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UNIVEST FINANCIAL Corp - Quarter Report: 2018 June (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 June 30, 2018.
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
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
 
29,403,651
(Title of Class)
 
(Number of shares outstanding at July 31, 2018)
 
 


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
CONDENSED CONSOLIDATED BALANCE SHEETS

 
(UNAUDITED)
 
 
(Dollars in thousands, except share data)
At June 30, 2018
 
At December 31, 2017
ASSETS
 
Cash and due from banks
$
54,409

 
$
46,721

Interest-earning deposits with other banks
18,534

 
28,688

Investment securities held-to-maturity (fair value $94,642 and $55,320 at June 30, 2018 and December 31, 2017, respectively)
96,457

 
55,564

Investment securities available-for-sale
347,804

 
391,457

Investments in equity securities
2,672

 
7,061

       Federal Home Loan Bank, Federal Reserve Bank and other stock, at cost
32,768

 
27,204

Loans held for sale
1,778

 
1,642

Loans and leases held for investment
3,818,398

 
3,620,067

Less: Reserve for loan and lease losses
(25,652
)
 
(21,555
)
Net loans and leases held for investment
3,792,746

 
3,598,512

Premises and equipment, net
60,529

 
61,797

Goodwill
172,559

 
172,559

Other intangibles, net of accumulated amortization and fair value adjustments of $23,613 and $21,825 at June 30, 2018 and December 31, 2017, respectively
12,809

 
13,909

Bank owned life insurance
109,527

 
108,246

Accrued interest receivable and other assets
46,589

 
41,502

Total assets
$
4,749,181

 
$
4,554,862

LIABILITIES
 
 
 
Noninterest-bearing deposits
$
1,055,479

 
$
1,040,026

Interest-bearing deposits:
 
 
 
Demand deposits
1,163,451

 
1,109,438

Savings deposits
807,461

 
830,706

Time deposits
594,395

 
574,749

Total deposits
3,620,786

 
3,554,919

Short-term borrowings
231,853

 
105,431

Long-term debt
155,556

 
155,828

Subordinated notes
94,453

 
94,331

Accrued interest payable and other liabilities
41,239

 
40,979

Total liabilities
4,143,887

 
3,951,488

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $5 par value: 48,000,000 shares authorized at June 30, 2018 and December 31, 2017; 31,556,799 shares issued at June 30, 2018 and December 31, 2017; 29,406,450 and 29,334,859 shares outstanding at June 30, 2018 and December 31, 2017, respectively
157,784

 
157,784

Additional paid-in capital
291,238

 
290,133

Retained earnings
226,574

 
216,761

Accumulated other comprehensive loss, net of tax benefit
(28,007
)
 
(17,771
)
Treasury stock, at cost; 2,150,349 and 2,221,940 shares at June 30, 2018 and December 31, 2017, respectively
(42,295
)
 
(43,533
)
Total shareholders’ equity
605,294

 
603,374

Total liabilities and shareholders’ equity
$
4,749,181

 
$
4,554,862

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

2

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Interest income
 
Interest and fees on loans and leases:
 
 
 
 
 
 
 
Taxable
$
40,637

 
$
35,102

 
$
78,587

 
$
68,802

Exempt from federal income taxes
2,421

 
2,084

 
4,768

 
4,119

Total interest and fees on loans and leases
43,058

 
37,186

 
83,355

 
72,921

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
2,268

 
1,833

 
4,457

 
3,521

Exempt from federal income taxes
477

 
576

 
945

 
1,175

Interest on deposits with other banks
148

 
38

 
224

 
55

Interest and dividends on other earning assets
509

 
397

 
1,013

 
754

Total interest income
46,460

 
40,030

 
89,994

 
78,426

Interest expense
 
 
 
 
 
 
 
Interest on deposits
4,542

 
2,461

 
8,233

 
4,652

Interest on short-term borrowings
958

 
325

 
1,603

 
587

Interest on long-term debt and subordinated notes
1,970

 
1,944

 
3,896

 
3,604

Total interest expense
7,470

 
4,730

 
13,732

 
8,843

Net interest income
38,990

 
35,300

 
76,262

 
69,583

Provision for loan and lease losses
15,409

 
2,766

 
17,462

 
5,211

Net interest income after provision for loan and lease losses
23,581

 
32,534

 
58,800

 
64,372

Noninterest income
 
 
 
 
 
 
 
Trust fee income
2,044

 
2,016

 
4,040

 
3,923

Service charges on deposit accounts
1,335

 
1,313

 
2,662

 
2,556

Investment advisory commission and fee income
3,778

 
3,333

 
7,461

 
6,514

Insurance commission and fee income
3,712

 
3,628

 
8,600

 
8,038

Other service fee income
2,431

 
2,245

 
4,600

 
4,232

Bank owned life insurance income
1,210

 
1,622

 
1,879

 
2,405

Net gain on sales of investment securities

 
21

 
10

 
36

Net gain on mortgage banking activities
942

 
1,537

 
1,658

 
2,650

Other (loss) income
(138
)
 
294

 
(14
)
 
625

Total noninterest income
15,314

 
16,009

 
30,896

 
30,979

Noninterest expense
 
 
 
 
 
 
 
Salaries, benefits and commissions
20,065

 
18,730

 
40,712

 
37,467

Net occupancy
2,533

 
2,684

 
5,290

 
5,349

Equipment
1,067

 
1,031

 
2,090

 
2,024

Data processing
2,091

 
2,081

 
4,323

 
4,139

Professional fees
1,331

 
1,248

 
2,686

 
2,487

Marketing and advertising
526

 
475

 
907

 
854

Deposit insurance premiums
452

 
451

 
843

 
853

Intangible expenses
594

 
446

 
1,206

 
1,205

Restructuring charges

 

 
571

 

Other expense
5,688

 
5,402

 
10,844

 
10,200

Total noninterest expense
34,347

 
32,548

 
69,472

 
64,578

Income before income taxes
4,548

 
15,995

 
20,224

 
30,773

Income tax expense
191

 
4,217

 
3,017

 
8,139

Net income
$
4,357

 
$
11,778

 
$
17,207

 
$
22,634

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.44

 
$
0.59

 
$
0.85

Diluted
0.15

 
0.44

 
0.58

 
0.85

Dividends declared
0.20

 
0.20

 
0.40

 
0.40

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

3

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended June 30,
(Dollars in thousands)
2018
 
2017
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
Income
$
4,548

 
$
191

 
$
4,357

 
$
15,995

 
$
4,217

 
$
11,778

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding (losses) gains arising during the period
(1,911
)
 
(401
)
 
(1,510
)
 
2,632

 
921

 
1,711

Less: reclassification adjustment for net gains on sales realized in net income (1)

 

 

 
(21
)
 
(8
)
 
(13
)
Total net unrealized (losses) gains on available-for-sale investment securities
(1,911
)
 
(401
)
 
(1,510
)
 
2,611

 
913

 
1,698

Net unrealized gains (losses) on interest rate swaps used in cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
154

 
32

 
122

 
(92
)
 
(31
)
 
(61
)
Less: reclassification adjustment for net losses realized in net income (2)
6

 
1

 
5

 
36

 
12

 
24

Total net unrealized gains (losses) on interest rate swaps used in cash flow hedges
160

 
33

 
127

 
(56
)
 
(19
)
 
(37
)
Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in net periodic pension costs (3)
282

 
58

 
224

 
299

 
104

 
195

Accretion of prior service cost included in net periodic pension costs (3)
(71
)
 
(14
)
 
(57
)
 
(71
)
 
(25
)
 
(46
)
Total defined benefit pension plans
211

 
44

 
167

 
228

 
79

 
149

Other comprehensive (loss) income
(1,540
)
 
(324
)
 
(1,216
)
 
2,783

 
973

 
1,810

Total comprehensive income (loss)
$
3,008

 
$
(133
)
 
$
3,141

 
$
18,778

 
$
5,190

 
$
13,588

(1) Included in net gain on sales of investment securities on the consolidated statements of income (before tax amount).
(2) Included in interest expense on deposits on the consolidated statements of income (before tax amount).
(3) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (before tax amount). See Note 8, "Retirement Plans and Other Postretirement Benefits" for additional details.

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


4

Table of Contents

 
Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
 
Before
Tax
Amount
 
Tax
Expense
(Benefit)
 
Net of
Tax
Amount
Income
$
20,224

 
$
3,017

 
$
17,207

 
$
30,773

 
$
8,139

 
$
22,634

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale investment securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding (losses) gains arising during the period
(8,249
)
 
(1,732
)
 
(6,517
)
 
3,052

 
1,068

 
1,984

Less: reclassification adjustment for net gains on sales realized in net income (1)
(10
)
 
(2
)
 
(8
)
 
(36
)
 
(13
)
 
(23
)
Total net unrealized (losses) gains on available-for-sale investment securities
(8,259
)
 
(1,734
)
 
(6,525
)
 
3,016

 
1,055

 
1,961

Net unrealized gains on interest rate swaps used in cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
366

 
77

 
289

 
(85
)
 
(29
)
 
(56
)
Less: reclassification adjustment for net losses realized in net income (2)
26

 
5

 
21

 
107

 
37

 
70

Total net unrealized gains on interest rate swaps used in cash flow hedges
392

 
82

 
310

 
22

 
8

 
14

Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in net periodic pension costs (3)
563

 
117

 
446

 
598

 
209

 
389

Accretion of prior service cost included in net periodic pension costs (3)
(142
)
 
(29
)
 
(113
)
 
(141
)
 
(49
)
 
(92
)
Total defined benefit pension plans
421

 
88

 
333

 
457

 
160

 
297

Other comprehensive (loss) income
(7,446
)
 
(1,564
)
 
(5,882
)
 
3,495

 
1,223

 
2,272

Total comprehensive income
$
12,778

 
$
1,453

 
$
11,325

 
$
34,268

 
$
9,362

 
$
24,906

(1) Included in net gain on sales of investment securities on the consolidated statements of income (before tax amount).
(2) Included in interest expense on deposits on the consolidated statements of income (before tax amount).
(3) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (before tax amount). See Note 8, "Retirement Plans and Other Postretirement Benefits" for additional details.

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


5

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED 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
 
Treasury
Stock
 
Total
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
29,334,859

 
$
157,784

 
$
290,133

 
$
216,761

 
$
(17,771
)
 
$
(43,533
)
 
$
603,374

Adjustment to initially apply ASU No. 2016-01 for equity securities measured at fair value (1)

 

 

 
433

 
(433
)
 

 

Adjustment to initially apply ASU No. 2018-02 for reclassification of stranded net tax charges (1)

 

 

 
3,921

 
(3,921
)
 

 

Net income

 

 

 
17,207

 

 

 
17,207

Other comprehensive loss, net of income tax benefit

 

 

 

 
(5,882
)
 

 
(5,882
)
Cash dividends declared ($0.40 per share)

 

 

 
(11,749
)
 

 

 
(11,749
)
Stock issued under dividend reinvestment and employee stock purchase plans
41,939

 

 
98

 
1

 

 
1,074

 
1,173

Exercise of stock options
36,990

 

 
(14
)
 

 

 
725

 
711

Stock-based compensation

 

 
1,719

 

 

 

 
1,719

Purchases of treasury stock
(44,353
)
 

 

 

 

 
(1,259
)
 
(1,259
)
Restricted stock awards granted, net of cancellations
37,015

 

 
(698
)
 

 

 
698

 

Balance at June 30, 2018
29,406,450

 
$
157,784

 
$
291,238

 
$
226,574

 
$
(28,007
)
 
$
(42,295
)
 
$
605,294

(Dollars in thousands, except share and per share data)
Common
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Total
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
26,589,353

 
$
144,559

 
$
230,494

 
$
194,516

 
$
(19,454
)
 
$
(44,906
)
 
$
505,209

Net income

 

 

 
22,634

 

 

 
22,634

Other comprehensive income, net of income tax

 

 

 

 
2,272

 

 
2,272

Cash dividends declared ($0.40 per share)

 

 

 
(10,652
)
 

 

 
(10,652
)
Stock issued under dividend reinvestment and employee stock purchase plans
43,415

 

 
72

 

 

 
1,157

 
1,229

Exercise of stock options
73,870

 

 
(105
)
 

 

 
1,433

 
1,328

Stock-based compensation

 

 
1,708

 

 

 

 
1,708

Purchases of treasury stock
(83,970
)
 

 

 

 

 
(2,422
)
 
(2,422
)
Restricted stock awards granted, net of cancellations
45,323

 

 
(880
)
 

 

 
880

 

Balance at June 30, 2017
26,667,991

 
$
144,559

 
$
231,289

 
$
206,498

 
$
(17,182
)
 
$
(43,858
)
 
$
521,306

(1) See Note 1, "Summary of Significant Accounting Policies - Accounting Pronouncements Adopted in 2018" for additional information.
Note: See accompanying notes to the unaudited condensed consolidated financial statements.

6

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
17,207

 
$
22,634

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
17,462

 
5,211

Depreciation of premises and equipment
2,795

 
2,730

Net amortization of investment securities premiums and discounts
779

 
959

Net gain on sales of investment securities
(10
)
 
(36
)
Net gain on mortgage banking activities
(1,658
)
 
(2,650
)
Bank owned life insurance income
(1,879
)
 
(2,405
)
Net accretion of acquisition accounting fair value adjustments
(495
)
 
(1,508
)
Stock-based compensation
1,719

 
1,708

Intangible expenses
1,206

 
1,205

Other adjustments to reconcile net income to cash (used in) provided by operating activities
190

 
(293
)
Originations of loans held for sale
(61,508
)
 
(64,035
)
Proceeds from the sale of loans held for sale
63,076

 
69,847

Contributions to pension and other postretirement benefit plans
(133
)
 
(138
)
(Increase) decrease in accrued interest receivable and other assets
(3,089
)
 
1,340

Increase (decrease) in accrued interest payable and other liabilities
814

 
(1,965
)
Net cash provided by operating activities
36,476

 
32,604

Cash flows from investing activities:
 
 
 
Net capital expenditures
(1,347
)
 
(4,622
)
Proceeds from maturities, calls and principal repayments of securities held-to-maturity
4,253

 
10,595

Proceeds from maturities, calls and principal repayments of securities available-for-sale
34,824

 
29,603

Proceeds from sales of securities available-for-sale
1,010

 
3,032

Purchases of investment securities held-to-maturity
(45,349
)
 
(29,498
)
Purchases of investment securities available-for-sale
(1,485
)
 
(8,476
)
Proceeds from sales of money market mutual funds
10,706

 
12,020

Purchases of money market mutual funds
(6,284
)
 
(16,768
)
Net increase in other investments
(5,564
)
 
(6,637
)
Net increase in loans and leases
(211,534
)
 
(225,682
)
Net decrease (increase) in interest-earning deposits
10,154

 
(3,168
)
Proceeds from sales of other real estate owned
21

 
3,612

Purchases of bank owned life insurance
(776
)
 

Proceeds from bank owned life insurance
1,374

 
2,916

Net cash used in investing activities
(209,997
)
 
(233,073
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
65,963

 
90,796

Net increase in short-term borrowings
126,422

 
35,555

Proceeds from issuance of long-term debt

 
95,000

Repayment of long-term debt

 
(5,000
)
Payment of contingent consideration on acquisitions
(67
)
 
(5,317
)
Purchases of treasury stock
(1,259
)
 
(2,422
)
Stock issued under dividend reinvestment and employee stock purchase plans
1,173

 
1,229

Proceeds from exercise of stock options
711

 
1,328

Cash dividends paid
(11,734
)
 
(10,636
)
Net cash provided by financing activities
181,209

 
200,533

Net increase in cash and due from banks
7,688

 
64

Cash and due from banks at beginning of year
46,721

 
48,757

Cash and due from banks at end of period
$
54,409

 
$
48,821

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
13,190

 
$
9,685

Cash paid for income taxes, net of refunds
1,060

 
5,942

Non cash transactions:
 
 
 
Transfer of loans to other real estate owned
$
402

 
$
653

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

7

Table of Contents

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES
Notes to the Condensed 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 direct subsidiary is Univest Bank and Trust Co. (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations for interim financial information. The accompanying unaudited consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary for a fair presentation of the financial statements for the interim periods presented. Certain prior period amounts have been reclassified to conform to the current-year presentation. Operating results for the six-month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018 or for any other period. 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, 2017, which was filed with the SEC on March 1, 2018.
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, reserve for loan and lease losses and purchase accounting.
Accounting Pronouncements Adopted in 2018

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02, "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU clarifies the accounting treatment of the reclassification of certain income tax effects within accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act. The Corporation elected to early adopt this guidance effective January 1, 2018 for all stranded tax effects resulting from tax reform and reclassified stranded tax effects, totaling $3.9 million, from accumulated other comprehensive income to retained earnings. The Corporation's policy for releasing income tax effects from accumulated other comprehensive income is to release such effects on an individual basis as each item is liquidated, sold or extinguished. See Note 10, "Accumulated Other Comprehensive (Loss) Income" for additional detail.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments in this ASU require that an employer that sponsors defined benefit pension plans and other postretirement plans present the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The Corporation adopted this guidance effective January 1, 2018 with retrospective application for prior period presentation. Effective January 1, 2018, components of net benefit income other than the service cost component are presented in the Corporation's statement of income in other noninterest expense rather than in salaries, benefits and commission expense. Prior period components of net benefit income other than the service cost component were reclassed to other noninterest expense in the Corporation's statement of income.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income. At December 31, 2017, the Corporation had financial services equity securities with a carrying value of $1.1 million which included an unrealized net gain of $666 thousand. At December 31, 2017, $433 thousand

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was recorded in accumulated other comprehensive income which represented the unrealized net gain, net of income taxes, based on the Corporation’s statutory tax rate as of December 31, 2017. In addition, at December 31, 2017, the Corporation had money market mutual funds with a fair value and amortized cost of $6.0 million which were reclassified to equity securities under this guidance. The Corporation adopted this guidance effective January 1, 2018 with a cumulative-effect adjustment to the balance sheet as of January 1, 2018. The balance in accumulated other comprehensive income of $433 thousand was reclassified to retained earnings effective January 1, 2018. The carrying value of the equity securities, at January 1, 2018, did not change; however, any future increases or decreases in fair value is recorded as an increase or decrease to the carrying value and recognized in other noninterest income. During the six months ended June 30, 2018, the Corporation recognized a $33 thousand net gain on equity securities in other noninterest income.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)” and subsequent related updates. The Corporation adopted the guidance effective January 1, 2018 using the modified retrospective method though no adjustments were made to retained earnings as a result of the adoption. The Corporation provided expanded disclosures related to recognition of revenue from contracts with customers. See Note 14, "Revenue from Contracts with Customers."
Recent Accounting Pronouncements Yet to Be Adopted
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in this update expand and refine hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additional hedging strategies permitted for hedge accounting include: hedges of contractually-specified price components of commodity purchases or sales, hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets or liabilities, hedges of the portion of a closed portfolio of prepayable assets not expected to prepay, and partial-term hedges of fixed-rate assets or liabilities. The ASU amends the presentation and disclosure requirements and changes how entities assess effectiveness. The ASU eliminates the requirement to separately measure and report hedge ineffectiveness and requires all items that affect earnings be presented in the same income statement line as the hedged items. After initial qualification, the new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test, such as a regression analysis, if the entity can reasonably support an expectation of high effectiveness throughout the term of the hedge. An initial quantitative test to establish that the hedge relationship is highly effective is still required. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities, or January 1, 2019 for the Corporation. Early adoption is permitted, including an interim period. The amended presentation and disclosure guidance is required only prospectively. The Corporation does not expect the adoption of this ASU will have a material impact on the Corporation's financial statements.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, or January 1, 2019 for the Corporation. Early adoption is permitted, including an interim period. This ASU is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Corporation does not expect the adoption of this ASU will have a material impact on the Corporation's financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This ASU eliminates Step 2 of the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, or for the Corporation's goodwill impairment test in 2020. Early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Corporation does not expect the adoption of this ASU will have a material impact on the Corporation's financial statements.

