UNIVEST FINANCIAL Corp - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - UNIVEST FINANCIAL Corp	usvp033118ex322.htm
EX-32.1 - EXHIBIT 32.1 - UNIVEST FINANCIAL Corp	usvp033118ex321.htm
EX-31.2 - EXHIBIT 31.2 - UNIVEST FINANCIAL Corp	usvp033118ex312.htm
EX-31.1 - EXHIBIT 31.1 - UNIVEST FINANCIAL Corp	usvp033118ex311.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2018.



¨	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		29,406,826
(Title of Class)		(Number of shares outstanding at April 30, 2018)

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UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX



			Page Number
Part I.	Financial Information:

	Item 1.	Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017	2

		Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017	3

		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017	4

		Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2018 and 2017	5

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017	6

		Notes to Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

	Item 4.	Controls and Procedures	57

Part II.	Other Information

	Item 1.	Legal Proceedings	58

	Item 1A.	Risk Factors	58

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

	Item 3.	Defaults Upon Senior Securities	58

	Item 4.	Mine Safety Disclosures	58

	Item 5.	Other Information	58

	Item 6.	Exhibits	59

Signatures			60

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PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

UNIVEST CORPORATION OF PENNSYLVANIA

CONDENSED CONSOLIDATED BALANCE SHEETS



	(UNAUDITED)
(Dollars in thousands, except share data)	At March 31, 2018			At December 31, 2017
ASSETS
Cash and due from banks	$	34,752		$	46,721
Interest-earning deposits with other banks	13,879			28,688
Investment securities held-to-maturity (fair value $82,975 and $55,320 at March 31, 2018 and December 31, 2017, respectively)	84,393			55,564
Investment securities available-for-sale	376,787			397,442
Investments in equity securities	1,072			1,076
Federal Home Loan Bank, Federal Reserve Bank and other stock, at cost	32,801			27,204
Loans held for sale	687			1,642
Loans and leases held for investment	3,689,888			3,620,067
Less: Reserve for loan and lease losses	(23,410		)	(21,555		)
Net loans and leases held for investment	3,666,478			3,598,512
Premises and equipment, net	61,397			61,797
Goodwill	172,559			172,559
Other intangibles, net of accumulated amortization and fair value adjustments of $22,725 and $21,825 at March 31, 2018 and December 31, 2017, respectively	13,346			13,909
Bank owned life insurance	109,692			108,246
Accrued interest receivable and other assets	46,116			41,502
Total assets	$	4,613,959		$	4,554,862
LIABILITIES
Noninterest-bearing deposits	$	1,002,021		$	1,040,026
Interest-bearing deposits:
Demand deposits	1,159,737			1,109,438
Savings deposits	815,032			830,706
Time deposits	520,503			574,749
Total deposits	3,497,293			3,554,919
Short-term borrowings	216,426			105,431
Long-term debt	155,692			155,828
Subordinated notes	94,392			94,331
Accrued interest payable and other liabilities	43,437			40,979
Total liabilities	4,007,240			3,951,488
SHAREHOLDERS’ EQUITY
Common stock, $5 par value: 48,000,000 shares authorized at March 31, 2018 and December 31, 2017; 31,556,799 shares issued at March 31, 2018 and December 31, 2017; 29,391,934 and 29,334,859 shares outstanding at March 31, 2018 and December 31, 2017, respectively	157,784			157,784
Additional paid-in capital	290,095			290,133
Retained earnings	228,097			216,761
Accumulated other comprehensive loss, net of tax benefit	(26,791		)	(17,771		)
Treasury stock, at cost; 2,164,865 and 2,221,940 shares at March 31, 2018 and December 31, 2017, respectively	(42,466		)	(43,533		)
Total shareholders’ equity	606,719			603,374
Total liabilities and shareholders’ equity	$	4,613,959		$	4,554,862

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

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UNIVEST CORPORATION OF PENNSYLVANIA

