary impairments.
Securities with a carrying value of $157.4 million and $210.1 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes as required by law.

10

Table of Contents

The following table presents information related to sales of securities available-for-sale during the three months ended March 31, 2016 and 2015:
 
Three Months Ended March 31,
(Dollars in thousands)
2016
 
2015
Securities available-for-sale:
 
 
 
Proceeds from sales
$
53,181

 
$
271

Gross realized gains on sales
106

 
91

Gross realized losses on sales
62

 

Tax expense related to net realized gains on sales
15

 
32

    
Management evaluates debt securities, which are comprised of U.S. government, government sponsored agencies, municipalities, corporate bonds and other issuers, for other-than-temporary impairment by considering the current economic conditions, the length of time and the extent to which the fair value has been less than cost, market interest rates and the bond rating of each security. All of the debt securities are rated as investment grade and management believes that it will not incur any losses. The unrealized losses on the Corporation’s investments in debt securities are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers. The Corporation does not have the intent to sell the debt securities and believes it is more likely than not, that it will not have to sell the securities before recovery of their cost basis. The Corporation did not recognize any other-than-temporary impairment charges on debt securities for the three months ended March 31, 2016 and 2015.

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

11

Table of Contents

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

 
$

 
$
4,965

 
$
(41
)
 
$
4,965

 
$
(41
)
Total
$

 
$

 
$
4,965

 
$
(41
)
 
$
4,965

 
$
(41
)
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
5,126

 
$

 
$
5,000

 
$

 
$
10,126

 
$

State and political subdivisions
5,669

 
(8
)
 
2,620

 
(21
)
 
8,289

 
(29
)
Collateralized mortgage obligations

 

 
3,056

 
(24
)
 
3,056

 
(24
)
Corporate bonds
42,051

 
(3,231
)
 
11,251

 
(94
)
 
53,302

 
(3,325
)
Equity securities
4

 

 

 

 
4

 

Total
$
52,850

 
$
(3,239
)
 
$
21,927

 
$
(139
)
 
$
74,777

 
$
(3,378
)
At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
12,078

 
$
(9
)
 
$
4,953

 
$
(55
)
 
$
17,031

 
$
(64
)
Total
$
12,078

 
$
(9
)
 
$
4,953

 
$
(55
)
 
$
17,031

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

 
$

 
$
4,887

 
$
(91
)
 
$
4,887

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

 
(379
)
 
4,972

 
(28
)
 
77,129

 
(407
)
State and political subdivisions
10,251

 
(49
)
 
1,335

 
(12
)
 
11,586

 
(61
)
Residential mortgage-backed securities
4,751

 
(13
)
 

 

 
4,751

 
(13
)
Collateralized mortgage obligations

 

 
3,133

 
(82
)
 
3,133

 
(82
)
Corporate bonds
72,234

 
(2,941
)
 
10,669

 
(253
)
 
82,903

 
(3,194
)
Total
$
159,393

 
$
(3,382
)
 
$
24,996

 
$
(466
)
 
$
184,389

 
$
(3,848
)
Note 4. Loans and Leases
Summary of Major Loan and Lease Categories
 
At March 31, 2016
(Dollars in thousands)
Originated
 
Acquired
 
Total
Commercial, financial and agricultural
$
486,112

 
$
21,207

 
$
507,319

Real estate-commercial
760,492

 
120,928

 
881,420

Real estate-construction
90,567

 
2,004

 
92,571

Real estate-residential secured for business purpose
103,591

 
114,673

 
218,264

Real estate-residential secured for personal purpose
185,482

 
3,227

 
188,709

Real estate-home equity secured for personal purpose
129,907

 
10,831

 
140,738

Loans to individuals
28,140

 
281

 
28,421

Lease financings
125,814

 

 
125,814

Total loans and leases held for investment, net of deferred income
$
1,910,105

 
$
273,151

 
$
2,183,256

Unearned lease income, included in the above table
$
(13,793
)
 
$

 
$
(13,793
)
Net deferred costs, included in the above table
4,568

 

 
4,568

Overdraft deposits included in the above table
58

 

 
58



12

Table of Contents

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

 
$
24,535

 
$
504,515

Real estate-commercial
759,342

 
126,550

 
885,892

Real estate-construction
91,904

 
4,637

 
96,541

Real estate-residential secured for business purpose
94,280

 
124,503

 
218,783

Real estate-residential secured for personal purpose
177,850

 
3,305

 
181,155

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

 
11,594

 
136,955

Loans to individuals
29,406

 
326

 
29,732

Lease financings
125,440

 

 
125,440

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

 
$
295,450

 
$
2,179,013

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

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

 

 
4,244

Overdraft deposits included in the above table
35

 

 
35

Overdraft deposits are re-classified as loans and are included in the total loans and leases on the balance sheet.
The carrying amount of acquired loans at March 31, 2016 totaled $273.2 million, including $1.3 million of loans acquired with deteriorated credit quality, or acquired credit impaired loans from the Valley Green Bank acquisition. Acquired credit impaired loans are accounted for in accordance with Accounting Standards Codification (ASC) Topic 310-30.
The outstanding principal balance and carrying amount for acquired credit impaired loans at March 31, 2016 and December 31, 2015 were as follows:
(Dollars in thousands)
At March 31, 2016
 
At December 31, 2015
Outstanding principal balance
$
3,186

 
$
3,551

Carrying amount
1,267

 
1,253

Allowance for loan losses
8

 
8


The following table presents the changes in accretable yield on acquired credit impaired loans:
(Dollars in thousands)
Three Months Ended March 31, 2016
Beginning of period
$
144

Reclassification from nonaccretable difference
46

Accretable yield amortized to interest income
(74
)
End of period
$
116



13

Table of Contents

Age Analysis of Past Due Loans and Leases
The following presents, by class of loans and leases, an aging of past due loans and leases, loans and leases which are current and the recorded investment in loans and leases 90 days or more past due which are accruing interest at March 31, 2016 and December 31, 2015:
(Dollars in thousands)
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days
or more
Past Due
 
Total
Past Due
 
Current
 
Acquired Credit Impaired
 
Total Loans
and Leases
Held for
Investment
 
Recorded
Investment 90
Days or more
Past Due and
Accruing
Interest
At March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
130

 
$

 
$
2,128

 
$
2,258

 
$
505,061

 
$

 
$
507,319

 
$

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
225

 

 
912

 
1,137

 
879,766

 
517

 
881,420

 

Construction

 

 

 

 
92,571

 

 
92,571

 

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
3,562

 
62

 
887

 
4,511

 
213,003

 
750

 
218,264

 

Residential secured for personal purpose
673

 
52

 
469

 
1,194

 
187,515

 

 
188,709

 
125

Home equity secured for personal purpose
210

 
159

 
483

 
852

 
139,886

 

 
140,738

 
353

Loans to individuals
289

 
137

 
205

 
631

 
27,790

 

 
28,421

 
205

Lease financings
1,376

 
413

 
431

 
2,220

 
123,594

 

 
125,814

 
10

Total
$
6,465

 
$
823

 
$
5,515

 
$
12,803

 
$
2,169,186

 
$
1,267

 
$
2,183,256

 
$
693

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

 
$
298

 
$
4,279

 
$
5,441

 
$
498,757

 
$
317

 
$
504,515

 
$

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

 

 
1,102

 
13,205

 
872,174

 
513

 
885,892

 

Construction

 

 

 

 
96,541

 

 
96,541

 

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

 
2,356

 
727

 
4,489

 
213,871

 
423

 
218,783

 

Residential secured for personal purpose
990

 
69

 
309

 
1,368

 
179,787

 

 
181,155

 

Home equity secured for personal purpose
777

 
52

 
174

 
1,003

 
135,952

 

 
136,955

 

Loans to individuals
198

 
97

 
173

 
468

 
29,264

 

 
29,732

 
173

Lease financings
1,294

 
652

 
646

 
2,592

 
122,848

 

 
125,440

 
206

Total
$
17,632

 
$
3,524

 
$
7,410

 
$
28,566

 
$
2,149,194

 
$
1,253

 
$
2,179,013

 
$
379



14

Table of Contents

Non-Performing Loans and Leases

The following presents, by class of loans and leases, non-performing loans and leases at March 31, 2016 and December 31, 2015:
 
At March 31, 2016
 
At December 31, 2015
(Dollars in thousands)
Nonaccrual
Loans and
Leases*
 
Accruing
Troubled
Debt
Restructured
Loans and
Lease
Modifications
 
Loans and
Leases
90 Days
or more
Past Due
and
Accruing
Interest
 
Total Non-
Performing
Loans and
Leases
 
Nonaccrual
Loans and
Leases*
 
Accruing
Troubled
Debt
Restructured
Loans and
Lease
Modifications
 
Loans and
Leases
90 Days
or more
Past Due
and
Accruing
Interest
 
Total Non-
Performing
Loans and
Leases
Commercial, financial and agricultural
$
6,080

 
$
1,443

 
$

 
$
7,523

 
$
6,915

 
$
1,602

 
$

 
$
8,517

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
3,981

 
2,417

 

 
6,398

 
4,314

 
2,449

 

 
6,763

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
2,496

 
413

 

 
2,909

 
1,863

 
763

 

 
2,626

Residential secured for personal purpose
375

 

 
125

 
500

 
376

 
421

 

 
797

Home equity secured for personal purpose
129

 

 
353

 
482

 
275

 

 

 
275

Loans to individuals

 

 
205

 
205

 

 

 
173

 
173

Lease financings
421

 
6

 
10

 
437

 
440

 
10

 
206

 
656

Total
$
13,482

 
$
4,279

 
$
693

 
$
18,454

 
$
14,183

 
$
5,245

 
$
379

 
$
19,807

 * Includes nonaccrual troubled debt restructured loans and lease modifications of $1.5 million and $93 thousand at March 31, 2016 and December 31, 2015, respectively.

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

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



15

Table of Contents

Commercial Credit Exposure Credit Risk by Internally Assigned Grades
The following table presents classifications for originated loans:
(Dollars in thousands)
Commercial,
Financial and
Agricultural
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Real Estate—
Residential Secured
for Business Purpose
 
Total
At March 31, 2016
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
527

 
$

 
$
4,902

 
$

 
$
5,429

3. Strong
17,817

 
2,998

 

 

 
20,815

4. Satisfactory
27,198

 
36,971

 
450

 
8

 
64,627

5. Acceptable
340,778

 
525,195

 
76,592

 
87,621

 
1,030,186

6. Pre-watch
63,932

 
125,085

 
8,245

 
10,921

 
208,183

7. Special Mention
8,395

 
29,977

 

 
115

 
38,487

8. Substandard
27,465

 
40,266

 
378

 
4,926

 
73,035

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
486,112

 
$
760,492

 
$
90,567

 
$
103,591

 
$
1,440,762

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

 
$

 
$
5,417

 
$

 
$
6,385

3. Strong
17,328

 
10,877

 

 

 
28,205

4. Satisfactory
36,697

 
36,023

 
450

 
9

 
73,179

5. Acceptable
328,140

 
530,766

 
72,630

 
78,659

 
1,010,195

6. Pre-watch
61,098

 
119,117

 
13,262

 
7,161

 
200,638

7. Special Mention
6,074

 
20,286

 

 
2,347

 
28,707

8. Substandard
29,675

 
42,273

 
145

 
6,104

 
78,197

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
479,980

 
$
759,342

 
$
91,904

 
$
94,280

 
$
1,425,506


















16

Table of Contents

The following table presents classifications for acquired loans:
(Dollars in thousands)
Commercial,
Financial and
Agricultural
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Real Estate—
Residential Secured
for Business Purpose
 
Total
At March 31, 2016
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
1,405

 
$

 
$

 
$

 
$
1,405

3. Strong

 

 

 

 

4. Satisfactory
1,163

 
3,000

 

 
604

 
4,767

5. Acceptable
15,557

 
98,120

 
2,004

 
103,018

 
218,699

6. Pre-watch
2,190

 
10,757

 

 
7,794

 
20,741

7. Special Mention

 
7,407

 

 
623

 
8,030

8. Substandard
892

 
1,644

 