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In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires businesses and other organizations to measure the current expected credit losses (CECL) on financial assets, such as loans, net investments in leases, certain debt securities, bond insurance and other receivables. The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU. A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years for public business entities that are SEC filers, or January 1, 2020 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, it is anticipated that the reserve for loan and lease losses will increase upon adoption of CECL and that the increased reserve level will decrease shareholders' equity and regulatory capital and ratios.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" to revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. Disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The ASU is effective for the first interim period within annual periods beginning after December 15, 2018, or January 1, 2019, with early adoption permitted. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, the adoption of this ASU will impact the balance sheet by the recording of lease liabilities and right-of-use assets associated with operating leases; any initial or continued impact of the recording of assets will have a negative impact on all Corporation and Bank capital ratios under current regulatory guidance and possibly equity ratios.

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Note 2. 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 table also notes anti-dilutive options which are those options with weighted average exercise prices in excess of the weighted average market value for the periods presented.
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars and shares in thousands, except per share data)
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income
$
4,357

 
$
11,778

 
$
17,207

 
$
22,634

Net income allocated to unvested restricted stock
(33
)
 
(122
)
 
(132
)
 
(234
)
Net income allocated to common shares
$
4,324

 
$
11,656

 
$
17,075

 
$
22,400

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
29,404

 
26,661

 
29,380

 
26,647

Average unvested restricted stock
(228
)
 
(281
)
 
(221
)
 
(284
)
Denominator for basic earnings per share—weighted-average shares outstanding
29,176

 
26,380

 
29,159

 
26,363

Effect of dilutive securities—employee stock options
95

 
97

 
95

 
100

Denominator for diluted earnings per share—adjusted weighted-average shares outstanding
29,271

 
26,477

 
29,254

 
26,463

Basic earnings per share
$
0.15

 
$
0.44

 
$
0.59

 
$
0.85

Diluted earnings per share
$
0.15

 
$
0.44

 
$
0.58

 
$
0.85

Average anti-dilutive options excluded from computation of diluted earnings per share
369

 
188

 
294

 
157



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Note 3. Investment Securities
The following table shows the amortized cost and the estimated fair value of the held-to-maturity securities and available-for-sale securities at June 30, 2018 and December 31, 2017, by contractual maturity within each type:
 
At June 30, 2018
 
At December 31, 2017
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 1 year to 5 years
$
6,996

 
$

 
$
(183
)
 
$
6,813

 
$
6,995

 
$

 
$
(77
)
 
$
6,918

 
6,996

 

 
(183
)
 
6,813

 
6,995

 

 
(77
)
 
6,918

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 5 years to 10 years
12,838

 

 
(206
)
 
12,632

 
8,944

 

 
(51
)
 
8,893

Over 10 years
76,623

 

 
(1,426
)
 
75,197

 
39,625

 
44

 
(160
)
 
39,509

 
89,461

 

 
(1,632
)
 
87,829

 
48,569

 
44

 
(211
)
 
48,402

Total
$
96,457

 
$

 
$
(1,815
)
 
$
94,642

 
$
55,564

 
$
44

 
$
(288
)
 
$
55,320

Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
$
5,020

 
$

 
$
(31
)
 
$
4,989

 
$
1,499

 
$

 
$
(3
)
 
$
1,496

After 1 year to 5 years
10,482

 

 
(132
)
 
10,350

 
15,590

 

 
(125
)
 
15,465


15,502

 

 
(163
)
 
15,339

 
17,089

 

 
(128
)
 
16,961

State and political subdivisions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
5,562

 

 
(5
)
 
5,557

 
2,721

 
1

 
(6
)
 
2,716

After 1 year to 5 years
14,538

 
29

 
(43
)
 
14,524

 
16,787

 
33

 
(44
)
 
16,776

After 5 years to 10 years
46,800

 
436

 
(438
)
 
46,798

 
54,846

 
897

 
(73
)
 
55,670

Over 10 years
3,120

 

 
(89
)
 
3,031

 
3,120

 
15

 

 
3,135


70,020

 
465

 
(575
)
 
69,910

 
77,474

 
946

 
(123
)
 
78,297

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 1 year to 5 years
5,496

 

 
(93
)
 
5,403

 
3,913

 
12

 
(26
)
 
3,899

After 5 years to 10 years
56,238

 
8

 
(2,082
)
 
54,164

 
51,428

 
5

 
(852
)
 
50,581

Over 10 years
110,422

 
29

 
(4,409
)
 
106,042

 
133,237

 
87

 
(2,383
)
 
130,941


172,156

 
37

 
(6,584
)
 
165,609

 
188,578

 
104

 
(3,261
)
 
185,421

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
After 5 years to 10 years
1,883

 

 
(105
)
 
1,778

 
2,103

 

 
(82
)
 
2,021

Over 10 years
1,414

 

 
(21
)
 
1,393

 
1,567

 
14

 

 
1,581


3,297

 

 
(126
)
 
3,171

 
3,670

 
14

 
(82
)
 
3,602

Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Within 1 year
2,510

 

 
(18
)
 
2,492

 
10,006

 

 
(5
)
 
10,001

After 1 year to 5 years
23,835

 
17

 
(471
)
 
23,381

 
24,885

 
20

 
(147
)
 
24,758

After 5 years to 10 years
15,657

 
5

 
(532
)
 
15,130

 
16,669

 
71

 
(296
)
 
16,444

Over 10 years
60,000

 

 
(7,228
)
 
52,772

 
60,000

 

 
(4,027
)
 
55,973


102,002

 
22

 
(8,249
)
 
93,775

 
111,560

 
91

 
(4,475
)
 
107,176

Equity securities:*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No stated maturity
N/A

 
N/A

 
N/A

 
N/A

 
6,395

 
667

 
(1
)
 
7,061


N/A

 
N/A

 
N/A

 
N/A

 
6,395

 
667

 
(1
)
 
7,061

Total
$
362,977

 
$
524

 
$
(15,697
)
 
$
347,804

 
$
404,766

 
$
1,822

 
$
(8,070
)
 
$
398,518

* Equity securities at December 31, 2017 include $6.0 million of money market mutual funds and $1.1 million of financial services equity securities. In accordance with ASU 2016-01, beginning January 1, 2018, such amounts were reclassified from investment securities available-for-sale to investments in equity securities on the Corporation's Condensed Consolidated Balance Sheets.

Expected maturities may differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties and mortgage-backed securities typically prepay at a rate faster than contractually due.

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Securities with a carrying value of $355.0 million and $345.1 million at June 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and other contractual obligations. In addition, securities of $295 thousand and $1.8 million were pledged to secure credit derivatives and interest rate swaps at June 30, 2018 and December 31, 2017, respectively. See Note 11, "Derivative Instruments and Hedging Activities" for additional information.
The following table presents information related to sales of securities available-for-sale during the six months ended June 30, 2018 and 2017:
 
Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017
Securities available-for-sale:
 
 
 
Proceeds from sales
$
1,010

 
$
3,032

Gross realized gains on sales
10

 
36

Tax expense related to net realized gains on sales
2

 
13

    
At June 30, 2018 and December 31, 2017, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.
The following table shows the fair value of securities that were in an unrealized loss position at June 30, 2018 and December 31, 2017 by the length of time those securities were in a continuous loss position. For the investment securities in an unrealized loss position, the Corporation has concluded, based on its analysis, that the unrealized losses are primarily caused by the movement of interest rates and current market conditions. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. It is more likely than not that the Corporation will not be required to sell the investments before a recovery of carrying value.
 
Less than
Twelve Months
 
Twelve Months
or Longer
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
At June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
6,813

 
$
(183
)
 
$

 
$

 
$
6,813

 
$
(183
)
Residential mortgage-backed securities
87,829

 
(1,632
)
 

 

 
87,829

 
(1,632
)
Total
$
94,642

 
$
(1,815
)
 
$

 
$

 
$
94,642

 
$
(1,815
)
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
5,121

 
$
(58
)
 
$
10,218

 
$
(105
)
 
$
15,339

 
$
(163
)
State and political subdivisions
29,012

 
(521
)
 
7,449

 
(54
)
 
36,461

 
(575
)
Residential mortgage-backed securities
35,367

 
(931
)
 
128,118

 
(5,653
)
 
163,485

 
(6,584
)
Collateralized mortgage obligations
1,393

 
(21
)
 
1,778

 
(105
)
 
3,171

 
(126
)
Corporate bonds
22,589

 
(534
)
 
67,665

 
(7,715
)
 
90,254

 
(8,249
)
Total
$
93,482

 
$
(2,065
)
 
$
215,228

 
$
(13,632
)
 
$
308,710

 
$
(15,697
)
At December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Securities Held-to-Maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
6,919

 
$
(77
)
 
$

 
$

 
$
6,919

 
$
(77
)
Residential mortgage-backed securities
40,881

 
(211
)
 

 

 
40,881

 
(211
)
Total
$
47,800

 
$
(288
)
 
$

 
$

 
$
47,800

 
$
(288
)
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
5,213

 
$
(38
)
 
$
11,749

 
$
(90
)
 
$
16,962

 
$
(128
)
State and political subdivisions
18,457

 
(91
)
 
6,332

 
(32
)
 
24,789

 
(123
)
Residential mortgage-backed securities
32,217

 
(210
)
 
141,371

 
(3,051
)
 
173,588

 
(3,261
)
Collateralized mortgage obligations

 

 
2,021

 
(82
)
 
2,021

 
(82
)
Corporate bonds
18,464

 
(1,016
)
 
71,957

 
(3,459
)
 
90,421

 
(4,475
)
Equity securities

 
(1
)
 
4

 

 
4

 
(1
)
Total
$
74,351

 
$
(1,356
)
 
$
233,434

 
$
(6,714
)
 
$
307,785

 
$
(8,070
)


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At June 30, 2018, gross unrealized losses for securities in an unrealized loss position for twelve months or longer, totaled $13.6 millionThree federal agency bonds, twelve investment grade corporate bonds, 105 federal agency residential mortgage securities, nine investment grade municipal bonds and one collateralized mortgage obligation bond had respective unrealized loss positions of $105 thousand, $7.7 million, $5.7 million, $54 thousand and $105 thousand, respectively. The fair value of these 130 securities fluctuate with changes in market conditions which for these underlying securities is primarily due to changes in the interest rate environment. The Corporation does not intend to sell the securities in an unrealized loss position and is unlikely to be required to sell these securities before a recovery of fair value, which may be maturity. Upon review of the attributes of the individual securities, the Corporation concluded these securities were not other-than-temporarily impaired. The Corporation did not recognize any other-than-temporary impairment charges on debt securities for the six months ended June 30, 2018 and 2017.

In conjunction with the adoption of ASU 2016-01, the Corporation recognized a $33 thousand net gain on equity securities during the six months ended June 30, 2018 in other noninterest income and the net unrealized gain on equity securities held at June 30, 2018 was $33 thousand. See Note 1, "Summary of Significant Accounting Policies - Accounting Pronouncements Adopted in 2018" for additional information.
Note 4. Loans and Leases
Summary of Major Loan and Lease Categories
 
At June 30, 2018
(Dollars in thousands)
Originated
 
Acquired
 
Total
Commercial, financial and agricultural
$
880,961

 
$
45,199

 
$
926,160

Real estate-commercial
1,373,093

 
270,551

 
1,643,644

Real estate-construction
204,602

 
4,284

 
208,886

Real estate-residential secured for business purpose
267,014

 
71,698

 
338,712

Real estate-residential secured for personal purpose
296,734

 
54,689

 
351,423

Real estate-home equity secured for personal purpose
175,351

 
9,909

 
185,260

Loans to individuals
31,048

 
143

 
31,191

Lease financings
133,122

 

 
133,122

Total loans and leases held for investment, net of deferred income
$
3,361,925

 
$
456,473

 
$
3,818,398

Unearned lease income, included in the above table
$
(14,700
)
 
$

 
$
(14,700
)
Net deferred costs, included in the above table
4,060

 

 
4,060

Overdraft deposits included in the above table
98

 

 
98


 
At December 31, 2017
(Dollars in thousands)
Originated
 
Acquired
 
Total
Commercial, financial and agricultural
$
833,100

 
$
63,111

 
$
896,211

Real estate-commercial
1,235,681

 
306,460

 
1,542,141

Real estate-construction
171,244

 
4,592

 
175,836

Real estate-residential secured for business purpose
250,800

 
91,167

 
341,967

Real estate-residential secured for personal purpose
260,654

 
60,920

 
321,574

Real estate-home equity secured for personal purpose
171,884

 
12,386

 
184,270

Loans to individuals
28,156

 
144

 
28,300

Lease financings
129,768

 

 
129,768

Total loans and leases held for investment, net of deferred income
$
3,081,287

 
$
538,780

 
$
3,620,067

Unearned lease income, included in the above table
$
(14,243
)
 
$

 
$
(14,243
)
Net deferred costs, included in the above table
4,669

 

 
4,669

Overdraft deposits included in the above table
222

 

 
222

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


14

Table of Contents

The carrying amount of acquired loans at June 30, 2018 totaled $456.5 million, including $368.6 million of loans from the Fox Chase acquisition and $87.9 million from the Valley Green Bank acquisition. At June 30, 2018, loans acquired with deteriorated credit quality, or acquired credit impaired loans, totaled $998 thousand representing $332 thousand from the Fox Chase acquisition and $666 thousand from the Valley Green Bank acquisition. Acquired credit impaired loans are accounted for in accordance with Accounting Standards Codification (ASC) Topic 310-30.
The outstanding principal balance and carrying amount for acquired credit impaired loans at June 30, 2018 and December 31, 2017 were as follows:
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
Outstanding principal balance
$
1,378

 
$
2,325

Carrying amount
998

 
1,583

Allowance for loan losses

 

The following table presents the changes in accretable yield on acquired credit impaired loans:
 
Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017
Beginning of period
$
11

 
$
50

Reclassification from nonaccretable discount
375

 
279

Accretable discount amortized to interest income
(386
)
 
(297
)
Disposals

 
(4
)
End of period
$

 
$
28


15

Table of Contents

Age Analysis of Past Due Loans and Leases
The following presents, by class of loans and leases, an aging of past due loans and leases, loans and leases which are current and the recorded investment in loans and leases 90 days or more past due which are accruing interest at June 30, 2018 and December 31, 2017:
(Dollars in thousands)
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days
or more
Past Due
 
Total
Past Due
 
Current
 
Acquired Credit Impaired
 
Total Loans
and Leases
Held for
Investment
 
Recorded
Investment 90
Days or more
Past Due and
Accruing
Interest
At June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
1,777

 
$
141

 
$
2,240

 
$
4,158

 
$
921,735

 
$
267

 
$
926,160

 
$

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1,543

 
1,145

 
1,619

 
4,307

 
1,639,131

 
206

 
1,643,644

 

Construction
364

 

 

 
364

 
208,522

 

 
208,886

 

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
1,750

 
782

 
1,173

 
3,705

 
334,547

 
460

 
338,712

 

Residential secured for personal purpose
2,896

 
88

 
1,561

 
4,545

 
346,813

 
65

 
351,423

 

Home equity secured for personal purpose
672

 
698

 
1,205

 
2,575

 
182,685

 

 
185,260

 

Loans to individuals
137

 
49

 
101

 
287

 
30,904

 

 
31,191

 
101

Lease financings
1,383

 
646

 
1,575

 
3,604

 
129,518

 

 
133,122

 
49

Total
$
10,522

 
$
3,549

 
$
9,474

 
$
23,545

 
$
3,793,855

 
$
998

 
$
3,818,398

 
$
150

At December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
2,182

 
$
1,440

 
$
1,509

 
$
5,131

 
$
890,658

 
$
422

 
$
896,211

 
$

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
733

 
548

 
1,410

 
2,691

 
1,539,094

 
356

 
1,542,141

 

Construction
1,970

 

 
365

 
2,335

 
173,501

 

 
175,836

 

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
1,651

 
315

 
1,355

 
3,321

 
338,061

 
585

 
341,967

 
162

Residential secured for personal purpose
4,368

 
1,118

 
23

 
5,509

 
315,845

 
220

 
321,574

 

Home equity secured for personal purpose
1,414

 
333

 
464

 
2,211

 
182,059

 

 
184,270

 
148

Loans to individuals
221

 
139

 
195

 
555

 
27,745

 

 
28,300

 
195

Lease financings
1,143

 
392

 
1,855

 
3,390

 
126,378

 

 
129,768

 
256

Total
$
13,682

 
$
4,285

 
$
7,176

 
$
25,143

 
$
3,593,341

 
$
1,583

 
$
3,620,067

 
$
761



16

Table of Contents

Nonperforming Loans and Leases
The following presents, by class of loans and leases, nonperforming loans and leases at June 30, 2018 and December 31, 2017. Nonperforming loans exclude acquired credit impaired loans from Fox Chase and Valley Green.
 
At June 30, 2018
 
At December 31, 2017
(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 Nonperforming
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 Nonperforming
Loans and
Leases
Commercial, financial and agricultural
$
4,084

 
$
607

 
$

 
$
4,691

 
$
4,448

 
$
921

 
$

 
$
5,369

Real estate—commercial real estate and construction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
19,584

 

 

 
19,584

 
4,285

 
10,266

 

 
14,551

Construction
110

 

 

 
110

 
365

 

 

 
365

Real estate—residential and home equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential secured for business purpose
1,538

 
183

 

 
1,721

 
2,843

 
206

 
162

 
3,211

Residential secured for personal purpose
1,741

 

 

 
1,741

 
466

 
42

 

 
508

Home equity secured for personal purpose
1,565

 

 

 
1,565

 
511

 

 
148

 
659

Loans to individuals

 

 
101

 
101

 

 

 
195

 
195

Lease financings
1,526

 

 
49

 
1,575

 
1,599

 

 
256

 
1,855

Total
$
30,148

 
$
790

 
$
150

 
$
31,088

 
$
14,517

 
$
11,435

 
$
761

 
$
26,713

 * Includes nonaccrual troubled debt restructured loans and lease modifications of $1.8 million and $2.5 million at June 30, 2018 and December 31, 2017, respectively.

Accruing troubled debt restructuring loans of $11.4 million at December 31, 2017 includes balances of $10.3 million related to one borrower which were classified as troubled debt restructurings as the related loans were granted amortization period extensions. These troubled debt restructured loans were returned to performing status during the first quarter of 2018 as the borrower was in compliance with the modified terms of the restructurings for the required time period. At June 30, 2018, commercial real estate nonaccrual loans and leases includes a $12.0 million loan that was placed on nonaccrual status during the first quarter of 2018. A specific reserve of $650 thousand was recorded for this loan as of June 30, 2018.