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2018		2017
Interest income
Interest and fees on loans and leases:
Taxable	$	37,950	$	33,700
Exempt from federal income taxes	2,347		2,035
Total interest and fees on loans and leases	40,297		35,735
Interest and dividends on investment securities:
Taxable	2,189		1,688
Exempt from federal income taxes	468		599
Interest on deposits with other banks	76		17
Interest and dividends on other earning assets	504		357
Total interest income	43,534		38,396
Interest expense
Interest on deposits	3,691		2,191
Interest on short-term borrowings	645		262
Interest on long-term debt and subordinated notes	1,926		1,660
Total interest expense	6,262		4,113
Net interest income	37,272		34,283
Provision for loan and lease losses	2,053		2,445
Net interest income after provision for loan and lease losses	35,219		31,838
Noninterest income
Trust fee income	1,996		1,907
Service charges on deposit accounts	1,327		1,243
Investment advisory commission and fee income	3,683		3,181
Insurance commission and fee income	4,888		4,410
Other service fee income	2,169		1,987
Bank owned life insurance income	669		783
Net gain on sales of investment securities	10		15
Net gain on mortgage banking activities	716		1,113
Other income	124		331
Total noninterest income	15,582		14,970
Noninterest expense
Salaries, benefits and commissions	20,647		18,737
Net occupancy	2,757		2,665
Equipment	1,023		993
Data processing	2,232		2,058
Professional fees	1,355		1,239
Marketing and advertising	381		379
Deposit insurance premiums	391		402
Intangible expenses	612		759
Restructuring charges	571		—
Other expense	5,156		4,798
Total noninterest expense	35,125		32,030
Income before income taxes	15,676		14,778
Income tax expense	2,826		3,922
Net income	$	12,850	$	10,856
Net income per share:
Basic	$	0.44	$	0.41
Diluted	0.44		0.41
Dividends declared	0.20		0.20

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

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UNIVEST CORPORATION OF PENNSYLVANIA

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended March 31,
(Dollars in thousands)	2018									2017
(Dollars in thousands)	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Income	$	15,676		$	2,826		$	12,850		$	14,778		$	3,922		$	10,856
Other comprehensive (loss) income:
Net unrealized (losses) gains on available-for-sale investment securities:
Net unrealized holding (losses) gains arising during the period	(6,338		)	(1,331		)	(5,007		)	420			147			273
Less: reclassification adjustment for net gains on sales realized in net income (1)	(10		)	(2		)	(8		)	(15		)	(5		)	(10		)
Total net unrealized (losses) gains on available-for-sale investment securities	(6,348		)	(1,333		)	(5,015		)	405			142			263
Net unrealized gains on interest rate swaps used in cash flow hedges:
Net unrealized holding gains arising during the period	212			45			167			7			2			5
Less: reclassification adjustment for net losses realized in net income (2)	20			4			16			71			25			46
Total net unrealized gains on interest rate swaps used in cash flow hedges	232			49			183			78			27			51
Defined benefit pension plans:
Amortization of net actuarial loss included in net periodic pension costs (3)	281			59			222			299			105			194
Accretion of prior service cost included in net periodic pension costs (3)	(71		)	(15		)	(56		)	(70		)	(24		)	(46		)
Total defined benefit pension plans	210			44			166			229			81			148
Other comprehensive (loss) income	(5,906		)	(1,240		)	(4,666		)	712			250			462
Total comprehensive income	$	9,770		$	1,586		$	8,184		$	15,490		$	4,172		$	11,318

(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 consolidated financial statements.

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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
Three Months Ended March 31, 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	—		—		—			12,850			—			—			12,850
Other comprehensive loss, net of income tax benefit	—		—		—			—			(4,666		)	—			(4,666		)
Cash dividends declared ($0.20 per share)	—		—		—			(5,868		)	—			—			(5,868		)
Stock issued under dividend reinvestment and employee stock purchase plans	20,253		—		44			—			—			525			569
Exercise of stock options	14,158		—		(9		)	—			—			277			268
Stock-based compensation	—		—		847			—			—			—			847
Purchases of treasury stock	(23,539	)	—		—			—			—			(655		)	(655		)
Restricted stock awards granted, net of cancellations	46,203		—		(920		)	—			—			920			—
Balance at March 31, 2018	29,391,934		$	157,784	$	290,095		$	228,097		$	(26,791	)	$	(42,466	)	$	606,719