 
2,634

 
5,170

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
21,207

 
$
120,928

 
$
2,004

 
$
114,673

 
$
258,812

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

 
$

 
$

 
$

 
$
1,411

3. Strong

 

 

 

 

4. Satisfactory
1,181

 
3,561

 

 
608

 
5,350

5. Acceptable
18,446

 
102,122

 
4,637

 
113,002

 
238,207

6. Pre-watch
2,273

 
10,365

 

 
8,153

 
20,791

7. Special Mention
417

 
8,853

 

 
367

 
9,637

8. Substandard
807

 
1,649

 

 
2,373

 
4,829

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
24,535

 
$
126,550

 
$
4,637

 
$
124,503

 
$
280,225

Credit Exposure—Real Estate—Residential Secured for Personal Purpose, Real Estate—Home Equity Secured for Personal Purpose, Loans to individuals, Lease Financing Credit Risk Profile by Payment Activity
The Corporation monitors the credit risk profile by payment activity for the following classifications of loans and leases: residential real estate loans secured for a personal purpose, home equity loans secured for a personal purpose, loans to individuals and lease financings. Nonperforming loans and leases are loans past due 90 days or more, loans and leases on nonaccrual of interest and troubled debt restructured loans and lease modifications. Performing loans and leases are reviewed only if the loan becomes 60 days or more past due. Nonperforming loans and leases are reviewed monthly. Performing loans and leases have a nominal to moderate risk of loss. Nonperforming loans and leases are loans or leases with a well-defined weakness and where collection in-full is unlikely.
The following table presents classifications for originated loans:
(Dollars in thousands)
Real Estate—
Residential
Secured for
Personal Purpose
 
Real Estate—
Home Equity
Secured for
Personal Purpose
 
Loans to
Individuals
 
Lease
Financing
 
Total
At March 31, 2016
 
 
 
 
 
 
 
 
 
Performing
$
184,982

 
$
129,425

 
$
27,935

 
$
125,377

 
$
467,719

Nonperforming
500

 
482

 
205

 
437

 
1,624

Total
$
185,482

 
$
129,907

 
$
28,140

 
$
125,814

 
$
469,343

At December 31, 2015
 
 
 
 
 
 
 
 
 
Performing
$
177,053

 
$
125,086

 
$
29,233

 
$
124,784

 
$
456,156

Nonperforming
797

 
275

 
173

 
656

 
1,901

Total
$
177,850

 
$
125,361

 
$
29,406

 
$
125,440

 
$
458,057



17

Table of Contents

The following table presents classifications for acquired loans:
(Dollars in thousands)
Real Estate—
Residential
Secured for
Personal Purpose
 
Real Estate—
Home Equity
Secured for
Personal Purpose
 
Loans to
Individuals
 
Lease
Financing
 
Total
At March 31, 2016
 
 
 
 
 
 
 
 
 
Performing
$
3,227

 
$
10,831

 
$
281

 
$

 
$
14,339

Nonperforming

 

 

 

 

Total
$
3,227

 
$
10,831

 
$
281

 
$

 
$
14,339

At December 31, 2015
 
 
 
 
 
 
 
 
 
Performing
$
3,305

 
$
11,594

 
$
326

 
$

 
$
15,225

Nonperforming

 

 

 

 

Total
$
3,305

 
$
11,594

 
$
326

 
$

 
$
15,225

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

18

Table of Contents

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

19

Table of Contents

Reserve for Loan and Lease Losses and Recorded Investment in Loans and Leases
The following presents, by portfolio segment, a summary of the activity in the reserve for loan and lease losses, the balance in the reserve for loan and lease losses disaggregated on the basis of impairment method and the recorded investment in loans and leases disaggregated on the basis of impairment method for the three months ended March 31, 2016 and 2015:
(Dollars in thousands)
Commercial,
Financial
and
Agricultural
 
Real Estate—
Commercial
and
Construction
 
Real Estate—
Residential
Secured for
Business
Purpose
 
Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose
 
Loans to
Individuals
 
Lease
Financings
 
Unallocated
 
Total
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,418

 
$
6,572

 
$
763

 
$
1,575

 
$
346

 
$
1,042

 
$
912

 
$
17,628

Charge-offs
(1,481
)
 
(26
)
 
(238
)
 
(46
)
 
(76
)
 
(205
)
 
N/A

 
(2,072
)
Recoveries
450

 
7

 
19

 
17

 
33

 
44

 
N/A

 
570

Provision (recovery of provision)
243

 
(82
)
 
203

 
(233
)
 
53

 
41

 
102

 
327

Recovery of provision for acquired credit impaired loans

 

 

 
(1
)
 

 

 

 
(1
)
Ending balance
$
5,630

 
$
6,471

 
$
747

 
$
1,312

 
$
356

 
$
922

 
$
1,014

 
$
16,452

Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,920

 
$
8,943

 
$
763

 
$
1,124

 
$
360

 
$
985

 
$
1,567

 
$
20,662

Charge-offs
(300
)
 
(348
)
 

 
(31
)
 
(184
)
 
(230
)
 
N/A

 
(1,093
)
Recoveries
110

 
65

 
6

 
1

 
48

 
61

 
N/A

 
291

(Recovery of provision) provision
(18
)
 
988

 
(101
)
 
34

 
141

 
197

 
(167
)
 
1,074

Ending balance
$
6,712

 
$
9,648

 
$
668

 
$
1,128

 
$
365

 
$
1,013

 
$
1,400

 
$
20,934

N/A – Not applicable


20

Table of Contents

(Dollars in thousands)
Commercial,
Financial
and
Agricultural
 
Real Estate—
Commercial
and
Construction
 
Real Estate—
Residential
Secured for
Business
Purpose
 
Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose
 
Loans to
Individuals
 
Lease
Financings
 
Unallocated
 
Total
At March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
151

 
$
140

 
$
20

 
$
30

 
$

 
$

 
N/A

 
$
341

Ending balance: collectively evaluated for impairment
5,479

 
6,323

 
727

 
1,282

 
356

 
922

 
1,014

 
16,103

Ending balance: acquired credit impaired loans evaluated for impairment

 
8

 

 

 

 

 

 
8

Total ending balance
$
5,630

 
$
6,471

 
$
747

 
$
1,312

 
$
356

 
$
922

 
$
1,014

 
$
16,452

Loans and leases held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
12,977

 
$
29,375

 
$
3,618

 
$
504

 
$

 
$

 
 
 
$
46,474

Ending balance: collectively evaluated for impairment
473,135

 
821,684

 
99,973

 
314,885

 
28,140

 
125,814

 
 
 
1,863,631

Acquired non-credit impaired loans
21,207

 
122,415

 
113,923

 
14,058

 
281

 

 
 
 
271,884

Acquired credit impaired loans

 
517

 
750

 

 

 

 
 
 
1,267

Total ending balance
$
507,319

 
$
973,991

 
$
218,264

 
$
329,447

 
$
28,421

 
$
125,814

 
 
 
$
2,183,256

At March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
1,004

 
$

 
$

 
$

 
$

 
$

 
N/A

 
$
1,004

Ending balance: collectively evaluated for impairment
5,708

 
9,648

 
668

 
1,128

 
365

 
1,013

 
1,400

 
19,930

Total ending balance
$
6,712

 
$
9,648

 
$
668

 
$
1,128

 
$
365

 
$
1,013

 
$
1,400

 
$
20,934

Loans and leases held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
15,124

 
$
34,380

 
$
3,239

 
$
909

 
$

 
$

 
 
 
$
53,652

Ending balance: collectively evaluated for impairment
446,366

 
700,581

 
38,658

 
281,120

 
29,620

 
115,958

 
 
 
1,612,303

Acquired non-credit impaired loans
29,418

 
189,225

 
140,779

 
16,461

 
371

 

 
 
 
376,254

Acquired credit impaired loans
371

 
578

 
619

 
63

 

 

 
 
 
1,631

Total ending balance
$
491,279

 
$
924,764

 
$
183,295

 
$
298,553

 
$
29,991

 
$
115,958

 
 
 
$
2,043,840

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




21

Table of Contents

Impaired Loans
The following presents, by class of loans, the recorded investment and unpaid principal balance of impaired loans , the amounts of the impaired loans for which there is not an allowance for credit losses and the amounts for which there is an allowance for credit losses at March 31, 2016 and December 31, 2015. The impaired loans exclude loans acquired with deteriorated credit quality.
 
At March 31, 2016
 
At December 31, 2015
(Dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
12,677

 
$
13,921

 
 
 
$
10,337

 
$
13,318

 
 
Real estate—commercial real estate
29,009

 
29,885

 
 
 
30,088

 
30,996

 
 
Real estate—residential secured for business purpose
3,454

 
3,710

 
 
 
4,597

 
4,717

 
 
Real estate—residential secured for personal purpose
123

 
132

 
 
 
545

 
554

 
 
Real estate—home equity secured for personal purpose
129

 
129

 
 
 
170

 
170

 
 
Total impaired loans with no allowance recorded
$
45,392

 
$
47,777

 
 
 
$
45,737

 
$
49,755

 
 
Impaired loans with an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
300

 
$
300

 
$
151

 
$
2,544

 
$
2,544

 
$
208

Real estate—commercial real estate
366

 
368

 
140

 

 

 

Real estate—residential secured for business purpose
164

 
167

 
20

 
295

 
295

 
45

Real estate—residential secured for personal purpose
252

 
252

 
30

 
252

 
252

 
16

Real estate—home equity secured for personal purpose

 

 

 
105

 
105

 
53

Total impaired loans with an allowance recorded
$
1,082

 
$
1,087

 
$
341

 
$
3,196

 
$
3,196

 
$
322


 
At March 31, 2016
 
At December 31, 2015
(Dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
12,977

 
$
14,221

 
$
151

 
$
12,881

 
$
15,862

 
$
208

Real estate—commercial real estate
29,375

 
30,253

 
140

 
30,088

 
30,996

 

Real estate—residential secured for business purpose
3,618

 
3,877

 
20

 
4,892

 
5,012

 
45

Real estate—residential secured for personal purpose
375

 
384

 
30

 
797

 
806

 
16

Real estate—home equity secured for personal purpose
129

 
129

 

 
275

 
275

 
53

Total impaired loans
$
46,474

 
$
48,864

 
$
341

 
$
48,933

 
$
52,951

 
$
322

Impaired loans include nonaccrual loans accruing troubled debt restructured loans and other accruing impaired loans for which it is probable that not all principal and interest payments due will be collectible in accordance with the contractual terms. These loans are individually measured to determine the amount of potential impairment. The loans are reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans’ initial effective interest rates. Impaired loans include other accruing impaired loans of $29.1 million and $30.0 million at March 31, 2016 and December 31, 2015, respectively. Specific reserves on other accruing impaired loans were $151 thousand and $186 thousand at March 31, 2016 and December 31, 2015, respectively.


22

Table of Contents

The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Therefore, interest income on accruing impaired loans is recognized using the accrual method. 
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
(Dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized*
 
Additional
Interest Income
That Would
Have Been
Recognized
Under Original
Terms
 
Average
Recorded
Investment
 
Interest
Income
Recognized*
 
Additional
Interest Income
That Would
Have Been
Recognized
Under Original
Terms
Commercial, financial and agricultural
$
13,569

 
$
68

 
$
95

 
$
16,094

 
$
142

 
$
87

Real estate—commercial real estate
29,212

 
305

 
70

 
29,124

 
320

 
83

Real estate—construction

 

 

 
5,748

 

 
77

Real estate—residential secured for business purpose
4,273

 
27

 
47

 
3,183

 
29

 
16

Real estate—residential secured for personal purpose
568

 
2

 
4

 
584

 

 
13

Real estate—home equity secured for personal purpose
177

 

 
2

 
165

 

 
3

Total
$
47,799

 
$
402

 
$
218

 
$
54,898

 
$
491

 
$
279

*
Includes interest income recognized on a cash basis for nonaccrual loans of $7 thousand and $4 thousand for the three months ended March 31, 2016 and 2015, respectively and interest income recognized on the accrual method for accruing impaired loans of $395 thousand and $487 thousand for the three months ended March 31, 2016 and 2015, respectively.
 