Credit Quality Indicators
The following tables present by class, the recorded investment in loans and leases held for investment by credit quality indicator at June 30, 2018 and December 31, 2017.
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 a relationship balance of less than $1 million are reviewed on a performance basis, with the primary monitored metrics being delinquency (60 days or more past due) and revolving stagnancy. Loans with relationships greater than $1 million are reviewed at least annually.  Loan relationships exceeding $15 million or classified as special mention or substandard are reviewed at least quarterly, or more frequently based on management’s discretion. 

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

17

Table of Contents

Commercial Credit Exposure Credit Risk by Internally Assigned Grades
The following table presents classifications for originated loans:
(Dollars in thousands)
Commercial,
Financial and
Agricultural
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Real Estate—
Residential Secured
for Business Purpose
 
Total
At June 30, 2018
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
2,846

 
$

 
$
24,304

 
$

 
$
27,150

3. Strong
13,926

 
612

 

 

 
14,538

4. Satisfactory
21,425

 
25,860

 

 
268

 
47,553

5. Acceptable
606,047

 
1,045,630

 
74,818

 
225,971

 
1,952,466

6. Pre-watch
204,593

 
249,505

 
103,970

 
36,000

 
594,068

7. Special Mention
23,203

 
41,286

 
1,400

 
984

 
66,873

8. Substandard
8,921

 
10,200

 
110

 
3,791

 
23,022

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
880,961

 
$
1,373,093

 
$
204,602

 
$
267,014

 
$
2,725,670

At December 31, 2017
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
2,521

 
$

 
$
20,420

 
$

 
$
22,941

3. Strong
9,206

 
1,821

 

 

 
11,027

4. Satisfactory
30,283

 
26,950

 

 
274

 
57,507

5. Acceptable
593,205

 
960,258

 
76,899

 
215,750

 
1,846,112

6. Pre-watch
179,990

 
209,844

 
72,168

 
29,738

 
491,740

7. Special Mention
4,027

 
12,974

 
1,392

 
296

 
18,689

8. Substandard
13,868

 
23,834

 
365

 
4,742

 
42,809

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
833,100

 
$
1,235,681

 
$
171,244

 
$
250,800

 
$
2,490,825


18

Table of Contents

The following table presents classifications for acquired loans:
(Dollars in thousands)
Commercial,
Financial and
Agricultural
 
Real Estate—
Commercial
 
Real Estate—
Construction
 
Real Estate—
Residential Secured
for Business Purpose
 
Total
At June 30, 2018
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$

 
$

 
$

 
$

 
$

3. Strong

 

 

 

 

4. Satisfactory

 

 

 

 

5. Acceptable
42,051

 
164,915

 

 
61,566

 
268,532

6. Pre-watch
1,229

 
86,041

 
4,284

 
8,784

 
100,338

7. Special Mention
865

 
4,462

 

 

 
5,327

8. Substandard
1,054

 
15,133

 

 
1,348

 
17,535

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
45,199

 
$
270,551

 
$
4,284

 
$
71,698

 
$
391,732

December 31, 2017
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
1. Cash secured/ 2. Fully secured
$
1,120

 
$

 
$

 
$

 
$
1,120

3. Strong

 

 

 

 

4. Satisfactory
125

 
482

 

 

 
607

5. Acceptable
49,949

 
183,490

 

 
73,402

 
306,841

6. Pre-watch
6,183

 
98,977

 
4,592

 
15,861

 
125,613

7. Special Mention
1,007

 
17,028

 

 

 
18,035

8. Substandard
4,727

 
6,483

 

 
1,904

 
13,114

9. Doubtful

 

 

 

 

10.Loss

 

 

 

 

Total
$
63,111

 
$
306,460

 
$
4,592

 
$
91,167

 
$
465,330

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 and leases 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.
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
Financings
 
Total
At June 30, 2018
 
 
 
 
 
 
 
 
 
Performing
$
296,127

 
$
174,866

 
$
30,947

 
$
131,547

 
$
633,487

Nonperforming
607

 
485

 
101

 
1,575

 
2,768

Total
$
296,734

 
$
175,351

 
$
31,048

 
$
133,122

 
$
636,255

At December 31, 2017
 
 
 
 
 
 
 
 
 
Performing
$
260,589

 
$
171,527

 
$
27,961

 
$
127,913

 
$
587,990

Nonperforming
65

 
357

 
195

 
1,855

 
2,472

Total
$
260,654

 
$
171,884

 
$
28,156

 
$
129,768

 
$
590,462



19

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
Financings
 
Total
At June 30, 2018
 
 
 
 
 
 
 
 
 
Performing
$
53,555

 
$
8,829

 
$
143

 
$

 
$
62,527

Nonperforming
1,134

 
1,080

 

 

 
2,214

Total
$
54,689

 
$
9,909

 
$
143

 
$

 
$
64,741

At December 31, 2017
 
 
 
 
 
 
 
 
 
Performing
$
60,477

 
$
12,084

 
$
144

 
$

 
$
72,705

Nonperforming
443

 
302

 

 

 
745

Total
$
60,920

 
$
12,386

 
$
144

 
$

 
$
73,450


20

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 for the three and six months ended June 30, 2018 and 2017:
(Dollars in thousands)
Commercial,
Financial
and
Agricultural
 
Real Estate—
Commercial
and
Construction
 
Real Estate—
Residential
Secured for
Business
Purpose
 
Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose
 
Loans to
Individuals
 
Lease
Financings
 
Unallocated
 
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,942

 
$
11,178

 
$
1,871

 
$
1,908

 
$
372

 
$
1,079

 
$
60

 
$
23,410

Charge-offs
(13,048
)
 

 

 

 
(79
)
 
(169
)
 
N/A

 
(13,296
)
Recoveries
23

 

 
7

 
8

 
16

 
75

 
N/A

 
129

Provision (recovery of provision)
13,341

 
1,149

 
126

 
578

 
138

 
86

 
(9
)
 
15,409

Ending balance
$
7,258

 
$
12,327

 
$
2,004

 
$
2,494

 
$
447

 
$
1,071

 
$
51

 
$
25,652

Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
7,890

 
$
7,624

 
$
1,345

 
$
1,001

 
$
335

 
$
1,329

 
$
4

 
$
19,528

Charge-offs
(108
)
 
(30
)
 
(1,139
)
 

 
(114
)
 
(327
)
 
N/A

 
(1,718
)
Recoveries
210

 

 
8

 
4

 
46

 
66

 
N/A

 
334

Provision (recovery of provision)
321

 
874

 
915

 
(30
)
 
62

 
592

 
33

 
2,767

Recovery of provision for acquired credit impaired loans

 

 

 
(1
)
 

 

 

 
(1
)
Ending balance
$
8,313

 
$
8,468

 
$
1,129

 
$
974

 
$
329

 
$
1,660

 
$
37

 
$
20,910

Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
6,742

 
$
9,839

 
$
1,661

 
$
1,754

 
$
373

 
$
1,132

 
$
54

 
$
21,555

Charge-offs
(13,649
)
 
(40
)
 

 

 
(171
)
 
(305
)
 
N/A

 
(14,165
)
Recoveries
249

 
73

 
258

 
65

 
46

 
109

 
N/A

 
800

Provision (recovery of provision)
13,916

 
2,455

 
85

 
674

 
199

 
135

 
(3
)
 
17,461

Provision for acquired credit impaired loans

 

 

 
1

 

 

 

 
1

Ending balance
$
7,258

 
$
12,327

 
$
2,004

 
$
2,494

 
$
447

 
$
1,071

 
$
51

 
$
25,652

Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
7,037

 
$
7,505

 
$
774

 
$
993

 
$
364

 
$
788

 
$
38

 
$
17,499

Charge-offs
(286
)
 
(30
)
 
(1,181
)
 
(94
)
 
(240
)
 
(584
)
 
N/A

 
(2,415
)
Recoveries
397

 
3

 
18

 
21

 
81

 
95

 
N/A

 
615

Provision (recovery of provision)
1,165

 
990

 
1,518

 
52

 
124

 
1,361

 
(1
)
 
5,209

Provision for acquired credit impaired loans

 

 

 
2

 

 

 

 
2

Ending balance
$
8,313

 
$
8,468

 
$
1,129

 
$
974

 
$
329

 
$
1,660

 
$
37

 
$
20,910

N/A – Not applicable
Charge-offs for the three and six months ended June 30, 2018 include a charge-off of $12.7 million for a commercial loan relationship related to alleged fraudulent activities believed to be perpetrated by one or more employees of the borrower. The Bank owns a participating interest which originally totaled $13.0 million in an approximately $80.0 million commercial lending facility. The charge-off represents the entire principal amount owed to the Bank.

21

Table of Contents

The following presents, by portfolio segment, a summary of 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 at June 30, 2018 and 2017:
(Dollars in thousands)
Commercial,
Financial
and
Agricultural
 
Real Estate—
Commercial
and
Construction
 
Real Estate—
Residential
Secured for
Business
Purpose
 
Real Estate—
Residential
and Home
Equity
Secured for
Personal
Purpose
 
Loans to
Individuals
 
Lease
Financings
 
Unallocated
 
Total
At June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
646

 
$
866

 
$
12

 
$

 
$

 
$

 
N/A

 
$
1,524

Ending balance: collectively evaluated for impairment
6,612

 
11,420

 
1,951

 
2,494

 
447

 
1,071

 
51

 
24,046

Ending balance: acquired credit impaired loans evaluated for impairment

 
41

 
41

 

 

 

 

 
82

Total ending balance
$
7,258

 
$
12,327

 
$
2,004

 
$
2,494

 
$
447

 
$
1,071

 
$
51

 
$
25,652

Loans and leases held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
6,238

 
$
21,004

 
$
2,132

 
$
3,306

 
$

 
$
1,250

 
 
 
$
33,930

Ending balance: collectively evaluated for impairment
874,723

 
1,554,844

 
264,882

 
468,779

 
31,048

 
131,872

 
 
 
3,326,148

Loans measured at fair value

 
1,847

 

 

 

 

 
 
 
1,847

Acquired non-credit impaired loans
44,932

 
274,629

 
71,238

 
64,533

 
143

 

 
 
 
455,475

Acquired credit impaired loans
267

 
206

 
460

 
65

 

 

 
 
 
998

Total ending balance
$
926,160

 
$
1,852,530

 
$
338,712

 
$
536,683

 
$
31,191

 
$
133,122

 
 
 
$
3,818,398

At June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
10

 
$
59

 
$
37

 
$
25

 
$

 
$
886

 
N/A

 
$
1,017

Ending balance: collectively evaluated for impairment
8,303

 
8,409

 
1,092

 
949

 
329

 
774

 
37

 
19,893

Total ending balance
$
8,313

 
$
8,468

 
$
1,129

 
$
974

 
$
329

 
$
1,660

 
$
37

 
$
20,910

Loans and leases held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
$
9,794

 
$
20,735

 
$
5,196

 
$
967

 
$

 
$
5,021

 
 
 
$
41,713

Ending balance: collectively evaluated for impairment
809,693

 
1,268,132

 
189,173

 
394,683

 
27,442

 
125,133

 
 
 
2,814,256

Loans measured at fair value

 
2,058

 

 

 

 

 
 
 
2,058

Acquired non-credit impaired loans
85,178

 
378,413

 
99,151

 
82,770

 
146

 

 
 
 
645,658

Acquired credit impaired loans
502

 
5,185

 
583

 
215

 

 

 
 
 
6,485

Total ending balance
$
905,167

 
$
1,674,523

 
$
294,103

 
$
478,635

 
$
27,588

 
$
130,154

 
 
 
$
3,510,170

N/A – Not applicable

22

Table of Contents

The Corporation records a provision for loan loss for the acquired non-impaired loans only when additional deterioration of the portfolio is identified over the projections utilized in the initial fair value analysis. After the acquisition measurement period, the present value of any decreases in expected cash flows of acquired credit impaired loans will generally result in an impairment charge recorded as a provision for loan loss, resulting in an increase to the allowance.
Impaired Loans (excludes Lease Financings)
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 a reserve for credit losses and the amounts for which there is a reserve for credit losses at June 30, 2018 and December 31, 2017. The impaired loans exclude acquired credit impaired loans.
 
At June 30, 2018
 
At December 31, 2017
(Dollars in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Reserve
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Reserve
Impaired loans with no related reserve recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
4,122

 
$
4,848

 
 
 
$
7,019

 
$
8,301

 
 
Real estate—commercial real estate
7,489

 
8,336

 
 
 
15,621

 
16,507

 
 
Real estate—construction
110

 
113

 
 
 
365

 
365

 
 
Real estate—residential secured for business purpose
1,926

 
2,062

 
 
 
3,430

 
4,620

 
 
Real estate—residential secured for personal purpose
1,741

 
1,784

 
 
 
508

 
566

 
 
Real estate—home equity secured for personal purpose
1,565

 
1,595

 
 
 
511

 
523

 
 
Total impaired loans with no related reserve recorded
$
16,953

 
$
18,738

 
 
 
$
27,454

 
$
30,882

 
 
Impaired loans with a reserve recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
2,116

 
$
2,180

 
$
646

 
$
60

 
$
60

 
$
31

Real estate—commercial real estate
13,405

 
13,645

 
866

 
933

 
933

 
99

Real estate—residential secured for business purpose
206

 
272

 
12

 
35

 
37

 
1

Total impaired loans with a reserve recorded
$
15,727

 
$
16,097

 
$
1,524

 
$
1,028

 
$
1,030

 
$
131

Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural
$
6,238

 
$
7,028

 
$
646

 
$
7,079

 
$
8,361

 
$
31

Real estate—commercial real estate
20,894

 
21,981

 
866

 
16,554

 
17,440

 
99

Real estate—construction
110

 
113

 

 
365

 
365

 

Real estate—residential secured for business purpose
2,132

 
2,334

 
12

 
3,465

 
4,657

 
1

Real estate—residential secured for personal purpose
1,741

 
1,784

 

 
508

 
566

 

Real estate—home equity secured for personal purpose
1,565

 
1,595

 

 
511

 
523

 

Total impaired loans
$
32,680

 
$
34,835

 
$
1,524

 
$
28,482

 
$
31,912

 
$
131

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 original 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 $3.3 million and $4.1 million at June 30, 2018 and December 31, 2017, respectively. Specific reserves on other accruing impaired loans were $25 thousand and $99 thousand at June 30, 2018 and December 31, 2017, respectively.

23

Table of Contents

The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Therefore, interest income on accruing impaired loans is recognized using the accrual method. 
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
(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
$
6,394

 
$
32

 
$
134

 
$
11,470

 
$
64

 
$
86

Real estate—commercial real estate
22,914

 
18

 
265

 
20,777

 
184

 
81

Real estate—construction
56

 

 
3

 
274

 

 
10

Real estate—residential secured for business purpose
1,966

 
5

 
23

 
4,184

 
21

 
61

Real estate—residential secured for personal purpose
889

 
2

 
33

 
699

 
1

 
15

Real estate—home equity secured for personal purpose
1,033

 

 
31

 
354

 

 
5

Total
$
33,252

 
$
57

 
$
489

 
$
37,758

 
$
270

 
$
258

*
Includes interest income recognized on a cash basis for nonaccrual loans of $2 thousand and $3 thousand for the three months ended June 30, 2018 and 2017, respectively, and interest income recognized on the accrual method for accruing impaired loans of $55 thousand and $267 thousand for the three months ended June 30, 2018 and 2017, respectively.
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
(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
$
7,090

 
$
72

 
$
211

 
$
11,506

 
$
110

 
$
171

Real estate—commercial real estate
20,105

 
190

 
552

 
22,464

 
417

 
154

Real estate—construction
137

 

 
5

 
156

 

 
10

Real estate—residential secured for business purpose
2,107

 
10

 
47

 
4,302

 
37

 
105

Real estate—residential secured for personal purpose
720

 
3

 
44

 
636

 
1

 
23

Real estate—home equity secured for personal purpose
819

 

 
39

 
431

 

 
10

Total
$
30,978

 
$
275

 
$
898

 
$
39,495

 
$
565

 
$
473

*
Includes interest income recognized on a cash basis for nonaccrual loans of $8 thousand and $4 thousand for the six months ended June 30, 2018 and 2017, respectively, and interest income recognized on the accrual method for accruing impaired loans of $267 thousand and $561 thousand for the six months ended June 30, 2018 and 2017, respectively.

Impaired Leases
The Corporation had impaired leases of $1.3 million at June 30, 2018 and December 31, 2017 with no related reserves. See discussion in Reserve for Loan and Lease Losses and Recorded Investment in Loans and Leases.

24

Table of Contents

Troubled Debt Restructured Loans
The following presents, by class of loans, information regarding accruing and nonaccrual loans that were restructured:
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
(Dollars in thousands)
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Reserve
 
Number
of
Loans
 
Pre-
Restructuring
Outstanding
Recorded
Investment
 
Post-
Restructuring
Outstanding
Recorded
Investment
 
Related
Reserve
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate

 
$

 
$

 
$

 
3

 
$
9,206

 
$
9,206

 
$

Total

 
$

 
$

 
$

 
3

 
$
9,206

 
$
9,206

 
$

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate

 
$

 
$

 
$

 
1

 
$
328

 
$
328

 
$

Real estate—residential secured for personal purpose
1

 
66

 
66

 

 

 

 

 

Total
1

 
$
66

 
$
66

 
$

 
1

 
$
328

 
$
328

 
$

 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
(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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate

 
$

 
$

 
$

 
3

 
$
9,206

 
$
9,206

 
$

Total

 
$

 
$

 
$

 
3

 
$
9,206

 
$
9,206

 
$

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate

 
$

 
$

 
$

 
1

 
$
328

 
$
328

 
$

Real estate—residential secured for personal purpose
1

 
66

 
66

 

 

 

 

 

Total
1

 
$
66

 
$
66

 
$

 
1

 
$
328

 
$
328

 
$


The Corporation grants concessions to existing borrowers primarily related to extensions of interest-only payment periods and an occasional payment modification. These modifications typically are for 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.


25

Table of Contents

The following presents, by class of loans, information regarding the types of concessions granted on accruing and nonaccrual loans that were restructured during the three and six months ended June 30, 2018 and 2017.
 