(Dollars in thousands, except share and per share data)	Common Shares Outstanding		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total
Three Months Ended March 31, 2017
Balance at December 31, 2016	26,589,353		$	144,559	$	230,494		$	194,516		$	(19,454	)	$	(44,906	)	$	505,209
Net income	—		—		—			10,856			—			—			10,856
Other comprehensive income, net of income tax	—		—		—			—			462			—			462
Cash dividends declared ($0.20 per share)	—		—		—			(5,322		)	—			—			(5,322		)
Stock issued under dividend reinvestment and employee stock purchase plans	20,944		—		16			—			—			601			617
Exercise of stock options	47,704		—		(62		)	—			—			923			861
Stock-based compensation	—		—		831			—			—			—			831
Purchases of treasury stock	(57,804	)	—		—			—			—			(1,634		)	(1,634		)
Restricted stock awards granted, net of cancellations	45,323		—		(888		)	—			—			888			—
Balance at March 31, 2017	26,645,520		$	144,559	$	230,391		$	200,050		$	(18,992	)	$	(44,128	)	$	511,880

(1) See Note 1, "Summary of Significant Accounting Policies - Accounting Pronouncements Adopted in 2018" for additional information.

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

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UNIVEST CORPORATION OF PENNSYLVANIA

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31,
(Dollars in thousands)	2018			2017
Cash flows from operating activities:
Net income	$	12,850		$	10,856
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	2,053			2,445
Depreciation of premises and equipment	1,408			1,192
Net amortization of investment securities premiums and discounts	402			515
Net gain on sales of investment securities	(10		)	(15		)
Net gain on mortgage banking activities	(716		)	(1,113		)
Bank owned life insurance income	(669		)	(783		)
Net accretion of acquisition accounting fair value adjustments	(146		)	(764		)
Stock-based compensation	847			831
Intangible expenses	612			759
Other adjustments to reconcile net income to cash (used in) provided by operating activities	(18		)	957
Originations of loans held for sale	(28,468		)	(24,828		)
Proceeds from the sale of loans held for sale	30,320			30,568
Contributions to pension and other postretirement benefit plans	(67		)	(69		)
(Increase) decrease in accrued interest receivable and other assets	(3,307		)	851
Increase (decrease) in accrued interest payable and other liabilities	2,805			(3,715		)
Net cash provided by operating activities	17,896			17,687
Cash flows from investing activities:
Net capital expenditures	(1,009		)	(2,299		)
Proceeds from maturities, calls and principal repayments of securities held-to-maturity	1,721			10,026
Proceeds from maturities, calls and principal repayments of securities available-for-sale	20,439			18,782
Proceeds from sales of securities available-for-sale	1,010			1,762
Purchases of investment securities held-to-maturity	(30,641		)	(18,209		)
Purchases of investment securities available-for-sale	(7,692		)	(9,009		)
Net increase in other investments	(5,597		)	(453		)
Net increase in loans and leases	(69,830		)	(56,550		)
Net decrease (increase) in interest-earning deposits	14,809			(3,987		)
Proceeds from sales of other real estate owned	—			2,039
Purchases of bank owned life insurance	(777		)	—
Proceeds from bank owned life insurance	—			211
Net cash used in investing activities	(77,567		)	(57,687		)
Cash flows from financing activities:
Net (decrease) increase in deposits	(57,575		)	108,543
Net increase (decrease) in short-term borrowings	110,995			(116,805		)
Proceeds from issuance of long-term debt	—			55,000
Payment of contingent consideration on acquisitions	(34		)	(5,284		)
Purchases of treasury stock	(655		)	(1,634		)
Stock issued under dividend reinvestment and employee stock purchase plans	569			617
Proceeds from exercise of stock options	268			861
Cash dividends paid	(5,866		)	(5,310		)
Net cash provided by financing activities	47,702			35,988
Net decrease in cash and due from banks	(11,969		)	(4,012		)
Cash and due from banks at beginning of year	46,721			48,757
Cash and due from banks at end of period	$	34,752		$	44,745
Supplemental disclosures of cash flow information:
Cash paid for interest	$	6,361		$	4,729
Cash paid for income taxes, net of refunds	145			157
Non cash transactions:
Transfer of loans to other real estate owned	$	—		$	653

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

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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 three-month period ended March 31, 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's equity portfolio had a carrying value of $1.1 million which included an unrealized net gain of $666 thousand. At December 31, 2017, $433 thousand was recorded in accumulated

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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. 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 three months ended March 31, 2018, the Corporation recognized a $4 thousand net loss on equity securities in other noninterest income.