 
 
 
 
 
 
 
 
 
 
 

Troubled Debt Restructured Loans
The following presents, by class of loans, information regarding accruing and nonaccrual loans that were restructured:
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
(Dollars in thousands)
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Allowance
 
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Allowance
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
1

 
$
1,545

 
$
1,545

 
$

 
1

 
$
143

 
$
143

 
$

Real estate—residential secured for business purpose

 

 

 

 
1

 
353

 
353

 

Total
1

 
$
1,545

 
$
1,545

 
$

 
2

 
$
496

 
$
496

 
$

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural

 
$

 
$

 
$

 
1

 
$
122

 
$
122

 
$

Total

 
$

 
$

 
$

 
1

 
$
122

 
$
122

 
$

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

23

Table of Contents

The following presents, by class of loans, information regarding the types of concessions granted on accruing and nonaccrual loans that were restructured during the three months ended March 31, 2016 and 2015.
 
Temporary Payment
Reduction
 
Amortization Period Extension
 
Total Concessions
Granted
(Dollars in thousands)
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural

 
$

 
1

 
$
1,545

 
1

 
$
1,545

Total

 
$

 
1

 
$
1,545

 
1

 
$
1,545

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Total

 
$

 

 
$

 

 
$

Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
1

 
$
143

 

 
$

 
1

 
$
143

Real estate—residential secured for business purpose
1

 
353

 

 

 
1

 
353

Total
2

 
$
496

 

 
$

 
2

 
$
496

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
1

 
$
122

 

 
$

 
1

 
$
122

Total
1

 
$
122

 

 
$

 
1

 
$
122

The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there were payment defaults within twelve months of the restructuring date:
 
Three Months Ended March 31,
 
2016
 
2015
(Dollars in thousands)
Number
of Loans
 
Recorded
Investment
 
Number
of Loans
 
Recorded
Investment
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
Commercial, financial and agricultural
1

 
$
50

 

 
$

Total
1

 
$
50

 

 
$

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
Commercial, financial and agricultural

 
$

 
2

 
$
200

Total

 
$

 
2

 
$
200

As a result of payment default during the first quarter of 2016, a commercial accruing troubled debt restructured loan totaling $50 thousand was placed on nonaccrual of interest status.
The following presents, by class of loans, information regarding consumer mortgages collateralized by residential real estate property that are in the process of foreclosure at March 31, 2016 and December 31, 2015:
(Dollars in thousands)
At March 31, 2016
 
At December 31, 2015
Real estate-residential secured for personal purpose
$
313

 
$
313

Real estate-home equity secured for personal purpose
60

 
60

Total
$
373

 
$
373

The Corporation held no foreclosed consumer residential real estate property at March 31, 2016 and December 31, 2015.
Note 5. Goodwill and Other Intangible Assets
The Corporation has core deposit and customer-related intangibles and mortgage servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life using the present value of projected cash flows. The Corporation also has goodwill which is deemed to be an indefinite intangible asset and is not amortized.



24

Table of Contents

Changes in the carrying amount of the Corporation's goodwill by business segment for the three months ended March 31, 2016 were as follows:
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Consolidated
Balance at December 31, 2015
$
78,574

 
$
15,434

 
$
18,649

 
$
112,657

Addition to goodwill from acquisitions

 

 

 

Balance at March 31, 2016
$
78,574

 
$
15,434

 
$
18,649

 
$
112,657

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

 
$
339

 
$
1,181

 
$
1,520

 
$
276

 
$
1,244

Customer related intangibles
12,381

 
7,305

 
5,076

 
14,227

 
8,728

 
5,499

Mortgage servicing rights
12,544

 
6,705

 
5,839

 
12,233

 
6,356

 
5,877

Total amortized intangible assets
$
26,445

 
$
14,349

 
$
12,096

 
$
27,980

 
$
15,360

 
$
12,620

The estimated aggregate amortization expense for core deposit and customer related intangibles for the remainder of 2016 and the succeeding fiscal years is as follows:
Year
(Dollars in thousands)
Amount
Remainder of 2016
 
$
1,385

2017
 
1,544

2018
 
1,170

2019
 
847

2020
 
577

Thereafter
 
734

The Corporation has originated mortgage servicing rights which are included in other intangible assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method and an accelerated amortization method for loan payoffs. Mortgage servicing rights are subject to impairment testing on a quarterly basis. The aggregate fair value of these rights was $7.2 million and $8.0 million at March 31, 2016 and December 31, 2015, respectively. The fair value of mortgage servicing rights was determined using a discount rate of 10.0% at March 31, 2016, and December 31, 2015.
Changes in the mortgage servicing rights balance are summarized as follows:
 
Three Months Ended March 31,
(Dollars in thousands)
2016
 
2015
Beginning of period
$
5,877

 
$
5,509

Servicing rights capitalized
311

 
382

Amortization of servicing rights
(349
)
 
(368
)
Changes in valuation allowance

 

End of period
$
5,839

 
$
5,523

Mortgage loans serviced for others
$
872,958

 
$
809,342


25

Table of Contents

There was no activity in the valuation allowance for the three months ended March 31, 2016 and March 31, 2015.

The estimated amortization expense of mortgage servicing rights for the remainder of 2016 and the succeeding fiscal years is as follows:
Year
(Dollars in thousands)
Amount
Remainder of 2016
 
$
763

2017
 
900

2018
 
755

2019
 
629

2020
 
521

Thereafter
 
2,271

Note 6. Income Taxes
At March 31, 2016 and December 31, 2015, the Corporation had no material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in noninterest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in noninterest expense in the year it is assessed and is treated as a deductible expense for tax purposes. At March 31, 2016, the Corporation’s tax years 2012 through 2015 remain subject to federal examination as well as examination by state taxing jurisdictions.
Note 7. Retirement Plans and Other Postretirement Benefits
Substantially all employees who were hired before December 8, 2009 are covered by a noncontributory retirement plan. Employees hired on or after December 8, 2009 are not eligible to participate in the noncontributory retirement plan. The Corporation also provides supplemental executive retirement benefits to certain former executives, a portion of which is in excess of limits imposed on qualified plans by federal tax law; these plans are non-qualified benefit plans. These non-qualified benefit plans are not offered to new participants; all current participants are now retired. Information on these plans are aggregated and reported under “Retirement Plans” within this footnote.
The Corporation also provides certain postretirement healthcare and life insurance benefits for retired employees. Information on these benefits is reported under “Other Postretirement Benefits” within this footnote.
The Corporation sponsors a Supplemental Non-Qualified Pension Plan which was established in 1981 prior to the existence of a 401(k) deferred salary savings plan, employee stock purchase plan and long-term incentive plans and therefore is not offered to new participants; all current participants are now retired.
Components of net periodic benefit cost (income) were as follows: 
 
Three Months Ended March 31,
 
2016
 
2015
 
2016
 
2015
(Dollars in thousands)
Retirement Plans
 
Other Post Retirement
Benefits
Service cost
$
171

 
$
193

 
$
12

 
$
15

Interest cost
518

 
488

 
33

 
28

Expected return on plan assets
(754
)
 
(756
)
 

 

Amortization of net actuarial loss
323

 
328

 
6

 
13

Accretion of prior service cost
(71
)
 
(70
)
 

 

Net periodic benefit cost
$
187

 
$
183

 
$
51

 
$
56

 
 
 
 
 
 
 
 
The Corporation previously disclosed in its financial statements for the year ended December 31, 2015, that it expected to make contributions of $160 thousand to its non-qualified retirement plans and $117 thousand to its other postretirement benefit plans in 2016. During the three months ended March 31, 2016, the Corporation contributed $40 thousand to its non-qualified retirement plans and $20 thousand to its other postretirement plans. During the three months ended March 31, 2016, $609 thousand was paid to participants from the retirement plans and $20 thousand was paid to participants from the other postretirement plans.

26

Table of Contents

Note 8. Earnings per Share
The Corporation uses the two-class method to calculate earnings per share as the unvested restricted stock issued under the Corporation's equity incentive plans are participating shares with nonforfeitable rights to dividends. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended 
 March 31,
(Dollars and shares in thousands, except per share data)
2016
 
2015
Numerator:
 
 
 
Net income
$
7,289

 
$
6,116

Net income allocated to unvested restricted stock
(59
)
 
(46
)
Net income allocated to common shares
$
7,230

 
$
6,070

Denominator:
 
 
 
Denominator for basic earnings per share—weighted-average shares outstanding
19,402

 
19,776

Effect of dilutive securities—employee stock options
31

 
24

Denominator for diluted earnings per share—adjusted weighted-average shares outstanding
19,433

 
19,800

Basic earnings per share
$
0.37

 
$
0.31

Diluted earnings per share
$
0.37

 
$
0.31

Average anti-dilutive options and awards excluded from computation of diluted earnings per share
588

 
632


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
Gains (Losses) on
Available-for-Sale
Investment
Securities
 
Net Change
Related to
Derivatives Used for Cash Flow Hedges
 
Net Change
Related to
Defined Benefit
Pension Plans
 
Accumulated
Other
Comprehensive
(Loss) Income
Balance, December 31, 2015
$
(592
)
 
$
(285
)
 
$
(15,831
)
 
$
(16,708
)
Net Change
1,413

 
(354
)
 
168

 
1,227

Balance, March 31, 2016
$
821

 
$
(639
)
 
$
(15,663
)
 
$
(15,481
)
Balance, December 31, 2014
$
1,711

 
$
(157
)
 
$
(16,016
)
 
$
(14,462
)
Net Change
1,344

 
(219
)
 
175

 
1,300

Balance, March 31, 2015
$
3,055

 
$
(376
)
 
$
(15,841
)
 
$
(13,162
)

    














27

Table of Contents

The following table illustrates the amounts reclassified out of each component of accumulated comprehensive loss for the three months ended March 31, 2016 and 2015:
Details about Accumulated Other
Comprehensive (Loss) Income Components
 
Amount Reclassified from Accumulated
Other Comprehensive (Loss) Income
 
Affected Line Item in the
Statement of Income
 
 
Three Months Ended 
 March 31,
 
 
(Dollars in thousands)
 
2016
 
2015
 
 
Net unrealized holding gains on available-for-sale investment securities:
 
 
 
 
 
 
 
 
$
44

 
$
91

 
Net gain on sales of investment securities
 
 
44

 
91

 
Total before tax
 
 
(15
)
 
(32
)
 
Tax expense
 
 
$
29

 
$
59

 
Net of tax
Defined benefit pension plans:
 
 
 
 
 
 
Amortization of net loss included in net periodic pension costs*
 
$
(329
)
 
$
(341
)
 
 
Accretion of prior service cost included in net periodic pension costs*
 
71

 
70

 
 
 
 
(258
)
 
(271
)
 
Total before tax
 
 
90

 
96

 
Tax benefit
 
 
$
(168
)
 
$
(175
)
 
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.
On October 24, 2014, the Corporation entered into an amortizing interest rate swap classified as a cash flow hedge with a notional amount of $20.0 million to hedge a portion of the debt financing of a pool of 10-year maturity fixed rate loans with balances totaling $29.1 million, at time of the hedge, that were originated in 2013. A brokered money market demand account with a balance exceeding the amortizing interest rate swap balance is being used for the cash flow hedge. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.10% and receives a floating rate based on the one-month LIBOR with a maturity date of November 1, 2022. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and on a recurring basis to determine that the derivative has been and is expected to continue to be highly effective in offsetting changes in cash flows of the hedged item. The Corporation expects that there will be no ineffectiveness over the life of the interest rate swap, and therefore anticipates no portion of the net loss in accumulated other comprehensive loss will be reclassified into interest expense. To the extent there is ineffectiveness, the Corporation would record the ineffectiveness in interest expense.
The Corporation pledges cash or securities to cover a portion of the negative fair value of the interest rate swap, as measured by the counterparty. At March 31, 2016, the notional amount of the cash flow hedge was $19.1 million, with a negative fair value of $983 thousand. The Corporation has pledged $1.2 million to the counterparty as collateral for the negative fair value.