Maturity Date
Extension
 
Amortization Period Extension
 
Total Concessions
Granted
(Dollars in thousands)
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
 
No. of
Loans
 
Amount
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Total

 
$

 

 
$

 

 
$

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential secured for personal purpose

 
$

 
1

 
$
66

 
1

 
$
66

Total

 
$

 
1

 
$
66

 
1

 
$
66

Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate

 
$

 
3

 
$
9,206

 
3

 
$
9,206

Total

 
$

 
3

 
$
9,206

 
3

 
$
9,206

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate
1

 
$
328

 

 
$

 
1

 
$
328

Total
1

 
$
328

 

 
$

 
1

 
$
328

Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Total

 
$

 

 
$

 

 
$

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—residential secured for personal purpose

 
$

 
1

 
$
66

 
1

 
$
66

Total

 
$

 
1

 
$
66

 
1

 
$
66

Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate

 
$

 
3

 
$
9,206

 
3

 
$
9,206

Total

 
$

 
3

 
$
9,206

 
3

 
$
9,206

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
Real estate—commercial real estate
1

 
$
328

 

 
$

 
1

 
$
328

Total
1

 
$
328

 

 
$

 
1

 
$
328

The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there were payment defaults within twelve months of the restructuring date:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
(Dollars in thousands)
Number
of Loans
 
Recorded
Investment
 
Number
of Loans
 
Recorded
Investment
 
Number
of Loans
 
Recorded
Investment
 
Number
of Loans
 
Recorded
Investment
Accruing Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial and agricultural

 
$

 

 
$

 
1

 
$
953

 

 
$

Total

 
$

 

 
$

 
1

 
$
953

 

 
$

Nonaccrual Troubled Debt Restructured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total

 
$

 

 
$

 

 
$

 

 
$


26

Table of Contents

The following presents, by class of loans, information regarding consumer mortgages collateralized by residential real estate property that are in the process of foreclosure at June 30, 2018 and December 31, 2017:
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
Real estate-residential secured for personal purpose
$

 
$
31

Real estate-home equity secured for personal purpose
812

 

Total
$
812

 
$
31

    
The following presents foreclosed residential real estate property included in other real estate owned at June 30, 2018 and December 31, 2017.
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
Foreclosed residential real estate
$
440

 
$
80

Note 5. Goodwill and Other Intangible Assets
The Corporation has core deposit and customer-related intangibles and servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life using the present value of projected cash flows. The Corporation also has goodwill which is deemed to be an indefinite intangible asset and is not amortized.
Changes in the carrying amount of the Corporation's goodwill by business segment for the six months ended June 30, 2018 were as follows:
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Consolidated
Balance at December 31, 2017
$
138,476

 
$
15,434

 
$
18,649

 
$
172,559

Addition to goodwill from acquisitions

 

 

 

Balance at June 30, 2018
$
138,476

 
$
15,434

 
$
18,649

 
$
172,559

The following table reflects the components of intangible assets at the dates indicated:
 
At June 30, 2018
 
At December 31, 2017
(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:
 
 
 
 
 
 
 
 
 
 
 
Covenants not to compete
$
710

 
$
710

 
$

 
$
710

 
$
580

 
$
130

Core deposit intangibles
6,788

 
2,663

 
4,125

 
6,788

 
2,135

 
4,653

Customer related intangibles
12,381

 
10,347

 
2,034

 
12,381

 
9,828

 
2,553

Servicing rights
16,543

 
9,893

 
6,650

 
15,855

 
9,282

 
6,573

Total amortized intangible assets
$
36,422

 
$
23,613

 
$
12,809

 
$
35,734

 
$
21,825

 
$
13,909

The estimated aggregate amortization expense for core deposit and customer related intangibles for the remainder of 2018 and the succeeding fiscal years is as follows:
Year
(Dollars in thousands)
Amount
Remainder of 2018
 
$
937

2019
 
1,565

2020
 
1,200

2021
 
923

2022
 
666

Thereafter
 
868


27

Table of Contents

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 $11.6 million at June 30, 2018 and $10.0 million at December 31, 2017. The fair value of mortgage servicing rights was determined using a discount rate of 10.0% at June 30, 2018 and December 31, 2017. The Corporation also records servicing rights on small business administration (SBA) loans. The value of these servicing rights was $22 thousand and $21 thousand at June 30, 2018 and December 31, 2017, respectively.
Changes in the servicing rights balance are summarized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Beginning of period
$
6,605

 
$
6,502

 
$
6,573

 
$
6,485

Servicing rights capitalized
350

 
387

 
687

 
730

Amortization of servicing rights
(305
)
 
(341
)
 
(610
)
 
(667
)
End of period
$
6,650

 
$
6,548

 
$
6,650

 
$
6,548

Residential mortgage and SBA loans serviced for others
$
1,019,233

 
$
984,846

 
$
1,019,233

 
$
984,846

The estimated amortization expense of servicing rights for the remainder of 2018 and the succeeding fiscal years is as follows:
Year
(Dollars in thousands)
Amount
Remainder of 2018
 
$
863

2019
 
769

2020
 
680

2021
 
601

2022
 
530

Thereafter
 
3,207

Note 6. Deposits

Deposits and their respective weighted average interest rate at June 30, 2018 and December 31, 2017 consist of the following:
 
At June 30, 2018
 
At December 31, 2017
 
Weighted Average Interest Rate
 
Amount
 
Weighted Average Interest Rate
 
Amount
 
(Dollars in thousands)
Noninterest-bearing deposits
%
 
$
1,055,479

 
%
 
$
1,040,026

Demand deposits
0.57

 
1,163,451

 
0.43

 
1,109,438

Savings deposits
0.34

 
807,461

 
0.26

 
830,706

Time deposits
1.46

 
594,395

 
1.12

 
574,749

Total
0.50
%
 
$
3,620,786

 
0.38
%
 
$
3,554,919

The aggregate amount of time deposits in denominations of $100 thousand or more was $208.9 million at June 30, 2018 and $250.0 million at December 31, 2017. Deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit insurance per account owner is currently up to $250 thousand. The aggregate amount of time deposits in denominations over $250 thousand was $65.8 million at June 30, 2018 and $118.4 million at December 31, 2017.


28

Table of Contents

At June 30, 2018, the scheduled maturities of time deposits are as follows:
Year
(Dollars in thousands)
Amount
Remainder of 2018
 
$
154,611

2019
 
233,501

2020
 
99,450

2021
 
26,170

2022
 
32,233

Thereafter
 
48,430

Total
 
$
594,395

Note 7. Borrowings
The following is a summary of borrowings by type. Short-term borrowings consist of overnight borrowings and term borrowings with an original maturity of one year or less. The long-term debt balances and weighted average interest rates include purchase accounting fair value adjustments, net of related amortization, from the Fox Chase acquisition.
 
At June 30, 2018
 
At December 31, 2017
(Dollars in thousands)
Balance at End of Period
 
Weighted Average Interest Rate at End of Period
 
Balance at End of Period
 
Weighted Average Interest Rate at End of Period
Short-term borrowings:
 
 
 
 
 
 
 
FHLB borrowings
$
138,530

 
2.10
%
 
$
30,225

 
1.54
%
Federal funds purchased
65,000

 
2.03

 
55,000

 
1.56

Customer repurchase agreements
28,323

 
0.05

 
20,206

 
0.05

 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
FHLB advances
$
125,005

 
1.73
%
 
$
125,036

 
1.73
%
Security repurchase agreements
30,551

 
2.04

 
30,792

 
1.52

 
 
 
 
 
 
 
 
Subordinated notes
$
94,453

 
5.34
%
 
$
94,331

 
5.35
%
The Corporation, through the Bank, has a credit facility with the Federal Home Loan Bank (FHLB) with a maximum borrowing capacity of approximately $1.5 billion. Advances from the FHLB are collateralized by a blanket floating lien on all first mortgage loans of the Bank, FHLB capital stock owned by the Bank and any funds on deposit with the FHLB. At June 30, 2018 and December 31, 2017, the Bank had outstanding short-term letters of credit with the FHLB totaling $178.9 million and $234.2 million, respectively, which were utilized to collateralize public funds deposits. The maximum borrowing capacity with the FHLB changes as a function of the Bank’s qualifying collateral assets as well as the FHLB’s internal credit rating of the Bank.    
The Corporation, through the Bank, maintains uncommitted federal fund credit lines with several correspondent banks totaling $367.0 million at June 30, 2018 and December 31, 2017. 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, holds collateral at the Federal Reserve Bank of Philadelphia in order to access their Discount Window Lending program. The collateral consisting of investment securities was valued at $69.4 million and $52.0 million at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018 and December 31, 2017, the Corporation had no outstanding borrowings under this program.
The Corporation has a $10.0 million line of credit with a correspondent bank. At June 30, 2018 and December 31, 2017, the Corporation had no outstanding borrowings under this line.

29

Table of Contents

Long-term advances with the FHLB of Pittsburgh mature as follows:
(Dollars in thousands)
As of June 30, 2018
 
Weighted Average Rate
Remainder of 2018
$
10,005

 
0.70
%
2019
10,000

 
1.35

2020
40,000

 
1.70

2021
55,000

 
1.94

2022
10,000

 
2.09

Thereafter

 

Total
$
125,005

 
1.73
%
Long-term debt under security repurchase agreements with large commercial banks mature as follows:
(Dollars in thousands)
As of June 30, 2018
 
Weighted Average Rate
Remainder of 2018
$
10,085

 
1.46
%
2019
10,190

 
2.33

2020
10,276

 
2.33

2021

 

2022

 

Thereafter

 

Total
$
30,551

 
2.04
%
Long-term debt under security repurchase agreements totaling $25.5 million are variable based on the one-month LIBOR rate plus a spread. One borrowing for $5.0 million has a fixed interest rate and may be called by the lender based on the underlying agreement.
Note 8. 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 June 30,
 
2018
 
2017
 
2018
 
2017
(Dollars in thousands)
Retirement Plans
 
Other Post Retirement
Benefits
Service cost
$
140

 
$
124

 
$
22

 
$
12

Interest cost
439

 
487

 
23

 
30

Expected return on plan assets
(795
)
 
(748
)
 

 

Amortization of net actuarial loss
281

 
289

 
1

 
10

Accretion of prior service cost
(71
)
 
(71
)
 

 

Net periodic benefit (income) cost
$
(6
)
 
$
81

 
$
46

 
$
52


30

Table of Contents

 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
(Dollars in thousands)
Retirement Plans
 
Other Post Retirement
Benefits
Service cost
$
280

 
$
275

 
$
44

 
$
24

Interest cost
880

 
952

 
46

 
59

Expected return on plan assets
(1,591
)
 
(1,501
)
 

 

Amortization of net actuarial loss
561

 
577

 
2

 
21

Accretion of prior service cost
(142
)
 
(141
)
 

 

Net periodic benefit (income) cost
$
(12
)
 
$
162

 
$
92

 
$
104


The components of net periodic benefit cost other than the service cost component are included in other noninterest expense in the consolidated statements of income.

The Corporation made a contribution of $3.0 million to its qualified retirement plan on July 5, 2018. The Corporation previously disclosed in its financial statements for the year ended December 31, 2017 that it expected to make contributions of $158 thousand to its non-qualified retirement plans and $80 thousand to its other postretirement benefit plans in 2018. During the six months ended June 30, 2018, the Corporation contributed $80 thousand to its non-qualified retirement plans and $53 thousand to its other postretirement plans. During the six months ended June 30, 2018, $1.3 million was paid to participants from the retirement plans and $53 thousand was paid to participants from the other postretirement plans.
Note 9. Stock-Based Incentive Plan

The Corporation has a shareholder approved 2013 Long-Term Incentive Plan, which replaced the expired 2003 Long-Term Incentive Plan. Under the 2013 Long-Term Incentive Plan, the Corporation may grant up to 3,698,974 options and restricted stock to employees and non-employee directors, which includes 330,625 shares as a result of the Corporation's common stock issuance in 2017, 857,191 shares as a result of the completion of the acquisition of Fox Chase in 2016 and 473,483 shares as a result of the completion of the acquisition of Valley Green Bank in 2015.
The following is a summary of the Corporation's stock option activity and related information for the six months ended June 30, 2018:
(Dollars in thousands, except per share data)
Shares Under Option
 
Weighted Average Exercise Price Per Share
 
Weighted Average Remaining Contractual Life (Years)
 
Aggregate Intrinsic Value at June 30, 2018
Outstanding at December 31, 2017
512,735

 
$
21.90

 
 
 
 
Granted
193,778

 
28.50

 
 
 
 
Expired

 

 
 
 
 
Forfeited
(12,537
)
 
25.48

 
 
 
 
Exercised
(36,990
)
 
19.21

 
 
 
 
Outstanding at June 30, 2018
656,986

 
23.93

 
7.7
 
$
2,648

Exercisable at June 30, 2018
279,627

 
20.26

 
6.0
 
2,063

The following is a summary of nonvested stock options at June 30, 2018 including changes during the six months then ended:
(Dollars in thousands, except per share data)
 Nonvested Stock Options
 
 Weighted Average Grant Date Fair Value
Nonvested stock options at December 31, 2017
352,142

 
$
6.47

Granted
193,778

 
6.46

Vested
(156,024
)
 
6.45

Forfeited
(12,537
)
 
6.48

Nonvested stock options at June 30, 2018
377,359

 
6.48


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Table of Contents

The following aggregated assumptions were used to estimate the fair value of options granted during the six months ended June 30, 2018 and 2017:
 
Six months ended June 30,
 
2018
 
2017
 
Actual
Expected option life in years
6.6

 
6.9

Risk free interest rate
2.80
%
 
2.30
%
Expected dividend yield
2.81
%
 
2.84
%
Expected volatility
27.15
%
 
29.75
%
Fair value of options
$6.46
 
$6.72
The following is a summary of nonvested restricted stock awards at June 30, 2018 including changes during the six months then ended:
(Dollars in thousands, except per share data)
 Nonvested Share Awards
 
 Weighted Average Grant Date Fair Value
Nonvested share awards at December 31, 2017
229,026

 
$
21.93

Granted
59,953

 
28.39

Vested
(43,200
)
 
18.59

Forfeited
(22,938
)
 
20.80

Nonvested share awards at June 30, 2018
222,841

 
24.44

The fair value of restricted stock is equivalent to the fair value on the date of grant and is amortized over the vesting period. Certain information regarding restricted stock is summarized below for the periods indicated:
 
Six months ended June 30,
(Dollars in thousands, except per share data)
2018
 
2017
Shares granted
59,953

 
61,823

Weighted average grant date fair value
$
28.39

 
$
28.08

Intrinsic value of awards vested
$
1,193

 
$
1,367

The total unrecognized compensation expense and the weighted average period over which unrecognized compensation expense is expected to be recognized related to nonvested stock options and nonvested restricted stock awards at June 30, 2018 is presented below:
(Dollars in thousands)
Unrecognized Compensation Cost
 
Weighted-Average Period Remaining (Years)
Stock options
$
1,935

 
2.1
Restricted stock awards
2,566

 
2.0
 
$
4,501

 
2.0
The following table presents information related to the Corporation’s compensation expense related to stock incentive plans recognized for the periods indicated:
 
Six months ended June 30,
(Dollars in thousands)
2018
 
2017
Stock-based compensation expense:
 
 
 
Stock options
$
515

 
$
454

Restricted stock awards
1,204

 
1,254

Employee stock purchase plan
34

 
32

Total
$
1,753

 
$
1,740

Tax benefit on nonqualified stock option expense, restricted stock awards and disqualifying dispositions of incentive stock options
$
413

 
$
828


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Table of Contents

Note 10. Accumulated Other Comprehensive (Loss) Income
The following table shows the components of accumulated other comprehensive (loss) income, net of taxes, for the periods presented:
(Dollars in thousands)
Net Unrealized
(Losses) Gains 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, 2017
$
(4,061
)
 
$
9

 
$
(13,719
)
 
$
(17,771
)
Adjustment to initially apply ASU No. 2016-01 for equity securities measured at fair value (1)
(433
)
 

 

 
(433
)
Adjustment to initially apply ASU No. 2018-02 for reclassification of stranded net tax charges (1)
(968
)
 
2

 
(2,955
)
 
(3,921
)
Other comprehensive (loss) income
(6,525
)
 
310

 
333

 
(5,882
)
Balance, June 30, 2018
$
(11,987
)
 
$
321

 
$
(16,341
)
 
$
(28,007
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
(4,988
)
 
$
(141
)
 
$
(14,325
)
 
$
(19,454
)
Net Change
1,961

 
14

 
297

 
2,272

Balance, June 30, 2017
$
(3,027
)
 
$
(127
)
 
$
(14,028
)
 
$
(17,182
)
(1) See Note 1, "Summary of Significant Accounting Policies - Accounting Pronouncements Adopted in 2018" for additional information.

Note 11. Derivative Instruments and Hedging Activities
Interest Rate Swaps
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.
In 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 of one-month LIBOR. The swap matures in November 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. At June 30, 2018, there is no gain or loss recorded in accumulated other comprehensive loss that is expected to be reclassified into earnings during the next twelve months. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2018. At June 30, 2018, the notional amount of the interest rate swap was $17.5 million, with a positive fair value of $407 thousand.
The Corporation has an interest rate swap classified as a fair value hedge with a current notional amount of $1.4 million to hedge a 10-year fixed rate loan that is earning interest at 5.83%. The Corporation pays a fixed rate of 5.83% and receives a floating rate based on the one-month LIBOR plus 350 basis points. The swap matures in October 2021. The difference between changes in the fair values of the interest rate swap agreement and the hedged loan represents hedge ineffectiveness and is recorded in other noninterest income in the consolidated statements of operations.
The Corporation has an interest rate swap with a current notional amount of $471 thousand, for a 15-year fixed rate loan that is earning interest at 7.43%. The Corporation pays a fixed rate of 7.43% and receives a floating rate based on the one-month LIBOR plus 224 basis points. The swap matures in April 2022. The interest rate swap is carried at fair value in accordance with

33

Table of Contents

FASB ASC 815 "Derivatives and Hedging." The loan is carried at fair value under the fair value option as permitted by FASB ASC 825 "Financial Instruments."
Credit Derivatives
The Corporation has agreements with third-party financial institutions whereby the third-party financial institution enters into interest rate derivative contracts with loan customers referred to them by the Corporation. By the terms of the agreements, the third-party financial institution has recourse to the Corporation for any exposure created under each swap contract in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. These transactions represent credit derivatives and are a customary arrangement that allows the Corporation to provide access to interest rate transactions for customers without creating the swap. The Corporation records the fair value of credit derivatives in other liabilities on the consolidated balance sheets. The Corporation recognizes changes in the fair value of credit derivatives, net of any fees received, in other noninterest income in the consolidated statements of income.
At June 30, 2018, the Corporation has fifteen variable-rate to fixed-rate interest rate swap transactions between the third-party financial institution and customers with a current notional amount of $75.7 million, and remaining maturities ranging from one to 10 years. At June 30, 2018, the fair value of the swaps to the customers was a liability of $37 thousand and all swaps were in paying positions to the third-party financial institution.
The maximum potential payments by the Corporation to the third-party financial institution under these credit derivatives are not estimable as they are contingent on future interest rates and the agreement does not provide for a limitation of the maximum potential payment amount.
Mortgage Banking Derivatives
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.
Derivatives Tables
The following table presents the notional amounts and fair values of derivatives designated as hedging instruments recorded on the consolidated balance sheets at June 30, 2018 and December 31, 2017. The Corporation pledges cash or securities to cover the negative fair value of derivative instruments. Cash collateral associated with derivative instruments are not added to or netted against the fair value amounts.
 