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.

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

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receivables. The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU. A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years for public business entities that are SEC filers, or January 1, 2020 for the Corporation. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's financial statements; however, it is anticipated that the allowance will increase upon adoption of CECL and that the increased allowance level will decrease 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 for the recording of assets and liabilities for 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 March 31,
(Dollars and shares in thousands, except per share data)	2018			2017
Numerator:
Net income	$	12,850		$	10,856
Net income allocated to unvested restricted stock	(97		)	(113		)
Net income allocated to common shares	$	12,753		$	10,743
Denominator:
Weighted average shares outstanding	29,355			26,631
Average unvested restricted stock	(215		)	(286		)
Denominator for basic earnings per share—weighted-average shares outstanding	29,140			26,345
Effect of dilutive securities—employee stock options	94			103
Denominator for diluted earnings per share—adjusted weighted-average shares outstanding	29,234			26,448
Basic earnings per share	$	0.44		$	0.41
Diluted earnings per share	$	0.44		$	0.41
Average anti-dilutive options excluded from computation of diluted earnings per share	217			126

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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 March 31, 2018 and December 31, 2017, by contractual maturity within each type:



	At March 31, 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	$	—	$	(169	)	$	6,827	$	6,995	$	—	$	(77	)	$	6,918
	6,996		—		(169		)	6,827		6,995		—		(77		)	6,918
Residential mortgage-backed securities:
After 5 years to 10 years	13,495		—		(157		)	13,338		8,944		—		(51		)	8,893
Over 10 years	63,902		—		(1,092		)	62,810		39,625		44		(160		)	39,509
	77,397		—		(1,249		)	76,148		48,569		44		(211		)	48,402
Total	$	84,393	$	—	$	(1,418	)	$	82,975	$	55,564	$	44	$	(288	)	$	55,320
Securities Available-for-Sale
U.S. government corporations and agencies:
Within 1 year	$	6,527	$	—	$	(40	)	$	6,487	$	1,499	$	—	$	(3	)	$	1,496
After 1 year to 5 years	10,519		—		(124		)	10,395		15,590		—		(125		)	15,465
	17,046		—		(164		)	16,882		17,089		—		(128		)	16,961
State and political subdivisions:
Within 1 year	5,824		—		(9		)	5,815		2,721		1		(6		)	2,716
After 1 year to 5 years	13,997		28		(58		)	13,967		16,787		33		(44		)	16,776
After 5 years to 10 years	49,935		508		(453		)	49,990		54,846		897		(73		)	55,670
Over 10 years	3,120		—		(84		)	3,036		3,120		15		—			3,135
	72,876		536		(604		)	72,808		77,474		946		(123		)	78,297
Residential mortgage-backed securities:
After 1 year to 5 years	3,969		2		(57		)	3,914		3,913		12		(26		)	3,899
After 5 years to 10 years	54,753		—		(1,691		)	53,062		51,428		5		(852		)	50,581
Over 10 years	121,722		50		(4,163		)	117,609		133,237		87		(2,383		)	130,941
	180,444		52		(5,911		)	174,585		188,578		104		(3,261		)	185,421
Collateralized mortgage obligations:
After 5 years to 10 years	1,999		—		(100		)	1,899		2,103		—		(82		)	2,021
Over 10 years	1,485		—		(16		)	1,469		1,567		14		—			1,581
	3,484		—		(116		)	3,368		3,670		14		(82		)	3,602
Corporate bonds:
Within 1 year	5,016		—		(19		)	4,997		10,006		—		(5		)	10,001
After 1 year to 5 years	23,845		13		(436		)	23,422		24,885		20		(147		)	24,758
After 5 years to 10 years	16,164		—		(458		)	15,706		16,669		71		(296		)	16,444
Over 10 years	60,000		—		(6,155		)	53,845		60,000		—		(4,027		)	55,973
	105,025		13		(7,068		)	97,970		111,560		91		(4,475		)	107,176
Money market mutual funds:
No stated maturity	11,174		—		—			11,174		5,985		—		—			5,985
	11,174		—		—			11,174		5,985		—		—			5,985
Equity securities:
No stated maturity	N/A		N/A		N/A			N/A		410		667		(1		)	1,076
	N/A		N/A		N/A			N/A		410		667		(1		)	1,076
Total	$	390,049	$	601	$	(13,863	)	$	376,787	$	404,766	$	1,822	$	(8,070	)	$	398,518