28

Table of Contents

The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at March 31, 2016 and December 31, 2015:
 
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in thousands)
Notional
Amount
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
At March 31, 2016
 
 
 
 
 
 
 
 
 
Interest rate locks with customers
$
44,520

 
Other Assets
 
$
1,721

 
 
 
$

Forward loan sale commitments
48,492

 
 
 

 
Other Liabilities
 
243

Total
$
93,012

 
 
 
$
1,721

 
 
 
$
243

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

 
Other Assets
 
$
1,089

 
 
 
$

Forward loan sale commitments
39,545

 
 
 

 
Other Liabilities
 
102

Total
$
73,995

 
 
 
$
1,089

 
 
 
$
102

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at March 31, 2016 and December 31, 2015:
 
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in thousands)
Notional
Amount
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
At March 31, 2016
 
 
 
 
 
 
 
 
 
Interest rate swap - cash flow hedge
$
19,096

 
 
 
$

 
Other Liabilities
 
$
983

Total
$
19,096

 

 
$

 

 
$
983

At December 31, 2015
 
 

 
 
 

 
 
Interest rate swap - cash flow hedge
$
19,269

 
 
 
$

 
Other Liabilities
 
$
438

Total
$
19,269

 

 
$

 

 
$
438

    
For the three months ended March 31, 2016 and 2015, the amounts included in the consolidated statements of income for derivatives not designated as hedging instruments are shown in the table below:
 
Statement of Income Classification
 
Three Months Ended 
 March 31,
(Dollars in thousands)
2016
 
2015
Interest rate locks with customers
Net gain on mortgage banking activities
 
$
632

 
$
449

Forward loan sale commitments
Net loss on mortgage banking activities
 
(141
)
 
(56
)
Total
 
 
$
491

 
$
393


For the three months ended March 31, 2016 and 2015, the amounts included in the consolidated statements of income for derivatives designated as hedging instruments are shown in the table below:
 
Statement of Income Classification
 
Three Months Ended 
 March 31,
(Dollars in thousands)
2016
 
2015
Interest rate swap—cash flow hedge—net interest payments
Interest expense
 
$
81

 
$
96

Net loss
 
 
$
(81
)
 
$
(96
)
    
    







29

Table of Contents

At March 31, 2016 and December 31, 2015, the amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments are shown in the table below:
(Dollars in thousands)
Accumulated Other
Comprehensive (Loss) Income
 
At March 31, 2016
 
At December 31, 2015
Interest rate swap—cash flow hedge
Fair value, net of taxes
 
$
(639
)
 
$
(285
)
Total
 
 
$
(639
)
 
$
(285
)

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 financial instruments based on the fair value hierarchy. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances, including assumptions about risk. Three levels of inputs are used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. Transfers between levels are recognized at the end of the reporting period.
Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation can access at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2: Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3: Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include: financial instruments whose value is determined using pricing models, discounted cash-flow methodologies, or similar techniques, as well as instruments for which the fair value calculation requires significant management judgment or estimation.
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Investment Securities
Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include U.S. Treasury securities, most equity securities and money market mutual funds. Mutual funds are registered investment companies which are valued at net asset value of shares on a market exchange at the end of each trading day. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include securities issued by U.S. Government sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate and municipal bonds and certain equity securities. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy.
Fair values for securities are determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does 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 a quarterly basis, the Corporation has its security portfolio priced by a second pricing service to determine consistency with another market evaluator, except for municipal bonds which are priced by

30

Table of Contents

another service provider on a sample basis. If, upon the Corporation’s review or in comparing with another service, a material difference between pricing evaluations were to exist, the Corporation may submit an inquiry to the current pricing service regarding the data used to determine the valuation of a particular security. If the Corporation determines there is market information that would support a different valuation than from the current pricing service’s evaluation, the Corporation can submit a challenge for a change to that security’s valuation. There were no material differences in valuations noted at March 31, 2016.
Derivative Financial Instruments
The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Derivative financial instruments are classified within Level 2 of the valuation hierarchy.

Contingent Consideration Liability
The Corporation estimates the fair value of the contingent consideration liability by using a discounted cash flow model of future contingent payments based on projected revenue related to the acquired business. The estimated fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change of estimated future contingent payments based on projected revenue of the acquired business affecting the contingent consideration liability will be recorded through noninterest expense. Changes in the original assumptions utilized at the time the acquisition closes and identified during the measurement period are recorded in accordance with ASC Topic 805 as an adjustment to goodwill. Due to the significant unobservable input related to the projected revenue, the contingent consideration liability is classified within Level 3 of the valuation hierarchy. An increase in the projected revenue may result in a higher fair value of the contingent consideration liability. Alternatively, a decrease in the projected revenue may result in a lower estimated fair value of the contingent consideration liability.
For the Sterner Insurance Associates acquisition, the remaining potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $3.9 million over the two-year period ending June 30, 2017. Due to updates to the original assumptions utilized for determining the contingent consideration liability for the Sterner acquisition completed on July 1, 2014, the Corporation recorded a purchase accounting adjustment, in accordance with ASC Topic 805, in the first quarter of 2015 which resulted in an increase to the contingent consideration liability and an increase to goodwill of $1.4 million.
For the Girard Partners acquisition, the remaining potential cash payments that could result from the contingent consideration arrangement range from $0 to a maximum of $12.9 million cumulative over the three-year period ending December 31, 2018. The Corporation recorded a reduction to the contingent liability during the fourth quarter of 2015 which resulted in a reduction of noninterest expense of $550 thousand. The adjustment reflected that projected revenue levels for earn-out payments in the second through fifth years post-acquisition are anticipated to be lower than originally projected.
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 $360 thousand cumulative over the one-year period ending April 30, 2016.










31

Table of Contents

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

 
$
67,667

 
$

 
$
67,667

State and political subdivisions

 
102,808

 

 
102,808

Residential mortgage-backed securities

 
8,574

 

 
8,574

Collateralized mortgage obligations

 
3,056

 

 
3,056

Corporate bonds

 
92,003

 

 
92,003

Money market mutual funds
17,563

 

 

 
17,563

Equity securities
754

 

 

 
754

Total available-for-sale securities
18,317

 
274,108

 

 
292,425

Interest rate locks with customers

 
1,721

 

 
1,721

Total assets
$
18,317

 
$
275,829

 
$

 
$
294,146

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$

 
$

 
$
4,957

 
$
4,957

Interest rate swap

 
983

 

 
983

Forward loan sale commitments

 
243

 

 
243

Total liabilities
$

 
$
1,226

 
$
4,957

 
$
6,183

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

 
$

 
$

 
$
4,887

U.S. government corporations and agencies

 
102,156

 

 
102,156

State and political subdivisions

 
102,032

 

 
102,032

Residential mortgage-backed securities

 
13,354

 

 
13,354

Collateralized mortgage obligations

 
3,133

 

 
3,133

Corporate bonds

 
86,675

 

 
86,675

Money market mutual funds
16,726

 

 

 
16,726

Equity securities
807

 

 

 
807

Total available-for-sale securities
22,420

 
307,350

 

 
329,770

Interest rate locks with customers

 
1,089

 

 
1,089

Total assets
$
22,420

 
$
308,439

 
$

 
$
330,859

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$

 
$

 
$
5,577

 
$
5,577

Interest rate swap

 
438

 

 
438

Forward loan sale commitments

 
102

 

 
102

Total liabilities
$

 
$
540

 
$
5,577

 
$
6,117

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

32

Table of Contents

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

 
$

 
$

 
$
154

 
$
1,298

Girard Partners
4,241

 

 
900

 
119

 
3,460

John T. Fretz Insurance Agency
192

 

 

 
7

 
199

Total contingent consideration liability
$
5,577

 
$

 
$
900

 
$
280

 
$
4,957

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

 
$
1,424

 
$

 
$
24

 
$
2,128

Girard Partners
5,503

 
$

 
$
620

 
$
34

 
4,917

John T. Fretz Insurance Agency
358

 

 

 
13

 
371

Total contingent consideration liability
$
6,541

 
$
1,424

 
$
620

 
$
71

 
$
7,416

*Includes adjustments during the measurement period in accordance with ASC Topic 805.
The Corporation may be required to periodically measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market accounting or impairment charges of individual assets. The following table represents assets measured at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015:
 
At March 31, 2016
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Assets/Liabilities at
Fair Value
Impaired loans held for investment
$

 
$

 
$
46,133

 
$
46,133

Total
$

 
$

 
$
46,133

 
$
46,133

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

 
$

 
$
48,611

 
$
48,611

Total
$

 
$

 
$
48,611

 
$
48,611


    











33

Table of Contents

The following table presents assets and liabilities and off-balance sheet items not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed at March 31, 2016 and December 31, 2015. The disclosed fair values are classified using the fair value hierarchy.
 
At March 31, 2016
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Carrying
Amount
Assets:
 
 
 
 
 
 
 
 
 
Cash and short-term interest-earning assets
$
38,547

 
$

 
$

 
$
38,547

 
$
38,547

Held-to-maturity securities


 
37,031

 


 
37,031

 
36,932

Loans held for sale


 
3,851

 


 
3,851

 
3,818

Net loans and leases held for investment


 


 
2,070,300

 
2,070,300

 
2,120,671

Mortgage servicing rights


 


 
7,203

 
7,203

 
5,839

Other real estate owned


 
3,073

 


 
3,073

 
3,073

Total assets
$
38,547

 
$
43,955

 
$
2,077,503

 
$
2,160,005

 
$
2,208,880

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand and savings deposits, non-maturity
$
1,951,453

 
$

 
$

 
$
1,951,453

 
$
1,951,453

Time deposits


 
383,986

 


 
383,986

 
382,908

Total deposits
1,951,453

 
383,986

 

 
2,335,439

 
2,334,361

Short-term borrowings

 
24,498

 

 
24,498

 
25,851

Subordinated notes

 
50,250

 

 
50,250

 
49,414

Total liabilities
$
1,951,453

 
$
458,734

 
$

 
$
2,410,187

 
$
2,409,626

Off-Balance-Sheet:
 
 
 
 
 
 
 
 
 
Commitments to extend credit
$

 
$
(1,829
)
 
$

 
$
(1,829
)
 
$

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

 
$

 
$

 
$
60,799

 
$
60,799

Held-to-maturity securities

 
41,061

 

 
41,061

 
40,990

Loans held for sale

 
4,708

 

 
4,708

 
4,680

Net loans and leases held for investment

 

 
2,099,082

 
2,099,082

 
2,112,774

Mortgage servicing rights

 

 
8,047

 
8,047

 
5,877

Other real estate owned

 
1,276

 

 
1,276

 
1,276

Total assets
$
60,799

 
$
47,045

 
$
2,107,129

 
$
2,214,973

 
$
2,226,396

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

 
$

 
$

 
$
1,939,954

 
$
1,939,954

Time deposits

 
455,527

 

 
455,527

 
454,406

Total deposits
1,939,954

 
455,527

 

 
2,395,481

 
2,394,360

Short-term borrowings

 
22,302

 

 
22,302

 
24,211

Subordinated notes
$

 
$
50,375

 
$

 
$
50,375

 
$
49,377

Total liabilities
$
1,939,954

 
$
528,204

 
$

 
$
2,468,158

 
$
2,467,948

Off-Balance-Sheet:
 
 
 
 
 
 
 
 
 
Commitments to extend credit
$

 
$
(1,788
)
 
$

 
$
(1,788
)
 