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in thousands)
Notional
Amount
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
At June 30, 2018
 
 
 
 
 
 
 
 
 
Interest rate swap - cash flow hedge
$
17,460

 
Other assets
 
$
407

 
 
 
$

Interest rate swap - fair value hedge
1,367

 
Other assets
 
15

 
 
 

Total
$
18,827

 
 
 
$
422

 
 
 
$

At December 31, 2017
 
 
 
 
 
 
 
 
 
Interest rate swap - cash flow hedge
$
17,836

 
Other assets
 
$
13

 
 
 
$

Interest rate swap - fair value hedge
1,388

 
 
 

 
Other liabilities
 
12

Total
$
19,224

 
 
 
$
13

 
 
 
$
12


34

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 June 30, 2018 and December 31, 2017:
 
 
 
Derivative Assets
 
Derivative Liabilities
(Dollars in thousands)
Notional
Amount
 
Balance Sheet
Classification
 
Fair
Value
 
Balance Sheet
Classification
 
Fair
Value
At June 30, 2018
 
 
 
 
 
 
 
 
 
Interest rate swap
$
471

 
 
 
$

 
Other liabilities
 
$
25

Credit derivatives
75,734

 
 
 

 
Other liabilities
 
37

Interest rate locks with customers
29,737

 
Other assets
 
632

 
 
 

Forward loan sale commitments
31,469

 
 
 

 
Other liabilities
 
91

Total
$
137,411

 
 
 
$
632

 
 
 
$
153

At December 31, 2017
 
 
 
 
 
 
 
 
 
Interest rate swap
$
523

 

 
$

 
Other liabilities
 
$
38

Credit derivatives
75,622

 

 

 
Other liabilities
 
36

Interest rate locks with customers
27,411

 
Other assets
 
527

 
 
 

Forward loan sale commitments
29,037

 
Other assets
 
61

 
 
 

Total
$
132,593

 
 
 
$
588

 
 
 
$
74


The following table presents amounts included in the consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:

 
Statement of Income
Classification
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Interest rate swap—cash flow hedge—net interest payments
Interest expense
 
$
6

 
$
36

 
$
26

 
$
107

Interest rate swap—fair value hedge—ineffectiveness
Other noninterest income
 
2

 
2

 
2

 
5

Net loss
 
 
$
(4
)
 
$
(34
)
 
$
(24
)
 
$
(102
)

The following table presents amounts included in the consolidated statements of income for derivatives not designated as hedging instruments for the periods indicated:
 
Statement of Income Classification
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Credit derivatives
Other noninterest income
 
$
34

 
$
53

 
$
38

 
$
124

Interest rate locks with customers
Net gain on mortgage banking activities
 
237

 
155

 
105

 
562

Forward loan sale commitments
Net loss on mortgage banking activities
 
(104
)
 
162

 
(153
)
 
(92
)
Total
 
 
$
167

 
$
370

 
$
(10
)
 
$
594


The following table presents amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments at June 30, 2018 and December 31, 2017:
(Dollars in thousands)
Accumulated Other
Comprehensive (Loss) Income
 
At June 30, 2018
 
At December 31, 2017
Interest rate swap—cash flow hedge
Fair value, net of taxes
 
$
321

 
$
9

Total
 
 
$
321

 
$
9



35

Table of Contents

Note 12. Fair Value Disclosures
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Corporation determines the fair value of financial instruments based on the fair value hierarchy. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances, including assumptions about risk. Three levels of inputs are used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. Transfers between levels are recognized at the end of the reporting period.
Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation can access at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2: Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3: Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include: financial instruments whose value is determined using pricing models, discounted cash-flow methodologies, or similar techniques, as well as instruments for which the fair value calculation requires significant management judgment or estimation.
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Investment Securities
Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include U.S. Treasury securities, most equity securities and money market mutual funds. Mutual funds are registered investment companies which are valued at net asset value of shares on a market exchange at the end of each trading day. Level 2 of the valuation hierarchy includes securities issued by U.S. Government sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate and municipal bonds and certain equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy.
Fair values for securities are determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does not have sufficient verifiable information to value a particular security, the Corporation will utilize valuations from another pricing service. Management has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control.
Certain corporate bonds owned by the Corporation are classified as Level 3 as they are not traded in active markets. The fair value of each bond is estimated by benchmarking similar transactions of structure, yield and credit which are owned by the Corporation and are actively traded in the market.
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. 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 may utilize and change the security's valuation. There were no material differences in valuations noted at June 30, 2018.

36

Table of Contents

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. Interest rate swaps and mortgage banking derivative financial instruments are classified within Level 2 of the valuation hierarchy. Credit derivatives are valued based on credit worthiness of the underlying borrower which is a significant unobservable input and therefore classified in Level 3 of the valuation hierarchy.
Two commercial loans associated with interest rate swaps are classified in Level 3 of the valuation hierarchy since lending credit risk is not an observable input for these loans. The unrealized gain on the two loans was $15 thousand at June 30, 2018.

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. 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.
The following table presents the assets and liabilities measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017, classified using the fair value hierarchy:
 
At June 30, 2018
(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
$

 
$
15,339

 
$

 
$
15,339

State and political subdivisions

 
69,910

 

 
69,910

Residential mortgage-backed securities

 
165,609

 

 
165,609

Collateralized mortgage obligations

 
3,171

 

 
3,171

Corporate bonds

 
67,389

 
26,386

 
93,775

Total available-for-sale securities

 
321,418

 
26,386

 
347,804

Equity securities:
 
 
 
 
 
 
 
Equity securities - financial services industry
1,109

 

 

 
1,109

Money market mutual funds
1,563

 

 

 
1,563

Total equity securities
2,672

 

 

 
2,672

Loans*




1,847

 
1,847

Interest rate swaps*

 
422

 

 
422

Interest rate locks with customers*

 
632

 

 
632

Total assets
$
2,672

 
$
322,472

 
$
28,233

 
$
353,377

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$

 
$

 
$
300

 
$
300

Interest rate swaps*

 
25

 

 
25

Credit derivatives*

 

 
37

 
37

Forward loan sale commitments*

 
91

 

 
91

Total liabilities
$

 
$
116

 
$
337

 
$
453


37

Table of Contents

 
At December 31, 2017
(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
$

 
$
16,961

 
$

 
$
16,961

State and political subdivisions

 
78,297

 

 
78,297

Residential mortgage-backed securities

 
185,421

 

 
185,421

Collateralized mortgage obligations

 
3,602

 

 
3,602

Corporate bonds

 
79,190

 
27,986

 
107,176

Total available-for-sale securities

 
363,471

 
27,986

 
391,457

Equity securities:
 
 
 
 
 
 
 
Equity securities - financial services industry
1,076

 

 

 
1,076

Money market mutual funds
5,985

 

 

 
5,985

Total equity securities
7,061

 

 

 
7,061

Loans*




1,958


1,958

Interest rate swap*

 
13

 

 
13

Interest rate locks with customers*

 
527

 

 
527

Forward loan sale commitments*

 
61

 

 
61

Total assets
$
7,061

 
$
364,072

 
$
29,944

 
$
401,077

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liability
$

 
$

 
$
339

 
$
339

Interest rate swaps*

 
50

 

 
50

Credit derivatives*

 

 
36

 
36

Total liabilities
$

 
$
50

 
$
375

 
$
425

* Such financial instruments are recorded at fair value as further described in Note 11, "Derivative Instruments and Hedging Activities."
The following table includes a rollforward of corporate bonds, loans and credit derivatives for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the six months ended June 30, 2018 and 2017:
 
Six Months Ended June 30, 2018
(Dollars in thousands)
Balance at
December 31,
2017
 
Purchases/additions
 
Sales
 
Payments received
 
Premium amortization, net
 
(Decrease) increase in value
 
Balance at June 30, 2018
Corporate bonds
$
27,986

 
$

 
$

 


 
$

 
$
(1,600
)
 
$
26,386

Loans
1,958

 

 

 
(73
)
 

 
(38
)
 
1,847

Credit derivatives
(36
)
 
(40
)
 

 

 

 
39

 
(37
)
Net total
$
29,908

 
$
(40
)
 
$

 
$
(73
)
 
$

 
$
(1,599
)
 
$
28,196

 
Six Months Ended June 30, 2017
(Dollars in thousands)
Balance at
December 31,
2016
 
Purchases/additions
 
Sales
 
Payments received
 
Premium amortization, net
 
(Decrease) increase in value
 
Balance at June 30, 2017
Corporate bonds
$
28,778

 
$

 
$

 
$

 
$

 
$
(391
)
 
$
28,387

Loans
$
2,138

 
$

 
$

 
$
(67
)
 
$

 
$
(13
)
 
$
2,058

Credit derivatives
(9
)
 
(272
)
 

 

 

 
124

 
(157
)
Net total
$
30,907

 
$
(272
)
 
$

 
$
(67
)
 
$

 
$
(280
)
 
$
30,288



38

Table of Contents

The following table presents the change in the balance of the contingent consideration liability related to acquisitions for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the six months ended June 30, 2018 and 2017:
 
Six Months Ended June 30, 2018
(Dollars in thousands)
Balance at
December 31,
2017
 
Contingent
Consideration
from New
Acquisition
 
Payment of
Contingent
Consideration
 
Adjustment
of Contingent
Consideration
 
Balance at June 30, 2018
Girard Partners
$
339

 
$

 
$
67

 
$
28

 
$
300

Total contingent consideration liability
$
339

 
$

 
$
67

 
$
28

 
$
300

 
Six Months Ended June 30, 2017
(Dollars in thousands)
Balance at
December 31,
2016
 
Contingent
Consideration
from New
Acquisition
 
Payment of
Contingent
Consideration
 
Adjustment
of Contingent
Consideration
 
Balance at June 30, 2017
Sterner Insurance Associates
$
331

 
$

 
$

 
$
(303
)
 
$
28

Girard Partners
5,668

 
$

 
5,317

 
28

 
379

Total contingent consideration liability
$
5,999

 
$

 
$
5,317

 
$
(275
)
 
$
407

The Corporation may be required to periodically measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market accounting or impairment charges of individual assets. The following table represents assets measured at fair value on a non-recurring basis at June 30, 2018 and December 31, 2017:
 
At June 30, 2018
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Assets at
Fair Value
Impaired loans held for investment
$

 
$

 
$
31,156

 
$
31,156

Impaired leases held for investment




1,250

 
1,250

Other real estate owned

 

 
1,742

 
1,742

Total
$

 
$

 
$
34,148

 
$
34,148

 
At December 31, 2017
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Assets at
Fair Value
Impaired loans held for investment
$

 
$

 
$
28,351

 
$
28,351

Impaired leases held for investment

 

 
1,250

 
1,250

Other real estate owned

 

 
1,843

 
1,843

Total
$

 
$

 
$
31,444

 
$
31,444


39

Table of Contents

The following table presents assets and liabilities and off-balance sheet items not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed at June 30, 2018 and December 31, 2017. The disclosed fair values are classified using the fair value hierarchy.
 
At June 30, 2018
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Carrying
Amount
Assets:
 
 
 
 
 
 
 
 
 
Cash and short-term interest-earning assets
$
72,943

 
$

 
$

 
$
72,943

 
$
72,943

Held-to-maturity securities

 
94,642

 

 
94,642

 
96,457

Federal Home Loan Bank, Federal Reserve Bank and other stock
NA

 
NA

 
NA

 
NA

 
32,768

Loans held for sale

 
1,815

 

 
1,815

 
1,778

Net loans and leases held for investment

 

 
3,742,808

 
3,742,808

 
3,758,493

Servicing rights

 

 
11,619

 
11,619

 
6,650

Total assets
$
72,943

 
$
96,457

 
$
3,754,427

 
$
3,923,827

 
$
3,969,089

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand and savings deposits, non-maturity
$
3,026,391

 
$

 
$

 
$
3,026,391

 
$
3,026,391

Time deposits

 
597,146

 

 
597,146

 
594,395

Total deposits
3,026,391

 
597,146

 

 
3,623,537

 
3,620,786

Short-term borrowings

 
231,853

 

 
231,853

 
231,853

Long-term debt

 
156,868

 

 
156,868

 
155,556

Subordinated notes

 
96,538

 

 
96,538

 
94,453

Total liabilities
$
3,026,391

 
$
1,082,405

 
$

 
$
4,108,796

 
$
4,102,648

Off-Balance-Sheet:
 
 
 
 
 
 
 
 
 
Commitments to extend credit
$

 
$
(2,469
)
 
$

 
$
(2,469
)
 
$

 
At December 31, 2017
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Fair
Value
 
Carrying
Amount
Assets:
 
 
 
 
 
 
 
 
 
Cash and short-term interest-earning assets
$
75,409

 
$

 
$

 
$
75,409

 
$
75,409

Held-to-maturity securities

 
55,320

 

 
55,320

 
55,564

Federal Home Loan Bank, Federal Reserve Bank and other stock
NA

 
NA

 
NA

 
NA

 
27,204

Loans held for sale

 
1,676

 

 
1,676

 
1,642

Net loans and leases held for investment

 

 
3,547,451

 
3,547,451

 
3,566,953

Servicing rights

 

 
10,046

 
10,046

 
6,573

Total assets
$
75,409

 
$
56,996

 
$
3,557,497

 
$
3,689,902

 
$
3,733,345

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
Demand and savings deposits, non-maturity
$
2,980,170

 
$

 
$

 
$
2,980,170

 
$
2,980,170

Time deposits

 
574,737

 

 
574,737

 
574,749

Total deposits
2,980,170

 
574,737

 

 
3,554,907

 
3,554,919

Short-term borrowings

 
105,431

 

 
105,431

 
105,431

Long-term debt

 
156,834

 

 
156,834

 
155,828

Subordinated notes

 
98,075

 

 
98,075

 
94,331

Total liabilities
$
2,980,170

 
$
935,077

 
$

 
$
3,915,247

 
$
3,910,509

Off-Balance-Sheet:
 
 
 
 
 
 
 
 
 
Commitments to extend credit
$

 
$
(2,414
)
 
$

 
$
(2,414
)
 
$


40

Table of Contents

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:
Cash and short-term interest-earning assets: The carrying amounts reported in the balance sheet for cash and due from banks, interest-earning deposits with other banks, federal funds sold and other short-term investments is their stated value. 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.
Federal Home Loan Bank, Federal Reserve Bank and other stock: It is not practical to determine the fair values of Federal Home Loan Bank, Federal Reserve Bank and other stock, due to restrictions placed on their transferability.
Loans held for sale: The fair value of the Corporation’s mortgage loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including interest rates, bids or indications provided by market participants on specific loans that are actively marketed for sale. These loans are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale are carried at the lower of cost or estimated fair value. There were no valuation adjustments for loans held for sale at June 30, 2018 and December 31, 2017.
Loans and leases held for investment: As of June 30, 2018, 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, adjusted as appropriate to consider credit, liquidity and marketability factors to arrive at a fair value that represents the Corporation's exit price at which these instruments would be sold or transferred. As of December 31, 2017, the fair values for loans and leases held for investment were 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 was made for specific credit risks in addition to general portfolio risk and is significant to the valuation. Loans and leases are classified within Level 3 in the fair value hierarchy.
Impaired loans and leases held for investment: For impaired loans and leases, the Corporation uses a variety of techniques to measure fair value, such as using the current appraised value of the collateral, agreements of sale, discounting the contractual cash flows, and analyzing market data that the Corporation may adjust due to specific characteristics of the loan/lease or collateral. At June 30, 2018, impaired loans held for investment had a carrying amount of $32.7 million with a valuation allowance of $1.5 million. At December 31, 2017, impaired loans held for investment had a carrying amount of $28.5 million with a valuation allowance of $131 thousand. The Corporation had impaired leases of $1.3 million with no reserve at June 30, 2018 and December 31, 2017.
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 in the fair value hierarchy based upon management's assessment of the inputs. 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. The Corporation also records servicing rights on SBA loans. At June 30, 2018 and December 31, 2017, servicing rights had a carrying amount of $6.7 million and $6.6 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 six months ended June 30, 2018, 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 (OREO) is originally estimated based upon the appraised value less estimated costs to sell. The fair value less cost to sell becomes the "original cost" of the OREO asset. Subsequently, OREO is reported as the lower of the original cost and the current the fair value less cost to sell. Capital improvement expenses associated with the construction or repair of the property are capitalized as part of the cost of the OREO asset; however, the capitalized expenses may not increase the OREO asset's recorded value to an amount greater than the asset's fair value after improvements and less cost to sell. New appraisals are generally obtained on an annual basis if an agreement of sale does not exist. During the six months ended June 30, 2018, two properties had write-downs totaling $503 thousand and two properties were transferred into OREO with a fair value of $402 thousand. At June 30, 2018 and December 31, 2017, OREO had a carrying amount

41

Table of Contents

of $1.7 million and $1.8 million, respectively. Other real estate owned is classified within Level 3 of the valuation hierarchy due to the unique characteristics of the collateral for each loan.
Deposit liabilities: The fair values for demand and savings accounts, with no stated maturities, is the amount payable on demand at the reporting date (carrying value) and are classified within Level 1 in the fair value hierarchy. The fair values for time deposits with fixed maturities are estimated by discounting the final maturity using interest rates currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 in the fair value hierarchy.
Short-term borrowings: The fair value of short-term borrowings are estimated using current market rates for similar borrowings and are classified within Level 2 in the fair value hierarchy.
Long-term debt: The fair value of long-term debt is estimated by using discounted cash flow analysis, based on current market rates for debt with similar terms and remaining maturities. Long-term debt is 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.
Note 13. Segment Reporting
At June 30, 2018, 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. The parent holding company and intercompany eliminations are included in the "Other" segment.
The Corporation's Banking segment consists of commercial, consumer and mortgage banking as well as lease financing. 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 consumer and commercial customers 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 following table provides total assets by reportable business segment as of the dates indicated.
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
 
At June 30, 2017
Banking
$
4,656,201

 
$
4,466,301

 
$
4,366,362

Wealth Management
37,227

 
34,600

 
32,806

Insurance
29,295

 
27,846

 
25,241

Other
26,458

 
26,115

 
29,118

Consolidated assets
$
4,749,181

 
$
4,554,862

 
$
4,453,527


42

Table of Contents

The following tables provide reportable segment-specific information and reconciliations to consolidated financial information for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended
 
June 30, 2018
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
46,444

 
$
8

 
$

 
$
8

 
$
46,460

Interest expense
6,209

 

 

 
1,261

 
7,470

Net interest income
40,235

 
8

 

 
(1,253
)
 
38,990

Provision for loan and lease losses
15,409

 

 

 

 
15,409

Noninterest income
5,461

 
5,862

 
3,904

 
87

 
15,314

Intangible expenses
329

 
137

 
128

 

 
594

Other noninterest expense
26,723

 
3,628

 
3,093

 
309

 
33,753

Intersegment (revenue) expense*
(295
)
 
156

 
139

 

 

Income (expense) before income taxes
3,530

 
1,949

 
544

 
(1,475
)
 
4,548

Income tax (benefit) expense
(162
)
 
597

 
163

 
(407
)
 
191

Net income (loss)
$
3,692

 
$
1,352

 
$
381

 
$
(1,068
)
 
$
4,357

Capital expenditures
$
820

 
$
40

 
$
2

 
$
10

 
$
872

 
Three Months Ended
 
June 30, 2017
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
40,022

 
$
1

 
$

 
$
7

 
$
40,030

Interest expense
3,469

 

 

 
1,261

 
4,730

Net interest income
36,553

 
1

 

 
(1,254
)
 
35,300

Provision for loan and lease losses
2,766

 

 

 

 
2,766

Noninterest income
6,790

 
5,399

 
3,746

 
74

 
16,009

Intangible expenses
398

 
168

 
(120
)
 

 
446

Other noninterest expense
24,160

 
3,512

 
2,846

 
1,584

 
32,102

Intersegment (revenue) expense*
(264
)
 
146

 
118

 

 

Income (expense) before income taxes
16,283

 
1,574

 
902

 
(2,764
)
 
15,995

Income tax expense (benefit)
4,193

 
639

 
379

 
(994
)
 
4,217

Net income (loss)
$
12,090

 
$
935

 
$
523

 
$
(1,770
)
 