N/A - Not applicable as a result of adoption of ASU 2016-01

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 $362.5 million and $345.1 million at March 31, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and other contractual obligations. In addition, securities of $296 thousand and $1.8 million were pledged to secure credit derivatives and interest rate swaps at March 31, 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 three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
(Dollars in thousands)	2018		2017
Securities available-for-sale:
Proceeds from sales	$	1,010	$	1,762
Gross realized gains on sales	10		15
Tax expense related to net realized gains on sales	2		5

At March 31, 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 March 31, 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 March 31, 2018
Securities Held-to-Maturity
U.S. government corporations and agencies	$	6,826	$	(169	)	$	—	$	—		$	6,826	$	(169	)
Residential mortgage-backed securities	76,149		(1,249		)	—		—			76,149		(1,249		)
Total	$	82,975	$	(1,418	)	$	—	$	—		$	82,975	$	(1,418	)
Securities Available-for-Sale
U.S. government corporations and agencies	$	5,155	$	(59	)	$	11,727	$	(105	)	$	16,882	$	(164	)
State and political subdivisions	35,367		(553		)	6,310		(51		)	41,677		(604		)
Residential mortgage-backed securities	36,274		(819		)	134,167		(5,092		)	170,441		(5,911		)
Collateralized mortgage obligations	1,469		(16		)	1,899		(100		)	3,368		(116		)
Corporate bonds	23,242		(384		)	71,714		(6,684		)	94,956		(7,068		)
Total	$	101,507	$	(1,831	)	$	225,817	$	(12,032	)	$	327,324	$	(13,863	)
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 March 31, 2018, gross unrealized losses for securities in an unrealized loss position for twelve months or longer, totaled $12.0 million. Four federal agency bonds, thirteen investment grade corporate bonds, 105 federal agency residential mortgage securities, and seven investment grade municipal bonds had respective unrealized loss positions of $105 thousand, $6.7 million, $5.2 million and $51 thousand, respectively. The fair value of these 129 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 three months ended March 31, 2018 and 2017.

In conjunction with the adoption of ASU 2016-01, the Corporation recognized a $4 thousand net loss on equity securities during the three months ended March 31, 2018 in other noninterest income and the net unrealized loss on equity securities held at March 31, 2018 was $4 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 March 31, 2018
(Dollars in thousands)	Originated			Acquired		Total
Commercial, financial and agricultural	$	856,250		$	51,688	$	907,938
Real estate-commercial	1,293,496			291,324		1,584,820
Real estate-construction	180,681			4,452		185,133
Real estate-residential secured for business purpose	251,188			82,173		333,361
Real estate-residential secured for personal purpose	278,990			58,183		337,173
Real estate-home equity secured for personal purpose	172,121			11,347		183,468
Loans to individuals	28,112			143		28,255
Lease financings	129,740			—		129,740
Total loans and leases held for investment, net of deferred income	$	3,190,578		$	499,310	$	3,689,888
Unearned lease income, included in the above table	$	(14,153	)	$	—	$	(14,153	)
Net deferred costs, included in the above table	4,436			—		4,436
Overdraft deposits included in the above table	396			—		396



	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.