$


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

34

Table of Contents

Cash and short-term interest-earning assets: The carrying amounts reported in the balance sheet for cash and due from banks, interest-earning deposits with other banks, and other short-term investments approximates those assets’ fair values. Cash and short-term interest-earning assets are classified within Level 1 in the fair value hierarchy.
Held-to-maturity securities: Fair values for the held-to-maturity investment securities are estimated by using pricing models or quoted prices of securities with similar characteristics and are classified in Level 2 in the fair value hierarchy.
Loans held for sale: The fair value of the Corporation’s mortgage loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including interest rates, bids or indications provided by market participants on specific loans that are actively marketed for sale. These loans are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale are carried at the lower of cost or estimated fair value. There were no valuation adjustments for loans held for sale at March 31, 2016 and December 31, 2015.
Loans and leases held for investment: The fair values for loans and leases held for investment are estimated using discounted cash flow analyses, using a discount rate based on current interest rates at which similar loans with similar terms would be made to borrowers and include components for credit risk, operating expense and embedded prepayment options. An overall valuation adjustment is made for specific credit risks in addition to general portfolio risk and is significant to the valuation. As permitted, the fair value of the loans and leases are not based on the exit price concept as discussed in the first paragraph of this note. Loans and leases are classified within Level 3 in the fair value hierarchy.
Impaired loans held for investment: Impaired loans held for investment include those collateral-dependent loans for which the practical expedient was applied, resulting in a fair-value adjustment to the loan. Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans less costs to sell and is classified at a Level 3 in the fair value hierarchy. The fair value of collateral is based on appraisals performed by qualified licensed appraisers hired by the Corporation. At March 31, 2016, impaired loans held for investment had a carrying amount of $46.5 million with a valuation allowance of $341 thousand. At December 31, 2015, impaired loans held for investment had a carrying amount of $48.9 million with a valuation allowance of $322 thousand.
Mortgage servicing rights: The Corporation estimates the fair value of mortgage servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. Mortgage servicing rights are classified within Level 3 of the valuation hierarchy. The Corporation reviews the mortgage servicing rights portfolio on a quarterly basis for impairment and the mortgage servicing rights are carried at the lower of amortized cost or estimated fair value. At March 31, 2016 and December 31, 2015, mortgage servicing rights had a carrying amount of $5.8 million and $5.9 million, respectively, with no valuation allowance.
Goodwill and other identifiable assets: Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other identifiable intangible assets. During the three months ended March 31, 2016, there were no triggering events that required valuation of goodwill and other identifiable intangible assets.
Other real estate owned: The fair value of other real estate owned is estimated based upon the appraised value less costs to sell. The real estate is stated at an amount equal to the loan balance prior to foreclosure, plus costs incurred for improvements to the property but no more than the fair value of the property, less estimated costs to sell. New appraisals are generally obtained on an annual basis. Other real estate owned is classified within Level 2 of the valuation hierarchy.
Deposit liabilities: The fair values for demand and savings accounts, with no stated maturities, is the amount payable on demand at the reporting date (carrying value) and are classified within Level 1 in the fair value hierarchy. The fair values for time deposits with fixed maturities are estimated by discounting the final maturity using interest rates currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 in the fair value hierarchy.
Short-term borrowings: The fair value of 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.
Subordinated notes: The fair value of the subordinated notes are estimated by discounting the principal balance using the treasury yield curve for the term to the call date as the Corporation has the option to call the subordinated notes. The subordinated notes are classified within Level 2 in the fair value hierarchy.
Off-balance-sheet instruments: Fair values for the Corporation’s off-balance-sheet instruments are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing and are classified within Level 2 in the fair value hierarchy.

35

Table of Contents

Note 12. Segment Reporting
At March 31, 2016, the Corporation has three reportable business segments: Banking, Wealth Management and Insurance. The Corporation determines the segments based primarily upon product and service offerings, through the types of income generated and the regulatory environment. This is strategically how the Corporation operates and has positioned itself in the marketplace. Accordingly, significant operating decisions are based upon analysis of each of these segments. At March 31, 2016, these segments meet the quantitative thresholds for separate disclosure as a business segment. Non-reportable segments include the parent holding company and intercompany eliminations, and are included in the "Other" segment.
The Corporation's Banking segment consists of commercial and consumer banking. The Wealth Management segment consists of investment advisory services, retirement plan services, trust, municipal pension services and broker/dealer services. The Insurance segment consists of commercial lines, personal lines, benefits and human resources consulting.
Each segment generates revenue from a variety of products and services it provides. Examples of products and services provided for each reportable segment are indicated below.
Ÿ
The Banking segment provides financial services to consumers, businesses and governmental units. These services include a full range of banking services such as deposit taking, loan origination and servicing, mortgage banking, other general banking services and equipment lease financing.
Ÿ
The Wealth Management segment offers trust and investment advisory services, guardian and custodian of employee benefits and other trust and brokerage services, as well as a registered investment advisory managing private investment accounts for both individuals and institutions.
Ÿ
The Insurance segment includes a full-service insurance brokerage agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions, personal insurance lines and human resources consulting.
The accounting policies, used in the disclosure of the operating segments, are the same as those described in Note 1, “Summary of Significant Accounting Policies".
The following table provides total assets by reportable operating segment as of the dates indicated.
(Dollars in thousands)
At March 31, 2016
 
At December 31, 2015
 
At March 31, 2015
Banking
$
2,746,433

 
$
2,797,746

 
$
2,680,245

Wealth Management
30,134

 
33,950

 
29,993

Insurance
24,715

 
24,436

 
24,447

Other
23,495

 
23,319

 
22,810

Consolidated assets
$
2,824,777

 
$
2,879,451

 
$
2,757,495

The following tables provide reportable segment-specific information and reconciliations to consolidated financial information for the three months ended March 31, 2016 and 2015.
 
Three Months Ended
 
March 31, 2016
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
25,600

 
$
2

 
$

 
$
7

 
$
25,609

Interest expense
2,211

 

 

 

 
2,211

Net interest income
23,389

 
2

 

 
7

 
23,398

Provision for loan and lease losses
326

 

 

 

 
326

Noninterest income
4,673

 
4,572

 
4,720

 
(9
)
 
13,956

Intangible expenses
67

 
303

 
400

 

 
770

Other noninterest expense
18,742

 
3,058

 
3,119

 
1,250

 
26,169

Intersegment (revenue) expense*
(511
)
 
219

 
292

 

 

Income (expense) before income taxes
9,438

 
994

 
909

 
(1,252
)
 
10,089

Income tax expense (benefit)
2,357

 
383

 
377

 
(317
)
 
2,800

Net income (loss)
$
7,081

 
$
611

 
$
532

 
$
(935
)
 
$
7,289

Capital expenditures
$
1,839

 
$
15

 
$
10

 
$
314

 
$
2,178


36

Table of Contents

 
Three Months Ended
 
March 31, 2015
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
24,730

 
$

 
$

 
$
8

 
$
24,738

Interest expense
1,434

 

 

 

 
1,434

Net interest income
23,296

 

 

 
8

 
23,304

Provision for loan and lease losses
1,074

 

 

 

 
1,074

Noninterest income
4,450

 
4,624

 
4,255

 
102

 
13,431

Intangible expenses
74

 
394

 
318

 

 
786

Other noninterest expense
21,222

 
2,955

 
2,669

 
(221
)
 
26,625

Intersegment (revenue) expense*
(534
)
 
222

 
312

 

 

Income before income taxes
5,910

 
1,053

 
956

 
331

 
8,250

Income tax expense
1,161

 
414

 
399

 
160

 
2,134

Net income
$
4,749

 
$
639

 
$
557

 
$
171

 
$
6,116

Capital expenditures
$
1,197

 
$
8

 
$
39

 
$
73

 
$
1,317

*Includes an allocation of general and administrative expenses from both the parent holding company and the Bank. Generally speaking, these expenses are allocated based upon number of employees and square footage utilized.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 13. Restructuring Charges
During the first quarter of 2015, the Corporation finalized a new financial center model, which is smaller in size, combines enhanced technology with personal service and provides consultive services and solutions delivered by personal bankers. These efforts led to the development of a comprehensive financial center optimization plan approved in April 2015 which includes opening new financial centers in growth markets while closing financial centers which operate in close proximity to other centers. As the Corporation announced in April 2015, six financial centers were closed in September 2015 that operated in close proximity to other centers. As a result, the Corporation recorded $1.6 million in restructuring charges during the second quarter of 2015 and related to the Banking business segment.
A roll-forward of the accrued restructuring expense for the three months ended March 31, 2016 is as follows:
(Dollars in thousands)
Write-downs and retirements of fixed assets
 
Lease cancellations
 
Total
Accrued at January 1, 2016
$
228

 
$
834

 
$
1,062

Payments

 
(73
)
 
(73
)
Accelerated depreciation

 

 

Accrued at March 31, 2016
$
228

 
$
761

 
$
989


37

Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(All dollar amounts presented within tables are in thousands, except per share data. “BP” equates to “basis points” “N/ M” equates to “not meaningful” “—” equates to “zero” or “doesn’t round to a reportable number” and “N/A” equates to “not applicable.” Certain amounts have been reclassified to conform to the current-year presentation.)
Forward-Looking Statements
The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words “believe,” “anticipate,” “estimate,” “expect,” “project,” “target,” “goal” and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below:
 
Operating, legal and regulatory risks
Economic, political and competitive forces impacting various lines of business
The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful
Volatility in interest rates
Other risks and uncertainties, including those occurring in the U.S. and world financial systems
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only at the date of the report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Corporation’s expectations with regard to any change in events, conditions or circumstances on which any such statement is based.
Critical Accounting Policies
Management, in order to prepare the Corporation’s financial statements in conformity with U.S. generally accepted accounting principles, is required to make estimates and assumptions that affect the amounts reported in the Corporation’s financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the fair value measurement of investment securities available-for-sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation as areas with critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation’s 2015 Annual Report on Form 10-K.
General
Univest Corporation of Pennsylvania (the Corporation), is a Bank Holding Company owning all of the capital stock of Univest Bank and Trust Co. (the Bank).
The Bank is engaged in the commercial and consumer banking business and provides a full range of banking and trust services to customers. The Bank is the parent company of Delview, Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency, Univest Investments, Inc., a full-service broker-dealer and investment advisory firm and Girard Partners (Girard), a registered investment advisory firm. The Bank is also the parent company of Univest Capital, Inc., an equipment financing business, and TCG Investment Advisory, a registered investment advisor which provides discretionary investment consulting and management services. Through its wholly-owned subsidiaries, the Bank provides a variety of financial services to individuals, municipalities and businesses throughout the Bank's markets of operation.
The Corporation earns revenues primarily from the margins and fees generated from lending and depository services to customers as well as fee-based income from trust, insurance, mortgage banking and investment services to customers. The Corporation seeks to achieve adequate and reliable earnings through business growth while maintaining adequate levels of capital and liquidity and limiting exposure to credit and interest rate risk to Board of Directors approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation is in a liability sensitive position from both a short-term maturity perspective and a short-term repricing perspective, as interest rates remain at historically low levels. Despite being liability sensitive, the Corporation projects increased net interest income in rising rate scenarios as the magnitude of the asset pricing change exceeds the liability pricing change.
The Corporation seeks to establish itself as the financial provider of choice in the markets it serves. The Corporation plans to achieve this goal by offering a broad range of high quality financial products and services and by increasing market awareness of its brand and the benefits that can be derived from its products. The Corporation operates in an attractive market for financial services but also is in intense competition with domestic and international banking organizations and other insurance and wealth management providers for the financial services business. The Corporation has taken initiatives to achieve its business objectives by acquiring banks and other financial service providers in strategic markets, through marketing, public relations and advertising, by establishing standards of service excellence for customers, and by using technology to ensure that the needs of customers are understood and satisfied.
Executive Overview
The Corporation’s consolidated net income, earnings per share and return on average assets and average equity were as follows:
 
Three Months Ended 
 March 31,
 
Change
(Dollars in thousands, except per share data)
2016
 
2015
 
Amount
 
Percent
Net income
$
7,289

 
$
6,116

 
$
1,173

 
19
%
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.31

 
$
0.06

 
19

Diluted
0.37

 
0.31

 
0.06

 
19

Return on average assets
1.03
%
 
0.92
%
 
11 BP

 
12

Return on average equity
8.05
%
 
6.85
%
 
120 BP

 
18


The Corporation reported net income of $7.3 million or $0.37 diluted earnings per share for the quarter ended March 31, 2016, a 19% increase from reported net income of $6.1 million or $0.31 diluted earnings per share for the quarter ended March 31, 2015. The financial results for the quarter ended March 31, 2016 included $220 thousand ($218 thousand, net of tax) of acquisition-related and integration costs associated with the pending merger with Fox Chase Bancorp, or $0.01 diluted earnings per share on a tax affected basis. The quarter ended March 31, 2015 included $1.8 million of integration and acquisition-related costs ($1.2 million, net of tax) associated with Valley Green Bank or $0.06 diluted earnings per share on a tax affected basis.