$
11,778

Capital expenditures
$
2,019

 
$
11

 
$
192

 
$
34

 
$
2,256

 
Six Months Ended
 
June 30, 2018
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
89,966

 
$
13

 
$

 
$
15

 
$
89,994

Interest expense
11,210

 

 

 
2,522

 
13,732

Net interest income
78,756

 
13

 

 
(2,507
)
 
76,262

Provision for loan and lease losses
17,462

 

 

 

 
17,462

Noninterest income
10,250

 
11,602

 
8,990

 
54

 
30,896

Intangible expenses
658

 
279

 
269

 

 
1,206

Restructuring charges
571

 

 

 

 
571

Other noninterest expense
54,384

 
7,286

 
6,338

 
(313
)
 
67,695

Intersegment (revenue) expense*
(586
)
 
309

 
277

 

 

Income (expense) before income taxes
16,517

 
3,741

 
2,106

 
(2,140
)
 
20,224

Income tax expense (benefit)
1,836

 
1,142

 
619

 
(580
)
 
3,017

Net income (loss)
$
14,681

 
$
2,599

 
$
1,487

 
$
(1,560
)
 
$
17,207

Capital expenditures
$
1,790

 
$
89

 
$
9

 
$
65

 
$
1,953


43

Table of Contents

 
Six Months Ended
 
June 30, 2017
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Interest income
$
78,414

 
$
2

 
$

 
$
10

 
$
78,426

Interest expense
6,321

 

 

 
2,522

 
8,843

Net interest income
72,093

 
2

 

 
(2,512
)
 
69,583

Provision for loan and lease losses
5,211

 

 

 

 
5,211

Noninterest income
11,952

 
10,537

 
8,293

 
197

 
30,979

Intangible expenses
794

 
338

 
73

 

 
1,205

Other noninterest expense
49,216

 
6,932

 
5,915

 
1,310

 
63,373

Intersegment (revenue) expense*
(528
)
 
292

 
236

 

 

Income (expense) before income taxes
29,352

 
2,977

 
2,069

 
(3,625
)
 
30,773

Income tax expense (benefit)
7,721

 
1,164

 
871

 
(1,617
)
 
8,139

Net income (loss)
$
21,631

 
$
1,813

 
$
1,198

 
$
(2,008
)
 
$
22,634

Capital expenditures
$
6,339

 
$
22

 
$
199

 
$
84

 
$
6,644

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

Note 14. Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)” and subsequent related updates. The Corporation adopted the guidance effective January 1, 2018 using the modified retrospective method though no adjustments were made to retained earnings as a result of the adoption. The Corporation’s revenue is the sum of net interest income and noninterest income. Revenues are recognized when obligations under the terms of contracts with customers are satisfied, including the transfer of control of the promised goods or services to customers, in an amount that reflects the consideration the Corporation expects to be entitled to in exchange for those goods or services. The Corporation provides services to customers which have related performance obligations that are completed to recognize revenue. The Corporation's revenues are generally recognized either immediately upon the completion of the services or over time as the services are performed. Any services performed over time generally require services to be rendered each period and therefore progress in completing these services is measured based upon the passage of time.

The following tables disaggregate the Corporation's revenue by major source for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended
 
June 30, 2018
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Net interest income (1)
$
40,235

 
$
8

 
$

 
$
(1,253
)
 
$
38,990

 
 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
 
Trust fee income

 
2,044

 

 

 
2,044

Service charges on deposit accounts
1,335

 

 

 

 
1,335

Investment advisory commission and fee income

 
3,778

 

 

 
3,778

Insurance commission and fee income

 

 
3,712

 

 
3,712

Other service fee income (2)
2,198

 
41

 
192

 

 
2,431

Bank owned life insurance income (1)
1,161

 

 

 
49

 
1,210

Net gain on mortgage banking activities (1)
942

 

 

 

 
942

Other (loss) income (2)
(175
)
 
(1
)
 

 
38

 
(138
)
Total noninterest income
$
5,461

 
$
5,862

 
$
3,904

 
$
87

 
$
15,314



44

Table of Contents

 
Three Months Ended
 
June 30, 2017
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Net interest income (1)
$
36,553

 
$
1

 
$

 
$
(1,254
)
 
$
35,300

 
 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
 
Trust fee income

 
2,016

 

 

 
2,016

Service charges on deposit accounts
1,313

 

 

 

 
1,313

Investment advisory commission and fee income

 
3,333

 

 

 
3,333

Insurance commission and fee income

 

 
3,628

 

 
3,628

Other service fee income (2)
2,077

 
50

 
118

 

 
2,245

Bank owned life insurance income (1)
1,549

 

 

 
73

 
1,622

Net gain on sales of investment securities (1)
20

 

 

 
1

 
21

Net gain on mortgage banking activities (1)
1,537

 

 

 

 
1,537

Other income (2)
294

 

 

 

 
294

Total noninterest income
$
6,790

 
$
5,399

 
$
3,746

 
$
74

 
$
16,009

 
Six Months Ended
 
June 30, 2018
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Net interest income (1)
$
78,756

 
$
13

 
$

 
$
(2,507
)
 
$
76,262

 
 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
 
Trust fee income

 
4,040

 

 

 
4,040

Service charges on deposit accounts
2,662

 

 

 

 
2,662

Investment advisory commission and fee income

 
7,461

 

 

 
7,461

Insurance commission and fee income

 

 
8,600

 

 
8,600

Other service fee income (2)
4,107

 
101

 
392

 

 
4,600

Bank owned life insurance income (1)
1,859

 

 

 
20

 
1,879

Net gain on sales of investment securities (1)
10

 

 

 

 
10

Net gain on mortgage banking activities (1)
1,658

 

 

 

 
1,658

Other (loss) income (2)
(46
)
 

 
(2
)
 
34

 
(14
)
Total noninterest income
$
10,250

 
$
11,602

 
$
8,990

 
$
54

 
$
30,896

 
Six Months Ended
 
June 30, 2017
(Dollars in thousands)
Banking
 
Wealth Management
 
Insurance
 
Other
 
Consolidated
Net interest income (1)
$
72,093

 
$
2

 
$

 
$
(2,512
)
 
$
69,583

 
 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
 
Trust fee income

 
3,923

 

 

 
3,923

Service charges on deposit accounts
2,556

 

 

 

 
2,556

Investment advisory commission and fee income

 
6,514

 

 

 
6,514

Insurance commission and fee income

 

 
8,038

 

 
8,038

Other service fee income (2)
3,878

 
100

 
254

 

 
4,232

Bank owned life insurance income (1)
2,211

 

 

 
194

 
2,405

Net gain on sales of investment securities (1)
33

 

 

 
3

 
36

Net gain on mortgage banking activities (1)
2,650

 

 

 

 
2,650

Other income (2)
624

 

 
1

 

 
625

Total noninterest income
$
11,952

 
$
10,537

 
$
8,293

 
$
197

 
$
30,979

(1)
Net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives are excluded from the scope of the standard. Noninterest income streams that are out-of-scope of the standard include bank owned life insurance income, sales of investment securities and mortgage banking activities.
(2)
Other service fee income and other income include certain items that are in scope and certain items that are out of scope of the standard and are described further in the following paragraphs.

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Table of Contents

Banking Segment

The Banking segment provides financial services to consumer and commercial customers 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.

Service charges on deposit accounts are generally earned on depository accounts for commercial and consumer customers and primarily includes fees for account services, overdraft services, and cash management services for commercial customers. Account services include fees for event-driven services such as ATM transactions and fees for periodic account maintenance activities. Cash management services for commercial customers include fees for event-driven services such as lockbox processing and line sweep services and fees for periodic account maintenance activities. The Corporation's obligation for event-driven services is satisfied at the time of the event when the service is delivered, while the obligation for periodic services is satisfied over the course of each month. Obligations for overdraft services is satisfied at the time of the overdraft.

Other service fee income is earned from commercial and consumer customers and primarily includes credit and debit card interchange and merchant revenues, mortgage servicing income, which is out of scope of the standard, and other deposit related service fee income such as wire transfers, check services and safe deposit boxes. Interchange and merchant revenues are recognized concurrently with the delivery of services on a monthly basis. Other deposit related service fee income include fees for event-driven services, such as wire transfers and check services, and fees for periodic services such as safe deposit box services. The obligation for event-driven services is satisfied at the time of the event when the service is delivered, while the obligation for periodic services is satisfied over the course of each month.

Other income primarily includes net gains or losses from the sales of loans and leases, net gains or losses from the sales or disposition of fixed assets and net gains or losses on interest rate swaps, all of which are out of scope of the standard, and net gains or losses on sales and write-downs of other real estate owned. Net gains or losses on sales of other real estate owned are recognized at the point in time in which control of the other real estate owned is transferred.

Wealth Management Segment

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.

Trust fee income is earned for providing trust, investment management and other related services. Obligations for trust and other related services are generally satisfied over time but may be satisfied at points in time for certain activities that are transactional in nature and obligations for investment management services are generally performed over time. Fees for trust fee income are typically based on a tiered scale relative to the market value of assets under management and are recognized in conjunction with the delivery of services.
Investment advisory commission and fee income include fees for financial planning, guardian and custodian of employee benefits, investment advisory, and brokerage services. Obligations for financial planning, guardian and custodian of employee benefits, and investment advisory services are generally satisfied over time and fees, typically based on a tiered scale relative to the market value of assets under management are recognized in conjunction with the delivery of services. Brokerage services are typically event driven and are based on the size and number of transactions executed at the client’s direction and recognized on the trade date.

Insurance Segment

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.

Insurance commission and fee income is derived primarily from commissions from the sale of insurance policies, which are generally calculated as a percentage of the policy premium, and contingent income, which is calculated based on the performance of the policies held by each carrier. Obligations for the sale of insurance policies are generally satisfied at the point in time which the policy is executed and are recognized at the point in time in which the amounts are known and collection is reasonably assured. Obligations for contingent income are generally satisfied over time and are recognized at the point in time in which the amounts are known and collection is reasonably assured.

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Table of Contents

Other service fee income is earned from human resources consulting services. These obligations are generally satisfied over time and are recognized on a periodic basis.
Note 15. Restructuring Charges
During January 2018, the Corporation announced the closure of two owned financial centers and one leased financial center and reduced staff associated with these financial centers, resulting in accruing a loss of $571 thousand related to the Banking business segment. These financial centers were closed in April 2018. The remaining accrued restructuring expense at January 1, 2018 of $23 thousand relates to 2016 restructuring charges.
A roll-forward of the remaining accrued restructuring expense for the six months ended June 30, 2018 is as follows:
(Dollars in thousands)
Severance expenses
 
Write-downs and retirements of fixed assets
 
Lease cancellations
 
Total
Accrued at January 1, 2018
$

 
$

 
$
23

 
$
23

Restructuring charges
366

 
48

 
157

 
571

Payments
(197
)
 

 
(22
)
 
(219
)
Non-cash settlement

 
(48
)
 

 
(48
)
Accrued at June 30, 2018
$
169

 
$

 
$
158

 
$
327


Note 16. Contingencies
The Corporation is periodically subject to various pending and threatened legal actions, which involve claims for monetary relief. Based upon information presently available to the Corporation, it is the Corporation's opinion that any legal and financial responsibility arising from such claims will not have a material adverse effect on the Corporation's results of operations, financial position or cash flows.


 

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Table of Contents

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
(All dollar amounts presented in tables are in thousands, except per share data. “BP” equates to “basis points” “N/ M” equates to “not meaningful” “—” equates to “zero” or “doesn’t round to a reportable number” and “N/A” equates to “not applicable.” Certain prior period amounts have been reclassified to conform to the current-year presentation.)
Forward-Looking Statements
The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words “believe,” “anticipate,” “estimate,” “expect,” “project,” “target,” “goal” and similar expressions are intended to identify forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including but not limited to those set forth below:
 
Operating, legal and regulatory risks;
Economic, political and competitive forces impacting various lines of business;
Legislative, regulatory and accounting changes;
Demand for our financial products and services in our market area;
Volatility in interest rates;
The quality and composition of our loan and investment portfolios;
Timing of revenues and expenditures;
Returns on investment decisions;
Other risks and uncertainties, including those occurring in the U.S. and world financial systems; and
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.
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 and other risk factors are more fully described in this report and in the Univest Corporation of Pennsylvania (the Corporation) Annual Report on Form 10-K for the year ended December 31, 2017 under the section entitled "Item 1A -- Risk Factors," and from time to time in other filings made by the Corporation with the SEC.
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, reserve for loan and lease losses and purchase accounting as areas with critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation’s 2017 Annual Report on Form 10-K.

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General
The Corporation is a bank holding company and owns 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 Ltd. (Girard Partners), 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 revenue 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.
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 faces intense competition from domestic and international banking organizations and other insurance and wealth management providers. The Corporation has taken initiatives to achieve its business objectives by acquiring banks and other financial service providers in strategic markets, through marketing, public relations and advertising, by establishing standards of service excellence for customers, and by using technology to ensure that the needs of customers are understood and satisfied.
Executive Overview
The Corporation’s consolidated net income, earnings per share and return on average assets and average equity were as follows:
 
Three Months Ended 
 June 30,
 
Change
 
Six Months Ended 
 June 30,
 
Change
(Dollars in thousands, except per share data)
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Net income
$
4,357

 
$
11,778

 
$
(7,421
)
 
(63.0
)%
 
$
17,207

 
$
22,634

 
$
(5,427
)
 
(24.0
)%
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.15

 
$
0.44

 
$
(0.29
)
 
(65.9
)
 
$
0.59

 
$
0.85

 
$
(0.26
)
 
(30.6
)
Diluted
0.15

 
0.44

 
(0.29
)
 
(65.9
)
 
0.58

 
0.85

 
(0.27
)
 
(31.8
)
Return on average assets
0.37
%
 
1.09
%
 
(72 BP)

 
(66.1
)
 
0.75
%
 
1.07
%
 
(32 BP)

 
(29.9
)
Return on average equity
2.86

 
9.13

 
(627 BP)

 
(68.7
)
 
5.70

 
8.89

 
(319 BP)

 
(35.9
)

The Corporation reported net income of $4.4 million, or $0.15 diluted earnings per share, for the three months ended June 30, 2018, compared to net income of $11.8 million, or $0.44 diluted earnings per share, for the three months ended June 30, 2017. Net income for the six months ended June 30, 2018 was $17.2 million, or $0.58 diluted earnings per share, compared to net income of $22.6 million, or $0.85 diluted earnings per share, for the six months ended June 30, 2017.

The financial results for the three and six months ended June 30, 2018 included a charge to the provision for loan and lease losses of $12.7 million, which represented $0.34 of diluted earnings per share in each period, related to alleged fraudulent activities believed to be perpetrated by one or more employees of a borrower. The Bank owns a participating interest which originally totaled $13.0 million in an approximately $80.0 million commercial lending facility. The $12.7 million represents the entire principal amount owed to the Bank and this amount was fully charged-off as of June 30, 2018.

In addition, the financial results for the three and six months ended June 30, 2018 included tax-free bank owned life insurance ("BOLI") death benefit claims of $446 thousand, which represented $0.02 diluted earnings per share in each period. The financial results for the three and six months ended June 30, 2017 included a tax-free BOLI death benefit claim of $889 thousand, which represented $0.03 diluted earnings per share in each period. The six months ended June 30, 2018 included restructuring costs related to financial center closures of $451 thousand, net of tax, or $0.02 of diluted earnings per share, recognized in the first quarter of 2018. There were no restructuring costs during the six months ended June 30, 2017.


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Table of Contents

The financial results for the three and six months ended June 30, 2018 also included a reduction in the Corporation's statutory federal income tax rate from 35% to 21% effective January 1, 2018 in accordance with the Tax Cuts and Jobs Act of 2017 (“TCJA”).
 
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, tax-equivalent interest income and interest expense and the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the three and six months ended June 30, 2018 and 2017. 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 weighted average tax-equivalent yield on interest-earning assets less 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.
Table 1, Table 2, and the interest income and net interest income analysis contain tax-equivalent financial information and measures determined by methods other than in accordance with U.S. GAAP. The management of the Corporation uses this non-GAAP financial information and measures in its analysis of the Corporation's performance. This financial information and measures should not be considered a substitute for GAAP basis financial information or measures nor should they be viewed as a substitute for operating results determined in accordance with GAAP. Management believes the presentation of the non-GAAP financial information and measures provide useful information that is essential to a proper understanding of the financial results of the Corporation.
The statutory federal tax rate utilized in the respective tables and analyses was 21% for the three and six months ended June 30, 2018 and was 35% for the three and six months ended June 30, 2017.
Three and six months ended June 30, 2018 versus 2017
Reported net interest income for the three months ended June 30, 2018 was $39.0 million, an increase of $3.7 million, or 10.5%, compared to the three months ended June 30, 2017. Net interest income on a tax-equivalent basis for the three months ended June 30, 2018 was $39.7 million, an increase of $2.9 million, or 8.0%, compared to the three months ended June 30, 2017. Reported net interest income for the six months ended June 30, 2018 was $76.3 million, an increase of $6.7 million, or 9.6%, compared to the same period in 2017. Net interest income on a tax-equivalent basis for the six months ended June 30, 2018 was $77.6 million, an increase of $5.2 million, or 7.2%, compared to the same period in 2017.
The increase in reported and tax-equivalent net interest income for the first six months of 2018 compared to the first six months of 2017 was primarily due to the growth in average loans of 10.0% and interest free funding through a combination of growth in average noninterest-bearing deposits of 9.7% and average equity of 18.6%.
The net interest margin on a tax-equivalent basis for the second quarter of 2018 was 3.73%, compared to 3.76% for the second quarter of 2017. The net interest margin on a tax-equivalent basis for the first six months of 2018 was 3.72%, compared to 3.78% for the first six months of 2017. The favorable impact of purchase accounting accretion was three basis points ($349 thousand) for the three months ended June 30, 2018, compared to eight basis points ($742 thousand) for the three months ended June 30, 2017. The favorable impact of purchase accounting accretion was two basis points ($494 thousand) for the six months ended June 30, 2018, compared to eight basis points ($1.5 million) for the six months ended June 30, 2017.