Net interest income on a tax-equivalent basis of $24.7 million for the three months ended March 31, 2016 was consistent with the same period in 2015. The net interest margin on a tax-equivalent basis for the first quarter of 2016 was 3.90%, compared to 4.12% for the first quarter of 2015. Increases in net interest income from the comparable period in the prior year, due to loan growth, were partially offset by reductions in loan rates and a decrease in the net accretion of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition (the favorable impact of the acquisition accounting adjustments was two basis points for the three months ended March 31, 2016 compared to ten basis points for the three months ended March 31, 2015). In addition, the subordinated debt issuance of $50 million on March 30, 2015 increased funding costs by 14 basis points in the three months ended March 31, 2016 from the same period in 2015.
The provision for loan and lease losses for the three months ended March 31, 2016 was $326 thousand, down from $1.1 million for the same period in 2015 as asset quality continues to improve; both qualitative factors and historical loss factors have improved.
Noninterest income for the three months ended March 31, 2016 was $14.0 million, an increase of $525 thousand or 4% from the same period in the prior year. The increase was mainly due to higher insurance commission and fee income and bank owned life insurance income.
Non-interest expense for the three months ended March 31, 2016 was $26.9 million, a decrease of $472 thousand, or 2% from the same period in the prior year. Non-interest expense for the three months ended March 31, 2016 included $220 thousand of acquisition-related and integration costs associated with the pending merger with Fox Chase Bancorp. Non-interest expense for the three months ended March 31, 2015 included $1.8 million of acquisition-related and integration costs related to the Valley Green Bank acquisition. Salaries and benefit expense increased $868 thousand for the three months ended March 31, 2016, primarily attributable to additional staff hired to support revenue generation across all business lines partially offset by higher deferred loan origination costs.

38

Table of Contents

Gross loans and leases held for investment were $2.2 billion at March 31, 2016, an increase of $4.2 million from December 31, 2015. Consistent with prior years, sluggish economic growth led to flat funded loan growth in the first quarter of 2016, however, loan activity did increase during the quarter leading to growth in the Corporation's loan pipeline. Deposits declined $60.0 million, or 3% from December 31, 2015, primarily due to a decrease in public funds.
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications were $13.5 million at March 31, 2016 compared to $14.2 million at December 31, 2015 and $18.6 million at March 31, 2015. Nonaccrual loans and leases as a percentage of total loans and leases held for investment were 0.62% at March 31, 2016 compared to 0.65% at December 31, 2015 and 0.91% at March 31, 2015. Net loan and lease charge-offs were $1.5 million for the three months ended March 31, 2016 compared to $802 thousand for the same period in the prior year.
The Corporation and the Bank continue to remain well-capitalized at March 31, 2016. Total risk-based capital at March 31, 2016 was 13.47% for the Corporation and 12.13% for the Bank, well in excess of the regulatory minimum for well-capitalized status of 10.00%.
Details of the changes in the various components of net income and the balance sheet are further discussed in the sections that follow.
Fox Chase Bank Acquisition
On December 8, 2015, the Corporation and Fox Chase Bancorp, Inc. (Fox Chase), parent company of Fox Chase Bank, entered into an Agreement and Plan of Merger pursuant to which Fox Chase will be merged with and into the Corporation in a cash and stock transaction with an aggregate value of approximately $239.3 million. Fox Chase had $1.1 billion in assets, $776.7 million in loans, and $815.7 million in deposits at March 31, 2016. Fox Chase's main office is in Hatboro, Pennsylvania and operates full-service banking offices in Pennsylvania and New Jersey. Upon completion, the Corporation's presence will expand in Bucks, Chester, Philadelphia and Montgomery counties in Pennsylvania and into Atlantic and Cape May counties in New Jersey, complementing and expanding the Corporation's existing network of financial centers.
Upon completion of the merger, Fox Chase shareholders will have the right to receive either $21.00 in cash, or a fixed exchange ratio of 0.9731 shares of the Corporation’s common stock, or a combination of the two, for outstanding shares of Fox Chase. The stock/cash election is subject to allocation provisions to assure that 40% of Fox Chase shares receive cash consideration and 60% of Fox Chase shares receive stock consideration. The Merger Agreement has been approved by the Boards of Directors of the Corporation, the Bank, Fox Chase and Fox Chase Bank 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 third quarter of 2016. The transaction is anticipated to be accretive to the Corporation's earnings per share in the first combined year of operations.
In January 2016, the Corporation approved a $30.0 million discretionary overnight federal funds line to Fox Chase Bank at a rate of one-month LIBOR plus 0.05%. At March 31, 2016, the Corporation had no outstanding federal funds sold to Fox Chase Bank. During the first quarter of 2016, average federal funds sold to Fox Chase Bank were $5.9 million.



39

Table of Contents

Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on loans and leases, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation’s revenue. Table 1 presents a summary of the Corporation’s average balances, the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the three months ended March 31, 2016 and 2015. The tax-equivalent net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of net interest free funding sources represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity. Table 2 analyzes the changes in the tax-equivalent net interest income for the periods broken down by their rate and volume components. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Investment Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.
Three months ended March 31, 2016 versus 2015
Net interest income on a tax-equivalent basis of $24.7 million for the three months ended March 31, 2016 was consistent with the same period in 2015. The tax-equivalent net interest margin for the three months ended March 31, 2016 was 3.90% compared to 4.12% for the three months ended March 31, 2015. Increases in net interest income from the comparable period in the prior year, due to loan growth, were partially offset by reductions in loan rates and a decrease in the net accretion of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition (the favorable impact of the acquisition accounting adjustments was two basis points for the three months ended March 31, 2016 compared to ten basis points for the three months ended March 31, 2015). In addition, the subordinated debt issuance for $50 million on March 30, 2015 increased funding costs by 14 basis points in the three months ended March 31, 2016 from the same period in 2015.


40

Table of Contents

Table 1—Average Balances and Interest Rates—Tax-Equivalent Basis
 
Three Months Ended March 31,
 
2016
 
2015
(Dollars in thousands)
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with other banks
$
19,619

 
$
28

 
0.57
%
 
$
9,135

 
$
5

 
0.22
%
U.S. government obligations
82,488

 
250

 
1.22

 
139,965

 
379

 
1.10

Obligations of states and political subdivisions
101,061

 
1,129

 
4.49

 
104,620

 
1,322

 
5.12

Other debt and equity securities
158,669

 
1,024

 
2.60

 
136,423

 
655

 
1.95

Federal funds sold
5,940

 
7

 
0.47

 
6,591

 
2

 
0.12

Total interest-earning deposits and investments
367,777

 
2,438

 
2.67

 
396,734

 
2,363

 
2.42

Commercial, financial and agricultural loans
411,999

 
4,014

 
3.92

 
422,817

 
4,249

 
4.08

Real estate—commercial and construction loans
887,118

 
9,919

 
4.50

 
821,902

 
9,631

 
4.75

Real estate—residential loans
541,976

 
5,976

 
4.43

 
473,142

 
5,384

 
4.61

Loans to individuals
29,478

 
399

 
5.44

 
30,622

 
407

 
5.39

Municipal loans and leases
231,498

 
2,625

 
4.56

 
203,999

 
2,437

 
4.84

Lease financings
75,022

 
1,542

 
8.27

 
71,353

 
1,583

 
9.00

Gross loans and leases
2,177,091

 
24,475

 
4.52

 
2,023,835

 
23,691

 
4.75

Total interest-earning assets
2,544,868

 
26,913

 
4.25

 
2,420,569

 
26,054

 
4.37

Cash and due from banks
31,665

 
 
 
 
 
30,203

 
 
 
 
Reserve for loan and lease losses
(17,771
)
 
 
 
 
 
(21,088
)
 
 
 
 
Premises and equipment, net
42,873

 
 
 
 
 
40,568

 
 
 
 
Other assets
232,922

 
 
 
 
 
221,261

 
 
 
 
Total assets
$
2,834,557

 
 
 
 
 
$
2,691,513

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking deposits
$
402,160

 
84

 
0.08

 
$
345,884

 
46

 
0.05

Money market savings
361,788

 
340

 
0.38

 
375,521

 
280

 
0.30

Regular savings
626,894

 
174

 
0.11

 
563,037

 
122

 
0.09

Time deposits
418,547

 
935

 
0.90

 
461,374

 
969

 
0.85

Total time and interest-bearing deposits
1,809,389

 
1,533

 
0.34

 
1,745,816

 
1,417

 
0.33

Short-term borrowings
27,388

 
3

 
0.04

 
46,837

 
10

 
0.09

Subordinated notes*
49,394

 
675

 
5.50

 
1,096

 
7

 
2.59

Total borrowings
76,782

 
678

 
3.55

 
47,933

 
17

 
0.14

Total interest-bearing liabilities
1,886,171

 
2,211

 
0.47

 
1,793,749

 
1,434

 
0.32

Noninterest-bearing deposits
542,427

 
 
 
 
 
492,014

 
 
 
 
Accrued expenses and other liabilities
41,867

 
 
 
 
 
43,625

 
 
 
 
Total liabilities
2,470,465

 
 
 
 
 
2,329,388

 
 
 
 
Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Common stock
110,271

 
 
 
 
 
110,271

 
 
 
 
Additional paid-in capital
120,824

 
 
 
 
 
120,159

 
 
 
 
Retained earnings and other equity
132,997

 
 
 
 
 
131,695

 
 
 
 
Total shareholders’ equity
364,092

 
 
 
 
 
362,125

 
 
 
 
Total liabilities and shareholders’ equity
$
2,834,557

 
 
 
 
 
$
2,691,513

 
 
 
 
Net interest income
 
 
$
24,702

 
 
 
 
 
$
24,620

 
 
Net interest spread
 
 
 
 
3.78

 
 
 
 
 
4.05

Effect of net interest-free funding sources
 
 
 
 
0.12

 
 
 
 
 
0.07

Net interest margin
 
 
 
 
3.90
%
 
 
 
 
 
4.12
%
Ratio of average interest-earning assets to average interest-bearing liabilities
134.92
%
 
 
 
 
 
134.94
%
 
 
 
 
* The interest rate on subordinated notes is calculated on a 30/360 day basis at a rate of 5.10%. The balance is net of debt issuance costs which are amortized to interest expense.
Notes:
For rate calculation purposes, average loan and lease categories include unearned discount.
Nonaccrual loans and leases have been included in the average loan and lease balances.
Loans held for sale have been included in the average loan balances.
Tax-equivalent amounts for the three months ended March 31, 2016 and 2015 have been calculated using the
Corporation’s federal applicable rate of 35%.

41

Table of Contents

Table 2—Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest income for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated proportionately.
 
Three Months Ended
 
March 31, 2016 Versus 2015
(Dollars in thousands)
Volume
Change
 
Rate
Change
 
Total
Interest income:
 
 
 
 
 
Interest-earning deposits with other banks
$
10

 
$
13

 
$
23

U.S. government obligations
(167
)
 
38

 
(129
)
Obligations of states and political subdivisions
(42
)
 
(151
)
 
(193
)
Other debt and equity securities
122

 
247

 
369

Federal funds sold

 
5

 
5

Interest on deposits, investments and federal funds sold
(77
)
 
152

 
75

Commercial, financial and agricultural loans
(93
)
 
(142
)
 
(235
)
Real estate—commercial and construction loans
785

 
(497
)
 
288

Real estate—residential loans
799

 
(207
)
 
592

Loans to individuals
(13
)
 
5

 
(8
)
Municipal loans and leases
330

 
(142
)
 
188

Lease financings
84

 
(125
)
 
(41
)
Interest and fees on loans and leases
1,892

 
(1,108
)
 
784

Total interest income
1,815

 
(956
)
 
859

Interest expense:
 
 
 
 
 
Interest-bearing checking deposits
8

 
30

 
38

Money market savings
(10
)
 
70

 
60

Regular savings
17

 
35

 
52

Time deposits
(91
)
 
57

 
(34
)
Interest on time and interest-bearing deposits
(76
)
 
192

 
116

Short-term borrowings
(3
)
 
(4
)
 
(7
)
Subordinated notes
651

 
17

 
668

Interest on borrowings
648

 
13

 
661

Total interest expense
572

 
205

 
777

Net interest income
$
1,243

 
$
(1,161
)
 
$
82


Interest Income
Three months ended March 31, 2016 versus 2015
Interest income on a tax-equivalent basis for the three months ended March 31, 2016 was $26.9 million, an increase of $859 thousand, or 3% from the same period in 2015. The increase was mainly due to loan growth in commercial real estate, residential real estate and municipal loans which was partially offset by decreases in loan interest rates due to re-pricing and the competitive environment. In addition, the net accretion of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition favorably impacted interest-earning assets by one basis point for the three months ended March 31, 2016 compared to seven basis points for the three months ended March 31, 2015.



42

Table of Contents

Interest Expense
Three months ended March 31, 2016 versus 2015
Interest expense for the three months ended March 31, 2016 was $2.2 million, an increase of $777 thousand from the same period in 2015. The increase in interest expense was primarily due to the subordinated debt issuance of $50 million on March 30, 2015 which increased funding costs by 14 basis for the three months ended March 31, 2016 from the same period in 2015. In addition, the net amortization of acquisition accounting fair value adjustments related to the Valley Green Bank acquisition favorably impacted interest-bearing liabilities by one basis point for the three months ended March 31, 2016 compared to four basis points for the three months ended March 31, 2015.
Provision for Loan and Lease Losses
The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Loans are also reviewed for impairment based on the fair value of the collateral for collateral dependent loans and for certain loans based on discounted cash flows using the loans’ initial effective interest rates. Any of the above criteria may cause the reserve to fluctuate. The provision for loan and lease losses for the three months ended March 31, 2016 was $326 thousand, down from $1.1 million for the same period in 2015 as asset quality continues to improve; both qualitative factors and historical loss factors have improved.
Noninterest Income
Noninterest income consists of trust department fee income, service charges on deposit accounts, commission income, net gains (losses) on sales of securities, net gains (losses) on mortgage banking activities, and other miscellaneous types of income. Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (Mastermoney fees), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Bank owned life insurance income represents changes in the cash surrender value of bank-owned life insurance policies, which is affected by the market value of the underlying assets, and also includes any excess proceeds from death benefit claims. The net gain on mortgage banking activities consists of gains (losses) on sales of mortgages held for sale and fair value adjustments on interest-rate locks and forward loan sale commitments. Other noninterest income includes other miscellaneous income.
The following table presents noninterest income for the periods indicated:
 
Three Months Ended 
 March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
Amount
 
Percent
Trust fee income
$
1,865

 
$
1,820

 
$
45

 
2
%
Service charges on deposit accounts
998

 
1,063

 
(65
)
 
(6
)
Investment advisory commission and fee income
2,669

 
2,763

 
(94
)
 
(3
)
Insurance commission and fee income
4,558

 
4,146

 
412

 
10

Other service fee income
1,833

 
1,598

 
235

 
15

Bank owned life insurance income
470

 
353

 
117

 
33

Net gain on sales of investment securities
44

 
91

 
(47
)
 
(52
)
Net gain on mortgage banking activities
1,218

 
1,258

 
(40
)
 
(3
)
Other income
301

 
339

 
(38
)
 
(11
)
Total noninterest income
$
13,956

 
$
13,431

 
$
525

 
4
%

Three months ended March 31, 2016 versus 2015
Noninterest income for the three months ended March 31, 2016 was $14.0 million, an increase of $525 thousand or 4% from the same period in the prior year. Insurance commission and fee income increased $412 thousand for the three months ended March 31, 2016, primarily due to an increase in contingent commission income and commercial premiums. Bank owned life insurance (BOLI) income increased $117 thousand or 33% mainly due to the purchase of policies totaling $8.0 million during the

43

Table of Contents

third quarter of 2015 and the transfer of policies totaling $9.8 million during 2015 to a higher yielding account structure. These increases were partially offset by a decrease of $94 thousand or 3% in investment advisory commission and fee income primarily resulting from the re-pricing of asset management fees in the Corporation's municipal pension business due to competitive pressures in the second quarter of 2015.
Noninterest Expense
The operating costs of the Corporation are known as noninterest expense, and include, but are not limited to, salaries and benefits, commissions, occupancy, equipment, professional services, intangible expenses, acquisition-related costs and integration costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses, and to provide technological innovation whenever practical, as operations change or expand.
The following table presents noninterest expense for the periods indicated:
 
Three Months Ended 
 March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
Amount
 
Percent
Salaries and benefits
$
14,182

 
$
13,314

 
$
868

 
7
 %
Commissions
1,895

 
1,814

 
81

 
4

Net occupancy
2,096

 
2,358

 
(262
)
 
(11
)
Equipment
1,888

 
1,689

 
199

 
12

Professional fees
1,020

 
807

 
213

 
26

Marketing and advertising
538

 
360

 
178

 
49

Deposit insurance premiums
447

 
412

 
35

 
8

Intangible expenses
770

 
786

 
(16
)
 
(2
)
Acquisition-related costs
214

 
466

 
(252
)
 
(54
)
Integration costs
6

 
1,374

 
(1,368
)
 
N/M

Other expense
3,883

 
4,031

 
(148
)
 
(4
)
Total noninterest expense
$
26,939

 
$
27,411

 
$
(472
)
 
(2
)%

Three months ended March 31, 2016 versus 2015
Noninterest expense for the three months ended March 31, 2016 was $26.9 million, a decrease of $472 thousand or 2% from the same period in the prior year. Non-interest expense for the three months ended March 31, 2016 included $220 thousand of acquisition-related and integration costs associated with the pending merger with Fox Chase Bancorp. Non-interest expense for the three months ended March 31 2015 included $1.8 million of acquisition-related and integration costs related to the Valley Green Bank acquisition. Salaries and benefit expense increased $868 thousand for the three months ended March 31, 2016, primarily attributable to additional staff hired to support revenue generation across all business lines. This increase was partially offset by higher deferred loan origination costs.
Tax Provision
The provision for income taxes for the three months ended March 31, 2016 and 2015 was $2.8 million and $2.1 million, at effective rates of 28% and 26%, respectively. The effective tax rates reflect the benefits of tax-exempt income from investments in municipal securities, loans and bank-owned life insurance.







44

Table of Contents

Financial Condition
Assets
The following table presents assets at the dates indicated:
 
At March 31, 
 2016
 
At December 31, 
 2015
 
Change
(Dollars in thousands)
Amount
 
Percent
Cash and interest-earning deposits
$
38,547

 
$
60,799

 
$
(22,252
)
 
(37
)%
Investment securities
329,357

 
370,760

 
(41,403
)
 
(11
)
Loans held for sale
3,818

 
4,680

 
(862
)
 
(18
)
Loans and leases held for investment
2,183,256

 
2,179,013

 
4,243

 

Reserve for loan and lease losses
(16,452
)
 
(17,628
)
 
1,176

 
7

Premises and equipment, net
43,385

 
42,156

 
1,229

 
3

Goodwill and other intangibles, net
124,753

 
125,277

 
(524
)
 

Bank owned life insurance
72,030

 
71,560

 
470

 
1

Accrued interest receivable and other assets
46,083

 
42,834

 
3,249

 
8

Total assets
$
2,824,777

 
$
2,879,451

 
$
(54,674
)
 
(2
)%

Cash and Interest-earning Deposits
Cash and interest-earning deposits at March 31, 2016 decreased $22.3 million from December 31, 2015 primarily due to a decrease in cash maintained at the Federal Reserve Bank. This was mainly due to the seasonal outflow of public funds deposits which were primarily invested in overnight fed funds partially offset by proceeds from the sale of available-for-sale investment securities.
Investment Securities
The investment portfolio is managed as part of the overall asset and liability management process to optimize income and market performance over an entire interest rate cycle while mitigating risk. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create more economically beneficial returns on these investments, and to collateralize public fund deposits. The securities portfolio consists primarily of U.S. Government agencies, municipals, residential mortgage-backed securities and corporate bonds.
Total investments at March 31, 2016 decreased $41.4 million from December 31, 2015. Sales of $53.2 million, maturities and pay-downs of $17.9 million and calls of $4.8 million were partially offset by purchases of $32.6 million and increases in the fair value of available-for-sale investment securities of $2.2 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 2016.
Loans and Leases
Gross loans and leases held for investment were $2.2 billion at March 31, 2016, an increase of $4.2 million from December 31, 2015. Consistent with prior years, sluggish economic growth led to flat funded loan growth in the first quarter of 2016, however, loan activity did increase during the quarter leading to growth in the Corporation's loan pipeline.
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.

45

Table of Contents

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 March 31, 2016, the recorded investment in loans held for investment and loans held for sale that were considered to be impaired was $46.5 million. The related reserve for loan losses was $341 thousand. At December 31, 2015, the recorded investment in loans that were considered to be impaired was $48.9 million. The related reserve for loan losses was $322 thousand. Impaired loans include nonaccrual loans and leases, accruing troubled debt restructured loans and lease modifications and other accruing impaired loans for which it is probable that not all principal and interest payments due will be collectible in accordance with the contractual terms. The amount of the specific reserve needed for these credits could change in future periods subject to changes in facts and judgments related to these credits. Specific reserves have been established based on current facts and management’s judgments about the ultimate outcome of these credits. Interest income recognized on impaired loans for the three months ended March 31, 2016 and 2015 was $402 thousand and $491 thousand, respectively. For the three months ended March 31, 2016 and 2015, additional interest income that would have been recognized under the original terms for impaired loans was $218 thousand and $279 thousand, respectively.
The impaired loan balances consisted mainly of commercial real estate and commercial business loans. Commercial real estate impaired loans were $29.4 million and $30.1 million at March 31, 2016 and December 31, 2015, respectively. Commercial business impaired loans were $13.0 million and $12.9 million at March 31, 2016 and December 31, 2015, respectively. Other real estate owned was $3.1 million at March 31, 2016, compared to $1.3 million at December 31, 2015. During the first quarter of 2016, three commercial real estate properties with a total fair value of $1.6 million and land with a fair value of $203 thousand were transferred to other real estate owned.


46

Table of Contents

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

The following table details information pertaining to the Corporation’s non-performing assets at the dates indicated:
(Dollars in thousands)
At March 31, 2016
 
At December 31, 2015
 
At March 31, 2015
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*:
 
 
 
 
 
Commercial, financial and agricultural
$
6,080

 
$
6,915

 
$
5,809

Real estate—commercial
3,981

 
4,314

 
4,805

Real estate—construction

 

 
5,660

Real estate—residential
3,000

 
2,514

 
1,928

Lease financings
421

 
440

 
402

Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*
13,482

 
14,183

 
18,604

Accruing troubled debt restructured loans and lease modifications not included in the above
4,279

 
5,245

 
5,341

Accruing loans and leases 90 days or more past due:
 
 
 
 
 
Real estate—residential
478

 

 
739

Loans to individuals
205

 
173

 
247

Lease financings
10

 
206

 
77

Total accruing loans and leases, 90 days or more past due
693

 
379

 
1,063

Total non-performing loans and leases
18,454

 
19,807

 
25,008

Other real estate owned
3,073

 
1,276

 
955

Total nonperforming assets
$
21,527

 
$
21,083

 
$
25,963

Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment
0.62
%
 
0.65
%
 
0.91
%
Nonperforming loans and leases / loans and leases held for investment
0.85

 
0.91

 
1.22

Nonperforming assets / total assets
0.76

 
0.73

 
0.94

Allowance for loan and lease losses / loans and leases held for investment
0.75

 
0.81

 
1.02

Allowance for loan and lease losses / loans and leases held for investment (excluding acquired loans at period-end)
0.86

 
0.94

 
1.26

Allowance for loan and lease losses / nonaccrual loans and leases held for investment
122.03

 
124.29

 
112.52

Allowance for loan and lease losses / nonperforming loans and leases held for investment
89.15

 
89.00

 
83.71

Allowance for loan and lease losses
$
16,452

 
$
17,628

 
$
20,934

Acquired credit impaired loans
$
1,267

 
$
1,253

 
$
1,631

* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table
$
1,459

 
$
93

 
$
3,489


47

Table of Contents

The following table provides additional information on the Corporation’s nonaccrual loans held for investment:
(Dollars in thousands)
At March 31, 2016
 
At December 31, 2015
 
At March 31, 2015
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications
$
13,482

 
$
14,183

 
$
18,604

Nonaccrual loans and leases with partial charge-offs
4,229

 
6,451

 
6,018

Life-to-date partial charge-offs on nonaccrual loans and leases
2,207

 
3,853

 
2,490

Charge-off rate of nonaccrual loans and leases with partial charge-offs
34.3
%
 
37.4
%
 
29.3
%
Specific reserves on impaired loans
$
341

 
$
322

 
$
1,004


Reserve for Loan and Lease Losses

Management believes the reserve for loan and lease losses is maintained at a level that is appropriate at March 31, 2016 to absorb probable losses in the loan and lease portfolio. Management’s methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan and lease loss experience, current economic conditions and trends, and the volume, growth, and composition of the portfolio.