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Table of Contents

Table 1—Average Balances and Interest Rates—Tax-Equivalent Basis
 
Three Months Ended June 30,
 
2018
 
2017
(Dollars in thousands)
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with other banks
$
37,254

 
$
148

 
1.59
%
 
$
17,951

 
$
39

 
0.87
%
U.S. government obligations
23,183

 
91

 
1.57

 
33,453

 
113

 
1.35

Obligations of states and political subdivisions
71,092

 
603

 
3.40

 
83,356

 
886

 
4.26

Other debt and equity securities
356,100

 
2,177

 
2.45

 
351,792

 
1,720

 
1.96

Federal funds sold and other earning assets
32,788

 
509

 
6.23

 
29,860

 
396

 
5.32

Total interest-earning deposits, investments, federal funds sold and other earning assets
520,417

 
3,528

 
2.72

 
516,412

 
3,154

 
2.45

Commercial, financial and agricultural loans
810,610

 
9,750

 
4.82

 
761,544

 
8,172

 
4.30

Real estate—commercial and construction loans
1,661,198

 
19,044

 
4.60

 
1,501,258

 
16,629

 
4.44

Real estate—residential loans
853,769

 
10,046

 
4.72

 
750,149

 
8,479

 
4.53

Loans to individuals
28,985

 
444

 
6.14

 
27,850

 
406

 
5.85

Municipal loans and leases
313,181

 
2,961

 
3.79

 
283,129

 
3,185

 
4.51

Lease financings
75,452

 
1,353

 
7.19

 
77,395

 
1,416

 
7.34

Gross loans and leases
3,743,195

 
43,598

 
4.67

 
3,401,325

 
38,287

 
4.51

Total interest-earning assets
4,263,612

 
47,126

 
4.43

 
3,917,737

 
41,441

 
4.24

Cash and due from banks
45,158

 
 
 
 
 
43,804

 
 
 
 
Reserve for loan and lease losses
(23,914
)
 
 
 
 
 
(20,474
)
 
 
 
 
Premises and equipment, net
61,234

 
 
 
 
 
65,690

 
 
 
 
Other assets
336,737

 
 
 
 
 
326,932

 
 
 
 
Total assets
$
4,682,827

 
 
 
 
 
$
4,333,689

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking deposits
$
463,156

 
383

 
0.33

 
$
445,830

 
118

 
0.11

Money market savings
694,734

 
1,758

 
1.01

 
560,350

 
694

 
0.50

Regular savings
803,586

 
582

 
0.29

 
835,495

 
446

 
0.21

Time deposits
553,579

 
1,819

 
1.32

 
547,115

 
1,203

 
0.88

Total time and interest-bearing deposits
2,515,055

 
4,542

 
0.72

 
2,388,790

 
2,461

 
0.41

Short-term borrowings
217,327

 
958

 
1.77

 
139,146

 
325

 
0.94

Long-term debt
155,628

 
709

 
1.83

 
200,207

 
683

 
1.37

Subordinated notes
94,420

 
1,261

 
5.36

 
94,176

 
1,261

 
5.37

Total borrowings
467,375

 
2,928

 
2.51

 
433,529

 
2,269

 
2.10

Total interest-bearing liabilities
2,982,430

 
7,470

 
1.00

 
2,822,319

 
4,730

 
0.67

Noninterest-bearing deposits
1,048,901

 
 
 
 
 
957,619

 
 
 
 
Accrued expenses and other liabilities
39,829

 
 
 
 
 
36,054

 
 
 
 
Total liabilities
4,071,160

 
 
 
 
 
3,815,992

 
 
 
 
Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Common stock
157,784

 
 
 
 
 
144,559

 
 
 
 
Additional paid-in capital
290,517

 
 
 
 
 
230,683

 
 
 
 
Retained earnings and other equity
163,366

 
 
 
 
 
142,455

 
 
 
 
Total shareholders’ equity
611,667

 
 
 
 
 
517,697

 
 
 
 
Total liabilities and shareholders’ equity
$
4,682,827

 
 
 
 
 
$
4,333,689

 
 
 
 
Net interest income
 
 
$
39,656

 
 
 
 
 
$
36,711

 
 
Net interest spread
 
 
 
 
3.43

 
 
 
 
 
3.57

Effect of net interest-free funding sources
 
 
 
 
0.30

 
 
 
 
 
0.19

Net interest margin
 
 
 
 
3.73
%
 
 
 
 
 
3.76
%
Ratio of average interest-earning assets to average interest-bearing liabilities
142.96
%
 
 
 
 
 
138.81
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes:     For rate calculation purposes, average loan and lease categories include deferred fees and costs, purchase accounting adjustments,
and unearned discount.
Nonaccrual loans and leases have been included in the average loan and lease balances.
Loans held for sale have been included in the average loan balances.
Tax-equivalent amounts for the three months ended June 30, 2018 and 2017 have been calculated using the
Corporation’s federal applicable rate of 21% and 35%, respectively.

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Table of Contents

 
Six Months Ended June 30,
 
2018
 
2017
(Dollars in thousands)
Average
Balance
 
Income/
Expense
 
Average
Rate
 
Average
Balance
 
Income/
Expense
 
Average
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning deposits with other banks
$
28,269

 
$
224

 
1.60
%
 
$
13,297

 
$
55

 
0.83
%
U.S. government obligations
23,550

 
185

 
1.58

 
33,744

 
219

 
1.31

Obligations of states and political subdivisions
72,814

 
1,196

 
3.31

 
84,598

 
1,808

 
4.31

Other debt and equity securities
357,766

 
4,272

 
2.41

 
351,104

 
3,302

 
1.90

Federal funds sold and other earning assets
30,933

 
1,013

 
6.60

 
27,896

 
754

 
5.45

Total interest-earning deposits, investments, federal funds sold and other earning assets
513,332

 
6,890

 
2.71

 
510,639

 
6,138

 
2.42

Commercial, financial and agricultural loans
796,483

 
18,650

 
4.72

 
741,409

 
16,013

 
4.36

Real estate—commercial and construction loans
1,630,964

 
36,662

 
4.53

 
1,480,757

 
32,369

 
4.41

Real estate—residential loans
845,677

 
19,721

 
4.70

 
744,213

 
16,715

 
4.53

Loans to individuals
28,475

 
857

 
6.07

 
28,707

 
806

 
5.66

Municipal loans and leases
312,470

 
5,853

 
3.78

 
281,264

 
6,305

 
4.52

Lease financings
75,083

 
2,697

 
7.24

 
78,011

 
2,899

 
7.49

Gross loans and leases
3,689,152

 
84,440

 
4.62

 
3,354,361

 
75,107

 
4.52

Total interest-earning assets
4,202,484

 
91,330

 
4.38

 
3,865,000

 
81,245

 
4.24

Cash and due from banks
43,839

 
 
 
 
 
42,878

 
 
 
 
Reserve for loan and lease losses
(22,973
)
 
 
 
 
 
(19,344
)
 
 
 
 
Premises and equipment, net
61,485

 
 
 
 
 
65,102

 
 
 
 
Other assets
334,879

 
 
 
 
 
328,707

 
 
 
 
Total assets
$
4,619,714

 
 
 
 
 
$
4,282,343

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking deposits
$
444,197

 
675

 
0.31

 
$
436,155

 
223

 
0.10

Money market savings
676,651

 
3,101

 
0.92

 
546,083

 
1,257

 
0.46

Regular savings
818,895

 
1,139

 
0.28

 
821,725

 
795

 
0.20

Time deposits
547,562

 
3,318

 
1.22

 
569,341

 
2,377

 
0.84

Total time and interest-bearing deposits
2,487,305

 
8,233

 
0.67

 
2,373,304

 
4,652

 
0.40

Short-term borrowings
196,690

 
1,603

 
1.64

 
144,620

 
587

 
0.82

Long-term debt
155,697

 
1,374

 
1.78

 
174,263

 
1,082

 
1.25

Subordinated notes
94,390

 
2,522

 
5.39

 
94,146

 
2,522

 
5.40

Total borrowings
446,777

 
5,499

 
2.48

 
413,029

 
4,191

 
2.05

Total interest-bearing liabilities
2,934,082

 
13,732

 
0.94

 
2,786,333

 
8,843

 
0.64

Noninterest-bearing deposits
1,036,916

 
 
 
 
 
945,198

 
 
 
 
Accrued expenses and other liabilities
39,881

 
 
 
 
 
37,413

 
 
 
 
Total liabilities
4,010,879

 
 
 
 
 
3,768,944

 
 
 
 
Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Common stock
157,784

 
 
 
 
 
144,559

 
 
 
 
Additional paid-in capital
290,363

 
 
 
 
 
230,395

 
 
 
 
Retained earnings and other equity
160,688

 
 
 
 
 
138,445

 
 
 
 
Total shareholders’ equity
608,835

 
 
 
 
 
513,399

 
 
 
 
Total liabilities and shareholders’ equity
$
4,619,714

 
 
 
 
 
$
4,282,343

 
 
 
 
Net interest income
 
 
$
77,598

 
 
 
 
 
$
72,402

 
 
Net interest spread
 
 
 
 
3.44

 
 
 
 
 
3.60

Effect of net interest-free funding sources
 
 
 
 
0.28

 
 
 
 
 
0.18

Net interest margin
 
 
 
 
3.72
%
 
 
 
 
 
3.78
%
Ratio of average interest-earning assets to average interest-bearing liabilities
143.23
%
 
 
 
 
 
138.71
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes:     For rate calculation purposes, average loan and lease categories include deferred fees and costs, purchase accounting adjustments,
and unearned discount.
Nonaccrual loans and leases have been included in the average loan and lease balances.
Loans held for sale have been included in the average loan balances.
Tax-equivalent amounts for the six months ended June 30, 2018 and 2017 have been calculated using the
Corporation’s federal applicable rate of 21% and 35%, respectively.

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Table 2—Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest income for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated proportionately.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018 Versus 2017
 
June 30, 2018 Versus 2017
(Dollars in thousands)
Volume
Change
 
Rate
Change
 
Total
 
Volume
Change
 
Rate
Change
 
Total
Interest income:
 
 
 
 
 
 

 

 

Interest-earning deposits with other banks
$
62

 
$
47

 
$
109

 
$
93

 
$
76

 
$
169

U.S. government obligations
(38
)
 
16

 
(22
)
 
(74
)
 
40

 
(34
)
Obligations of states and political subdivisions
(119
)
 
(164
)
 
(283
)
 
(230
)
 
(382
)
 
(612
)
Other debt and equity securities
21

 
436

 
457

 
64

 
906

 
970

Federal funds sold and other earning assets
41

 
72

 
113

 
88

 
171

 
259

Interest on deposits, investments, federal funds sold and other earning assets
(33
)
 
407

 
374

 
(59
)
 
811

 
752

Commercial, financial and agricultural loans
549

 
1,029

 
1,578

 
1,249

 
1,388

 
2,637

Real estate—commercial and construction loans
1,804

 
611

 
2,415

 
3,385

 
908

 
4,293

Real estate—residential loans
1,202

 
365

 
1,567

 
2,357

 
649

 
3,006

Loans to individuals
17

 
21

 
38

 
(7
)
 
58

 
51

Municipal loans and leases
316

 
(540
)
 
(224
)
 
651

 
(1,103
)
 
(452
)
Lease financings
(35
)
 
(28
)
 
(63
)
 
(107
)
 
(95
)
 
(202
)
Interest and fees on loans and leases
3,853

 
1,458

 
5,311

 
7,528

 
1,805

 
9,333

Total interest income
3,820

 
1,865

 
5,685

 
7,469

 
2,616

 
10,085

Interest expense:
 
 
 
 
 
 

 

 

Interest-bearing checking deposits
5

 
260

 
265

 
4

 
448

 
452

Money market savings
203

 
861

 
1,064

 
356

 
1,488

 
1,844

Regular savings
(18
)
 
154

 
136

 
(3
)
 
347

 
344

Time deposits
14

 
602

 
616

 
(94
)
 
1,035

 
941

Interest on time and interest-bearing deposits
204

 
1,877

 
2,081

 
263

 
3,318

 
3,581

Short-term borrowings
246

 
387

 
633

 
269

 
747

 
1,016

Long-term debt
(173
)
 
199

 
26

 
(125
)
 
417

 
292

Interest on borrowings
73

 
586

 
659

 
144

 
1,164

 
1,308

Total interest expense
277

 
2,463

 
2,740

 
407

 
4,482

 
4,889

Net interest income
$
3,543

 
$
(598
)
 
$
2,945

 
$
7,062

 
$
(1,866
)
 
$
5,196



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Table of Contents

Interest Income
Three and six months ended June 30, 2018 versus 2017
Interest income on a tax-equivalent basis for the three months ended June 30, 2018 was $47.1 million, an increase of $5.7 million, or 13.7%, from the same period in 2017. Interest income on a tax-equivalent basis for the six months ended June 30, 2018 was $91.3 million, an increase of $10.1 million, or 12.4% from the same period in 2017. The increase in interest income (tax-equivalent) for the three and six months ended June 30, 2018 was primarily due to organic loan growth in commercial real estate, commercial business and residential real estate loans. In addition, loan yields increased as the Federal Reserve increased interest rates 75 basis points in 2017 and 50 basis points in 2018. The favorable impact of purchase accounting accretion on interest-earning assets was one basis point ($167 thousand) for the three months ended June 30, 2018, compared to a favorable impact of one basis point ($162 thousand) for the same period in the prior year. The favorable impact of purchase accounting accretion on interest-earning assets was 0 basis point ($126 thousand) for the six months ended June 30, 2018, compared to a favorable impact of two basis points ($314 thousand) for the same period in the prior year.
Interest Expense
Three and six months ended June 30, 2018 versus 2017
Interest expense for the three months ended June 30, 2018 was $7.5 million, an increase of $2.7 million, or 57.9%, from the same period in 2017. Interest expense for the six months ended June 30, 2018 was $13.7 million, an increase of $4.9 million, or 55.3%, from the same period in 2017. The increase in interest expense for the three months ended June 30, 2018 was primarily due to higher deposit and borrowing costs which were impacted by the Federal Reserve interest rate increases in 2017 and the first and second quarters of 2018. The favorable impact of purchase accounting accretion on interest-bearing liabilities was three basis points ($182 thousand) for the three months ended June 30, 2018, compared to a favorable impact of nine basis points ($580 thousand) for the same period in the prior year. The favorable impact of purchase accounting accretion on interest-bearing liabilities was three basis points ($368 thousand) for the six months ended June 30, 2018, compared to a favorable impact of nine basis points ($1.2 million) for the same period in the prior year.
Provision for Loan and Lease Losses
The provision for loan and lease losses for the three and six months ended June 30, 2018 was $15.4 million and $17.5 million, respectively, compared to $2.8 million and $5.2 million, respectively, for the same periods in 2017. Net loan and lease charge-offs for the three and six months ended June 30, 2018 were $13.2 million and $13.4 million, respectively, compared to $1.4 million and $1.8 million, respectively, for the same periods in the prior year. The increase in both the provision for loan and leases losses and loan and lease charge-offs for 2018 is primarily due to the $12.7 million commercial loan charge-off during the second quarter of 2018 previously discussed in the Executive Overview.
Noninterest Income
The following table presents noninterest income for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended 
 June 30,
 
Change
 
Six Months Ended 
 June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Trust fee income
$
2,044

 
$
2,016

 
$
28

 
1.4
 %
 
$
4,040

 
$
3,923

 
$
117

 
3.0
 %
Service charges on deposit accounts
1,335

 
1,313

 
22

 
1.7

 
2,662

 
2,556

 
106

 
4.1

Investment advisory commission and fee income
3,778

 
3,333

 
445

 
13.4

 
7,461

 
6,514

 
947

 
14.5

Insurance commission and fee income
3,712

 
3,628

 
84

 
2.3

 
8,600

 
8,038

 
562

 
7.0

Other service fee income
2,431

 
2,245

 
186

 
8.3

 
4,600

 
4,232

 
368

 
8.7

Bank owned life insurance income
1,210

 
1,622

 
(412
)
 
(25.4
)
 
1,879

 
2,405

 
(526
)
 
(21.9
)
Net gain on sales of investment securities

 
21

 
(21
)
 
N/M

 
10

 
36

 
(26
)
 
(72.2
)
Net gain on mortgage banking activities
942

 
1,537

 
(595
)
 
(38.7
)
 
1,658

 
2,650

 
(992
)
 
(37.4
)
Other (loss) income
(138
)
 
294

 
(432
)
 
N/M

 
(14
)
 
625

 
(639
)
 
N/M

Total noninterest income
$
15,314

 
$
16,009

 
$
(695
)
 
(4.3
)%
 
$
30,896

 
$
30,979

 
$
(83
)
 
(0.3
)%

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Table of Contents

Three and six months ended June 30, 2018 versus 2017

Noninterest income for the three months ended June 30, 2018 was $15.3 million, a decrease of $695 thousand, or 4.3%, from the three months ended June 30, 2017. Noninterest income for the six months ended June 30, 2018 was $30.9 million, consistent with the same period in the prior year.

Investment advisory commission and fee income increased $445 thousand, or 13.4%, for the three months and $947 thousand, or 14.5%, for the six months ended June 30, 2018, primarily due to new customer relationships and continued favorable market performance. Insurance commission and fee income increased $562 thousand, or 7.0%, for the six months ended June 30, 2018, primarily due to an increase in contingent commission income of $377 thousand, which is largely recognized in the first quarter of the year and due to an increase in group life and health premiums.

BOLI income decreased $412 thousand for the three months and $526 thousand for the six months ended June 30, 2018, primarily due to proceeds from the previously mentioned BOLI death benefits of $446 thousand in the second quarter of 2018 as compared to $889 thousand in the second quarter of 2017. The net gain on mortgage banking decreased $595 thousand, or 38.7%, for the three months and $992 thousand, or 37.4%, for the six months ended June 30, 2018, primarily due to a decrease in refinance mortgage volume, a shortage of housing supply and the Bank retaining, on balance-sheet, a higher percentage of its mortgage originations. Such on balance-sheet loans are predominantly hybrid adjustable rate mortgages. Other income decreased $432 thousand for the three months and $639 thousand for the six months ended June 30, 2018. The decrease in the six months ended June 30, 2018 is primarily due to a net loss of $300 thousand related to valuations and sales of other real estate owned and sales of closed branches as compared to a net gain of $289 thousand of such assets in the six months ended June 30, 2017.
Noninterest Expense
The following table presents noninterest expense for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended 
 June 30,
 
Change
 
Six Months Ended 
 June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
Salaries, benefits and commissions
$
20,065

 
$
18,730

 
$
1,335

 
7.1
 %
 
$
40,712

 
$
37,467

 
$
3,245

 
8.7
%
Net occupancy
2,533

 
2,684

 
(151
)
 
(5.6
)
 
5,290

 
5,349

 
(59
)
 
(1.1
)
Equipment
1,067

 
1,031

 
36

 
3.5

 
2,090

 
2,024

 
66

 
3.3

Data processing
2,091

 
2,081

 
10

 
0.5

 
4,323

 
4,139

 
184

 
4.4

Professional fees
1,331

 
1,248

 
83

 
6.7

 
2,686

 
2,487

 
199

 
8.0

Marketing and advertising
526

 
475

 
51

 
10.7

 
907

 
854

 
53

 
6.2

Deposit insurance premiums
452

 
451

 
1

 
0.2

 
843

 
853

 
(10
)
 
(1.2
)
Intangible expenses
594

 
446

 
148

 
33.2

 
1,206

 
1,205

 
1

 
0.1

Restructuring charges

 

 

 

 
571

 

 
571

 
N/M

Other expense
5,688

 
5,402

 
286

 
5.3

 
10,844

 
10,200

 
644

 
6.3

Total noninterest expense
$
34,347

 
$
32,548

 
$
1,799

 
5.5
 %
 
$
69,472

 
$
64,578

 
$
4,894

 
7.6
%

Three and six months ended June 30, 2018 versus 2017

Noninterest expense for the three months ended June 30, 2018 was $34.3 million, an increase of $1.8 million, or 5.5%, from the three months ended June 30, 2017. Noninterest expense for the six months ended June 30, 2018 was $69.5 million, an increase of $4.9 million, or 7.6%, from the same period in the prior year.