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

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

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

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

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


48

Table of Contents

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

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

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

Goodwill and Other Intangible Assets

Goodwill and other intangible assets have been recorded on the books of the Corporation in connection with acquisitions. The Corporation has core deposit and customer-related intangibles and mortgage servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life using the present value of projected cash flows. The amortization of intangible assets was $834 thousand and $948 thousand for the three months ended March 31, 2016 and 2015, respectively. The Corporation also has goodwill with a net carrying value of $112.7 million at March 31, 2016 and December 31, 2015, which is deemed to be an indefinite intangible asset and is not amortized.

The Corporation completes a goodwill impairment analysis at least on an annual basis, or more often, if events and circumstances indicate that there may be impairment. The Corporation also completes an impairment test for other identifiable intangible assets on an annual basis or more often if events and circumstances indicate there may be impairment. There was no impairment of goodwill or identifiable intangibles during the three months ended March 31, 2016 and 2015. Since the last annual impairment analysis during 2015, there have been no circumstances to indicate impairment. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Other Assets
At March 31, 2016 and December 31, 2015, the Bank held $6.6 million in Federal Reserve Bank stock as required by the Federal Reserve Bank. The Bank is a member of the FHLB, and as such, is required to hold FHLB stock as a condition of membership as determined by the FHLB. The Bank is required to hold additional stock in the FHLB in relation to the level of outstanding borrowings. The Bank held FHLB stock of $2.1 million and $2.2 million at March 31, 2016 and December 31, 2015, respectively. Additionally, the FHLB might require its members to increase their capital stock investments. Changes in the credit ratings of the U.S. government and federal agencies, including the FHLB, could increase the borrowing costs of the FHLB and possibly have a negative impact on the FHLB operations and long-term performance. It is possible this could have an adverse effect on the value of the Corporation’s investment in FHLB stock. The Corporation determined there was no other-than-temporary impairment of the investment in FHLB stock. Therefore, at March 31, 2016, the FHLB stock is recorded at cost.
Liabilities
The following table presents liabilities at the dates indicated:
(Dollars in thousands)
At March 31, 2016
 
At December 31, 2015
 
Change
Amount
 
Percent
Deposits
$
2,334,361

 
$
2,394,360

 
$
(59,999
)
 
(3
)%
Short-term borrowings
25,851

 
24,211

 
1,640

 
7

Long-term borrowings
49,414

 
49,377

 
37

 

Accrued interest payable and other liabilities
48,148

 
49,929

 
(1,781
)
 
(4
)
Total liabilities
$
2,457,774

 
$
2,517,877

 
$
(60,103
)
 
(2
)%
Deposits
Total deposits declined $60.0 million or 3% from December 31, 2015, primarily due to a decrease in public funds.

49

Table of Contents

Borrowings
Short-term borrowings at March 31, 2016, consisted of customer repurchase agreements on an overnight basis totaling $25.9 million. Long-term borrowings at March 31, 2016 consisted of $50.0 million in aggregate principal amount subordinated notes issued by the Corporation in a private placement transaction to institutional accredited investors with net proceeds of $49.3 million.
Shareholders’ Equity
The following table presents total shareholders’ equity at the dates indicated:
(Dollars in thousands)
At March 31, 2016
 
At December 31, 2015
 
Change
Amount
 
Percent
Common stock
$
110,271

 
$
110,271

 
$

 
%
Additional paid-in capital
120,906

 
121,280

 
(374
)
 

Retained earnings
196,827

 
193,446

 
3,381

 
2

Accumulated other comprehensive loss
(15,481
)
 
(16,708
)
 
1,227

 
7

Treasury stock
(45,520
)
 
(46,715
)
 
1,195

 
3

Total shareholders’ equity
$
367,003

 
$
361,574

 
$
5,429

 
2
%

The increase in shareholder's equity at March 31, 2016 of $5.4 million from December 31, 2015 was primarily related to a $3.4 million increase to retained earnings. Retained earnings at March 31, 2016 were impacted by the three months of net income of $7.3 million partially offset by cash dividends declared of $3.9 million. Accumulated other comprehensive loss decreased by $1.2 million mainly attributable to increases in the fair value of available-for-sale investment securities. Treasury stock decreased by $1.2 million primarily due to 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), or leverage ratio.

In July 2013, the federal bank regulatory agencies adopted final rules revising the agencies’ capital adequacy guidelines and prompt corrective action rules, designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The new minimum capital requirements were effective on January 1, 2015. Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer requirements phase in over a four-year period beginning January 1, 2016.
The Corporation adopted the new Basel III regulatory capital rules during the first quarter of 2015 under the transition rules, primarily relating to regulatory deductions and adjustments impacting common equity tier 1 capital and tier 1 capital, to be phased in over a three-year period beginning January 1, 2015. Under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. During 2016, the Corporation and the Bank must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than .625% of total risk-weighted assets in order to avoid limitations on capital distributions. Total risk-based capital at March 31, 2016 was 13.47% for the Corporation and 12.13% for the Bank, well in excess of the regulatory minimum for well-capitalized status of 10%. The regulatory capital ratios for the Corporation and the Bank at March 31, 2016 were well in excess of the regulatory minimum requirements including the capital conservation buffer requirements.

50

Table of Contents

Table 4—Regulatory Capital
The Corporation's and Bank's actual and required capital ratios as of March 31, 2016 and December 31, 2015 under BASEL III regulatory capital rules were as follows.
 
Actual
 
For Capital Adequacy
Purposes
 
To Be Well-Capitalized
Under Prompt
Corrective Action
Provisions
(Dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount  
 
Ratio  
At March 31, 2016
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
$
336,896

 
13.47
%
 
$
200,145

 
8.00
%
 
$
250,181

 
10.00
%
Bank
300,650

 
12.13

 
198,319

 
8.00

 
247,899

 
10.00

Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
270,381

 
10.81

 
150,109

 
6.00

 
200,145

 
8.00

Bank
283,549

 
11.44

 
148,739

 
6.00

 
198,319

 
8.00

Tier 1 Common Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
270,381

 
10.81

 
112,582

 
4.50

 
162,618

 
6.50

Bank
283,549

 
11.44

 
111,555

 
4.50

 
161,134

 
6.50

Tier 1 Capital (to Average Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
270,381

 
9.93

 
108,898

 
4.00

 
136,123

 
5.00

Bank
283,549

 
10.49

 
108,134

 
4.00

 
135,168

 
5.00

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

 
13.35
%
 
$
200,613

 
8.00
%
 
$
250,766

 
10.00
%
Bank
300,527

 
12.09

 
198,816

 
8.00

 
248,521

 
10.00

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

 
10.65

 
150,460

 
6.00

 
200,613

 
8.00

Bank
282,245

 
11.36

 
149,112

 
6.00

 
198,816

 
8.00

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

 
10.65

 
112,845

 
4.50

 
162,998

 
6.50

Bank
282,245

 
11.36

 
111,834

 
4.50

 
161,538

 
6.50

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

 
9.69

 
110,227

 
4.00

 
137,783

 
5.00

Bank
282,245

 
10.31

 
109,480

 
4.00

 
136,850

 
5.00

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

51

Table of Contents

Asset/Liability Management
The primary functions of Asset/Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers and corporate needs. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates.
The Corporation uses both interest-sensitivity gap analysis and simulation modeling to quantify exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year and two-year horizon. The simulation uses existing portfolio rate and re-pricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayment speeds on loans, and the discretionary pricing of non-maturity assets and liabilities. The Corporation is in a liability sensitive position from both a short-term maturity perspective and a short-term re-pricing perspective, as interest rates remain at historically low levels. Despite being liability sensitive, the Corporation projects increased net interest income in rising rate scenarios as the magnitude of the asset pricing change exceeds the liability pricing change.
Liquidity
The Corporation, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans and deposit withdrawals. The Corporation manages liquidity risk by measuring and monitoring liquidity sources and estimated funding needs. The Corporation has a contingency funding plan in place to address liquidity needs in the event of an institution-specific or a systemic financial crisis.
Sources of Funds
Core deposits and customer repurchase agreements have historically been the most significant funding sources for the Corporation. These deposits and repurchase agreements are primarily generated from a base of consumer, business and public customers primarily located in Bucks, Montgomery and Philadelphia counties, Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, credit unions, savings institutions, mutual funds, security dealers and others.
The Corporation supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the Bank’s investment portfolio and bear interest at current money market mutual fund rates. This funding source is subject to changes in the asset allocations of the trust accounts.

The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $821.3 million. At March 31, 2016 and December 31, 2015, there were no overnight borrowings with the FHLB. At March 31, 2016 and December 31, 2015, the Bank had outstanding short-term letters of credit with the FHLB totaling $153.4 million and $170.2 million, respectively, which were utilized to collateralize public funds deposits. The maximum borrowing capacity with the FHLB changes as a function of qualifying collateral assets as well as the FHLB’s internal credit rating of the Bank, and the amount of funds received may be reduced by additional required purchases of FHLB stock.
The Corporation has a $10.0 million line of credit with a correspondent bank. At March 31, 2016, the Corporation had no outstanding borrowings under this line.
The Corporation, through the Bank, maintains federal fund lines with several correspondent banks totaling $122.0 million at March 31, 2016 and December 31, 2015. At March 31, 2016 and December 31, 2015, the Corporation had no outstanding federal funds purchased with these correspondent banks. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.
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 March 31, 2016 and December 31, 2015, the Corporation had no outstanding borrowings under this line.


52

Table of Contents

Cash Requirements
The Corporation has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The most significant contractual obligation, in both the under and over one year time period, is for the Bank to repay certificates of deposit. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its financial center network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market.
Commitments to extend credit are the Bank’s most significant commitment in both the under and over one year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.
Recent Accounting 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 Corporation's Annual Report on Form 10-K for the period ended December 31, 2015.

Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended March 31, 2016 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 material proceedings pending other than the ordinary routine litigation incident to the business of the Corporation. In addition, there are no material proceedings pending or known to be threatened or contemplated against the Corporation or the Bank by government authorities.

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

53

Table of Contents

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information on repurchases by the Corporation of its common stock under the Corporation's Board approved program.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
January 1 – 31, 2016

 
$

 

 
1,080,246

February 1 – 29, 2016

 

 

 
1,080,246

March 1 – 31, 2016

 

 

 
1,080,246

Total

 
$

 

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

Item 3.
Defaults Upon Senior Securities
None.

Item 4.
Mine Safety Disclosures
Not Applicable.

Item 5.
Other Information
None.

54

Table of Contents

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

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


55

Table of Contents

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: May 10, 2016
/s/ Jeffrey M. Schweitzer
 
Jeffrey M. Schweitzer
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date: May 10, 2016
/s/ Michael S. Keim
 
Michael S. Keim
Senior Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


56