Salaries, benefits and commissions increased $1.3 million, or 7.1%, for the three months and $3.2 million, or 8.7%, for the six months ended June 30, 2018, primarily attributable to additional staff hired to support revenue generation across all business lines, expansion of our financial center footprint in Lancaster County and the Lehigh Valley and annual merit increases. Data processing expense increased $184 thousand for the six months ended June 30, 2018, primarily due to increased investments in customer relationship management software, internal infrastructure improvements and outsourced data processing solutions. Professional fees increased $199 thousand for the six months ended June 30, 2018, primarily due to increased consultant fees. Other expense increased $286 thousand for the three months and $644 thousand for the six months ended June 30, 2018, primarily due to increases in Bank shares tax and employment related expense. Restructuring costs related to financial center closures and

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staffing rationalization were $571 thousand during the first quarter of 2018. There were no restructuring costs during the six months ended June 30, 2017.
Tax Provision
The provision for income taxes for the three months ended June 30, 2018 and 2017 was $191 thousand and $4.2 million, at effective rates of 4.2% and 26.4%, respectively. The provision for income taxes for the six months ended June 30, 2018 and 2017 was $3.0 million and $8.1 million, at effective rates of 14.9% and 26.4%, respectively. As previously discussed, the Corporation's statutory federal tax rate was reduced to 21% effective January 1, 2018 in accordance with the TCJA. The Corporation's effective income tax rate for the six months ended June 30, 2018 was favorably impacted by discrete tax benefits and proceeds from BOLI death benefits. Excluding these discrete items, the effective tax rate was 18.2% for the six months ended June 30, 2018, which reflects the impact of the Corporation's level of tax-exempt income for the period relative to the overall level of taxable income.

Financial Condition
Assets
The following table presents assets at the dates indicated:
 
At June 30, 
 2018
 
At December 31, 
 2017
 
Change
(Dollars in thousands)
Amount
 
Percent
Cash and interest-earning deposits
$
72,943

 
$
75,409

 
$
(2,466
)
 
(3.3
)
Investment securities
446,933

 
454,082

 
(7,149
)
 
(1.6
)
Federal Home Loan Bank, Federal Reserve Bank and other stock, at cost
32,768

 
27,204

 
5,564

 
20.5

Loans held for sale
1,778

 
1,642

 
136

 
8.3

Loans and leases held for investment
3,818,398

 
3,620,067

 
198,331

 
5.5

Reserve for loan and lease losses
(25,652
)
 
(21,555
)
 
(4,097
)
 
(19.0
)
Premises and equipment, net
60,529

 
61,797

 
(1,268
)
 
(2.1
)
Goodwill and other intangibles, net
185,368

 
186,468

 
(1,100
)
 
(0.6
)
Bank owned life insurance
109,527

 
108,246

 
1,281

 
1.2

Accrued interest receivable and other assets
46,589

 
41,502

 
5,087

 
12.3

Total assets
$
4,749,181

 
$
4,554,862

 
$
194,319

 
4.3
 %
Investment Securities
Total investments securities at June 30, 2018 decreased $7.1 million from December 31, 2017. Maturities and pay-downs of $43.0 million, calls of $6.8 million, sales of $1.0 million and decreases in the fair value of available-for-sale investment securities of $8.3 million were partially off-set by purchases of $53.1 million. The decrease in the fair value of available-for-sale investment securities was due to increased interest rates during the year.
Federal Home Loan Bank, Federal Reserve Bank and other stock, at cost
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 $18.0 million and $12.5 million at June 30, 2018 and December 31, 2017, respectively. FHLB stock increased $5.6 million mainly due to purchase requirements related to the increase in FHLB borrowings during the year.
The Bank held $14.6 million in Federal Reserve Bank stock as required by the Federal Reserve Bank at June 30, 2018 and December 31, 2017.
Loans and Leases
Gross loans and leases held for investment grew $198.3 million, or 5.5%, from December 31, 2017. The growth in loans was primarily in commercial real estate, commercial business and residential real estate loans.

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Table of Contents

Asset Quality
The Bank's strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans and leases. Performance of the loan and lease portfolio is monitored on a regular basis by Bank management and lending officers.
Loans and leases are deemed impaired when, based on current information and events, it is probable that the Bank will be unable to collect all proceeds due according to the original contractual terms of the agreement or when a loan or lease is classified as a troubled debt restructuring. Factors considered by management in determining impairment include payment status, borrower cash flows, collateral value and the probability of collecting scheduled principal and interest payments when due.

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 and the amortization of net deferred costs is suspended. 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 ultimate collectability of principal.

Loans or leases are usually restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
At June 30, 2018, the recorded investment in loans and leases held for investment that were considered to be impaired was $33.9 million. The related reserve for loan and lease losses was $1.5 million. At December 31, 2017, the recorded investment in loans and leases that were considered to be impaired was $29.7 million. The related reserve for loan and lease losses was $131 thousand. During the first quarter of 2018, one commercial real-estate loan totaling $12.3 million was placed on non-accrual status. This was partially offset by troubled debt restructured commercial real estate loans for another borrower totaling $10.3 million being returned to performing status during the first quarter of 2018 as the borrower was in compliance with the modified terms of the restructuring for the required time period. The impaired loan and lease balances consisted mainly of commercial real estate loans and business loans. Impaired loans and leases 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 original 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.
Other real estate owned was $1.7 million at June 30, 2018, compared to $1.8 million at December 31, 2017. During the three months ended June 30, 2018, two residential properties with a carrying value of $402 thousand were transferred to other real estate owned and one residential property with no carrying value was sold for a gain of $21 thousand. Additionally, the market value of a parcel of land was written down by $460 thousand based on a potential agreement to sell the property and the market value of a residential property was written down by $43 thousand to reflect current market conditions.
Reserve for Loan and Lease Losses

The reserve for loan and lease losses is maintained at a level representing management's best estimate of known risks and inherent losses in the portfolio, based upon management's evaluation of the portfolio's collectability. Management evaluates the need to establish reserves against losses on loans and leases on a quarterly basis. When changes in the reserve are necessary, an adjustment is made.

The reserve for loan and lease losses consists of a reserve for impaired loans and leases and a general valuation allowance on the remainder of the originated portfolio. Although management determines the amount of each element of the reserve separately, the entire reserve for loan and lease losses is available for losses on the portfolio. The Corporation records a provision for loan loss for the acquired non-impaired loans only when additional deterioration of the portfolio is identified over the projections utilized in the initial fair value analysis. After the acquisition measurement period, the present value of any decreases in expected cash flows of acquired credit impaired loans will generally result in an impairment charge recorded as a provision for loan loss, resulting in an increase to the allowance.

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Table of Contents

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 $412 thousand and $390 thousand at June 30, 2018 and December 31, 2017, respectively.

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 nonperforming assets at the dates indicated. Nonperforming loans and assets exclude acquired credit impaired loans from Fox Chase and Valley Green.
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*:
 
 
 
Commercial, financial and agricultural
$
4,084

 
$
4,448

Real estate—commercial
19,584

 
4,285

Real estate—construction
110

 
365

Real estate—residential
4,844

 
3,820

Lease financings
1,526

 
1,599

Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*
30,148

 
14,517

Accruing troubled debt restructured loans and lease modifications not included in the above
790

 
11,435

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

 
310

Loans to individuals
101

 
195

Lease financings
49

 
256

Total accruing loans and leases, 90 days or more past due
150

 
761

Total nonperforming loans and leases
31,088

 
26,713

Other real estate owned
1,742

 
1,843

Total nonperforming assets
$
32,830

 
$
28,556

Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment
0.79
%
 
0.40
%
Nonperforming loans and leases / loans and leases held for investment
0.81

 
0.74

Nonperforming assets / total assets
0.69

 
0.63

 
 
 
 
Allowance for loan and lease losses
$
25,652

 
$
21,555

Allowance for loan and lease losses / loans and leases held for investment
0.67
%
 
0.60
%
Allowance for loan and lease losses / loans and leases held for investment (excluding acquired loans at period-end)
0.76

 
0.70

Allowance for loan and lease losses / nonaccrual loans and leases held for investment
85.09

 
148.48

Allowance for loan and lease losses / nonperforming loans and leases held for investment
82.51

 
80.69

Acquired credit impaired loans
$
998

 
$
1,583

 
 
 
 
 
 
 
 
Nonperforming loans and leases and acquired credit impaired loans / loans and leases held for investment
0.84
%
 
0.78
%
Nonperforming assets and acquired credit impaired loans / total assets
0.71

 
0.66

* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table
$
1,770

 
$
2,513


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Table of Contents

The following table provides additional information on the Corporation’s nonaccrual loans held for investment:
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications
$
30,148

 
$
14,517

Nonaccrual loans and leases with partial charge-offs
3,789

 
5,397

Life-to-date partial charge-offs on nonaccrual loans and leases
2,810

 
4,107

Charge-off rate of nonaccrual loans and leases with partial charge-offs
42.6
%
 
43.2
%
Specific reserves on impaired loans
$
1,524

 
$
131

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 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 $885 thousand and $1.1 million for the three months ended June 30, 2018 and 2017, respectively. The amortization of intangible assets was $1.8 million and $2.1 million for the six months ended June 30, 2018 and 2017, respectively. See Note 5 to the Consolidated Financial Statements, "Goodwill and Other Intangible Assets," for a summary of intangible assets at June 30, 2018 and December 31, 2017. The Corporation also has goodwill with a net carrying value of $172.6 million at June 30, 2018 and December 31, 2017, which is deemed to be an indefinite intangible asset and is not amortized.
The Corporation completes a goodwill impairment analysis at least on an annual basis, or more often, if events and circumstances indicate that there may be impairment. The Corporation also completes an impairment test for other identifiable intangible assets on an annual basis or more often if events and circumstances indicate there may be impairment. There was no impairment of goodwill or identifiable intangibles during the six months ended June 30, 2018 and 2017. Since the last annual impairment analysis during 2017, 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.

Liabilities
The following table presents liabilities at the dates indicated:
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
 
Change
Amount
 
Percent
Deposits
$
3,620,786

 
$
3,554,919

 
$
65,867

 
1.9
 %
Short-term borrowings
231,853

 
105,431

 
126,422

 
N/M

Long-term debt
155,556


155,828

 
(272
)
 
(0.2
)
Subordinated notes
94,453

 
94,331

 
122

 
0.1

Accrued interest payable and other liabilities
41,239

 
40,979

 
260

 
0.6

Total liabilities
$
4,143,887

 
$
3,951,488

 
$
192,399

 
4.9
 %

Deposits
Total deposits increased $65.9 million, or 1.9%, from December 31, 2017, primarily due to increases in consumer time deposits and commercial deposits partially offset by a seasonal decline in public funds deposits.
Borrowings
Total borrowings increased $126.3 million from December 31, 2017, primarily due to an increase in short-term borrowings of $126.4 million. The Corporation increased its short-term borrowings to fund loan growth during the first six months of 2018.

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Shareholders’ Equity
The following table presents total shareholders’ equity at the dates indicated:
(Dollars in thousands)
At June 30, 2018
 
At December 31, 2017
 
Change
Amount
 
Percent
Common stock
$
157,784

 
$
157,784

 
$

 
N/M

Additional paid-in capital
291,238

 
290,133

 
1,105

 
0.4

Retained earnings
226,574

 
216,761

 
9,813

 
4.5

Accumulated other comprehensive loss
(28,007
)
 
(17,771
)
 
(10,236
)
 
(57.6
)
Treasury stock
(42,295
)
 
(43,533
)
 
1,238

 
2.8

Total shareholders’ equity
$
605,294

 
$
603,374

 
$
1,920

 
0.3
 %

The increase in shareholder's equity at June 30, 2018 of $1.9 million from December 31, 2017 was primarily related to an increase in retained earnings of $9.8 million. Retained earnings at June 30, 2018 were impacted by the six months of net income of $17.2 million and the reclassification of $3.9 million and $433 thousand from accumulated other comprehensive income related to the January 1, 2018 adoption of ASU 2016-01 and ASU 2018-02, respectively, partially offset by cash dividends declared of $11.7 million. Accumulated other comprehensive loss increased by $10.2 million mainly attributable to decreases in the fair value of available-for-sale investment securities of $6.5 million, net of tax, and the reclassification to retained earnings from the previously discussed adoption of ASU 2016-01 and ASU 2018-02 ($3.0 million related to the defined benefit pension plans and $1.4 million related to 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 capital, Tier 1 capital and Tier 1 common 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 began to be phased in over a four-year period beginning January 1, 2016 with final phase in occurring 2019.
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 four-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 2018, the Corporation and the Bank must hold a capital conservation buffer greater than 1.875% above its minimum risk-based capital requirements in order to avoid limitations on capital distributions. It is the Corporation's and Bank's intent to maintain capital levels in excess of the capital conservation buffer which would require Tier 1 Capital to Risk Weighted Assets to exceed 8.50% and Total Capital to Risk Weighted Assets to exceed 10.50% beginning in the first quarter of 2019.


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Table 4—Regulatory Capital
The Corporation's and Bank's actual and required capital ratios as of June 30, 2018 and December 31, 2017 under regulatory capital rules were as follows.
 
Actual
 
For Capital Adequacy
Purposes
 
To Be Well-Capitalized
Under Prompt
Corrective Action
Provisions
(Dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount  
 
Ratio  
At June 30, 2018
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
$
580,048

 
13.76
%
 
$
337,246

 
8.00
%
 
$
421,557

 
10.00
%
Bank
475,914

 
11.36

 
335,137

 
8.00

 
418,922

 
10.00

Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
459,235

 
10.89

 
252,934

 
6.00

 
337,246

 
8.00

Bank
449,554

 
10.73

 
251,353

 
6.00

 
335,137

 
8.00

Tier 1 Common Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
459,235

 
10.89

 
189,701

 
4.50

 
274,012

 
6.50

Bank
449,554

 
10.73

 
188,515

 
4.50

 
272,299

 
6.50

Tier 1 Capital (to Average Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
459,235

 
10.19

 
180,350

 
4.00

 
225,438

 
5.00

Bank
449,554

 
10.03

 
179,203

 
4.00

 
224,004

 
5.00

At December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
$
563,797

 
14.00
%
 
$
322,148

 
8.00
%
 
$
402,685

 
10.00
%
Bank
464,851

 
11.62

 
320,003

 
8.00

 
400,004

 
10.00

Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
447,228

 
11.11

 
241,611

 
6.00

 
322,148

 
8.00

Bank
442,613

 
11.07

 
240,002

 
6.00

 
320,003

 
8.00

Tier 1 Common Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
447,228

 
11.11

 
181,208

 
4.50

 
261,745

 
6.50

Bank
442,613

 
11.07

 
180,002

 
4.50

 
260,002

 
6.50

Tier 1 Capital (to Average Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
447,228

 
10.48

 
170,753

 
4.00

 
213,441

 
5.00

Bank
442,613

 
10.45

 
169,453

 
4.00

 
211,816

 
5.00

At June 30, 2018 and December 31, 2017, 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 2018, 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 1.875% of total risk-weighted assets in order to avoid limitations on capital distributions. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, Tier 1 and Total capital ratios must be at least 8.0% and 10.0% on a risk-adjusted basis, respectively. At June 30, 2018, 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 phase in of the capital conservation buffer as well as the impact of new accounting rules, such as Lease Accounting (ASU No. 2016-02) and CECL (ASU No. 2016-13) on its regulatory capital ratios. See Note 1 to the financial statements included in Part I, Item I of this Form 10-Q for additional information.


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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. Management's objective to address interest rate risk is to understand the Corporation's sensitivity to changes in interest rates and develop and implement strategies to minimize volatility while maximizing net interest income.
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 impact of declining or rising interest rates on net interest income over a one-year and two-year horizon. The simulation uses expected cash flows and repricing characteristics for all financial instruments at a point in time and incorporates company developed, market-based assumptions regarding growth, pricing, and optionality such as prepayment speeds. 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.

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, deposit withdrawals, repayment of borrowings and certificates of deposit at maturity, operating expenditures, and capital expansion. The Corporation manages liquidity risk by measuring and monitoring liquidity sources and estimated funding needs on a daily basis. 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 continue to be the largest significant funding source for the Corporation. These deposits are primarily generated from a base of consumer, business, municipalities and non-profit customers located in our primary service areas. 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 also utilizes a mix of short-term and long-term wholesale funding providers. Wholesale funding includes correspondent bank borrowings, secured borrowing lines from the Federal Home Loan Bank, the Federal Reserve Bank of Philadelphia and, at times, brokered deposits and other similar sources.
The Corporation, through the Bank, has a credit facility with the FHLB with a maximum borrowing capacity of approximately $1.5 billion. At June 30, 2018 and December 31, 2017, the carrying amount of overnight borrowings with the FHLB was $138.5 million and $30.2 million, respectively. At June 30, 2018 and December 31, 2017, the carrying amount of long-term borrowings with the FHLB was $125.0 million. At June 30, 2018 and December 31, 2017, the Bank had outstanding short-term letters of credit with the FHLB totaling $178.9 million and $234.2 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.
The Corporation, through the Bank, maintains uncommitted federal fund lines with several correspondent banks totaling $367.0 million at June 30, 2018 and December 31, 2017. At June 30, 2018 and December 31, 2017, the Corporation had $65.0 million and $55.0 million, respectively, 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, holds collateral at the Federal Reserve Bank of Philadelphia in order to access their Discount Window Lending program. The collateral consisting of investment securities was valued at $69.4 million and $52.0 million at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018 and December 31, 2017, the Corporation had no outstanding borrowings under this program.
The Corporation has a $10.0 million line of credit with a correspondent bank. At June 30, 2018 and December 31, 2017, the Corporation had no outstanding borrowings under this line.

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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 and short-term and long-term borrowings. 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. The Bank will also use borrowings and brokered deposits to meet its obligations.
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 Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies.”

Recent Legislative Developments

Economic Growth, Regulatory Relief, and Consumer Protection Act

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Most of the changes made by the new Act can be grouped into five general areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified a systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation. Some of the key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings. The Corporation continues to analyze the changes implemented by the Act, but does not believe that such changes will materially impact the Corporation’s business, operations, or financial results.
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 year ended December 31, 2017.

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,

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including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2018.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended June 30, 2018 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings

The Corporation is periodically subject to various pending and threatened legal actions, which involve claims for monetary relief. Based upon information presently available to the Corporation, it is the Corporation's opinion that any legal and financial responsibility arising from such claims will not have a material adverse effect on the Corporation's results of operations, financial position or cash flows.

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, 2017.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information on repurchases by the Corporation of its common stock under the Corporation's Board approved program.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
April 1 – 30, 2018

 
$

 

 
1,014,246

May 1 – 31, 2018

 

 

 
1,014,246

June 1 – 30, 2018

 

 

 
1,014,246

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 does not include normal treasury activity such as purchases to fund the dividend reinvestment, employee stock purchase and equity compensation plans. The program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.

Item 3.
Defaults Upon Senior Securities
None.

Item 4.
Mine Safety Disclosures
Not Applicable.

Item 5.
Other Information
None.

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Item 6.
Exhibits
 
a.
Exhibits
 
 
 
 
 
 
 
Exhibit 3.1
 
 
 
 
 
 
Exhibit 3.2
 
 
 
 
 
 
Exhibit 31.1
 
 
 
 
 
 
Exhibit 31.2
 
 
 
 
 
 
Exhibit 32.1
 
 
 
 
 
Exhibit 32.2
 
 
 
 
 
Exhibit 101.INS
 
XBRL Instance Document
 
 
 
 
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Univest Corporation of Pennsylvania
 
(Registrant)
 
 
Date: August 3, 2018
/s/ Jeffrey M. Schweitzer
 
Jeffrey M. Schweitzer
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date: August 3, 2018
/s/ Roger S. Deacon
 
Roger S. Deacon
Senior Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


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