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The carrying amount of acquired loans at March 31, 2018 totaled $499.3 million, including $400.1 million of loans from the Fox Chase acquisition and $99.2 million from the Valley Green Bank acquisition. At March 31, 2018, loans acquired with deteriorated credit quality, or acquired credit impaired loans, totaled $1.5 million representing $733 thousand from the Fox Chase acquisition and $792 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 March 31, 2018 and December 31, 2017 were as follows:



(Dollars in thousands)	At March 31, 2018		At December 31, 2017
Outstanding principal balance	$	2,197	$	2,325
Carrying amount	1,525		1,583
Allowance for loan losses	—		—

The following table presents the changes in accretable yield on acquired credit impaired loans:



	Three Months Ended March 31,
(Dollars in thousands)	2018			2017
Beginning of period	$	11		$	50
Reclassification from nonaccretable discount	81			107
Accretable discount amortized to interest income	(87		)	(116		)
Disposals	—			(4		)
End of period	$	5		$	37

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Age Analysis of Past Due Loans and Leases

The following presents, by class of loans and leases, an aging of past due loans and leases, loans and leases which are current and the recorded investment in loans and leases 90 days or more past due which are accruing interest at March 31, 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 March 31, 2018
Commercial, financial and agricultural	$	663	$	187	$	2,763	$	3,613	$	903,947	$	378	$	907,938	$	—
Real estate—commercial real estate and construction:
Commercial real estate	1,564		174		4,347		6,085		1,578,379		356		1,584,820		—
Construction	1,168		—		—		1,168		183,965		—		185,133		—
Real estate—residential and home equity:
Residential secured for business purpose	1,164		—		962		2,126		330,649		586		333,361		—
Residential secured for personal purpose	3,575		—		826		4,401		332,567		205		337,173		569
Home equity secured for personal purpose	1,335		74		1,110		2,519		180,949		—		183,468		955
Loans to individuals	153		53		644		850		27,405		—		28,255		644
Lease financings	1,225		635		127		1,987		127,753		—		129,740		127
Total	$	10,847	$	1,123	$	10,779	$	22,749	$	3,665,614	$	1,525	$	3,689,888	$	2,295
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

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Nonperforming Loans and Leases

The following presents, by class of loans and leases, nonperforming loans and leases at March 31, 2018 and December 31, 2017. Nonperforming loans exclude acquired credit impaired loans from Fox Chase and Valley Green.



	At March 31, 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	$	4,192	$	796	$	—	$	4,988	$	4,448	$	921	$	—	$	5,369
Real estate—commercial real estate and construction:
Commercial real estate	19,014		—		—		19,014		4,285		10,266		—		14,551
Construction	—		—		—		—		365		—		—		365
Real estate—residential and home equity:
Residential secured for business purpose	1,565		195		—		1,760		2,843		206		162		3,211
Residential secured for personal purpose	594		41		569		1,204		466		42		—		508
Home equity secured for personal purpose	649		—		955		1,604		511		—		148		659
Loans to individuals	—		—		644		644		—		—		195		195
Lease financings	1,680		—		127		1,807		1,599		—		256		1,855
Total	$	27,694	$	1,032	$	2,295	$	31,021	$	14,517	$	11,435	$	761	$	26,713

* Includes nonaccrual troubled debt restructured loans and lease modifications of $1.7 million and $2.5 million at March 31, 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 March 31, 2018, commercial real estate nonaccrual loans and leases includes a $12.3 million loan that was placed on nonaccrual status during the current quarter. A specific reserve of $656 thousand was recorded for this loan as of March 31, 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 March 31, 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

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Commercial Credit Exposure Credit Risk by Internally Assigned Grades

The following table presents classifications for originated loans:



(Dollars in thousands)	Commercial, Financial and Agricultural		Real Estate— Commercial		Real Estate— Construction		Real Estate— Residential Secured for Business Purpose		Total
At March 31, 2018
Grade:
1. Cash secured/ 2. Fully secured	$	2,257	$	399	$	17,935	$	—	$	20,591
3. Strong	15,010		1,779		—		—		16,789
4. Satisfactory	19,252		25,858		—		271		45,381
5. Acceptable	605,721		1,001,237		73,203		215,138		1,895,299
6. Pre-watch	196,721		239,815		87,030		30,898		554,464
7. Special Mention	6,939		13,117		2,513		1,024		23,593
8. Substandard	10,350		11,291		—		3,857		25,498
9. Doubtful	—		—		—		—		—
10.Loss	—		—		—		—		—
Total	$	856,250	$	1,293,496	$	180,681	$	251,188	$	2,581,615
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

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The following table presents classifications for acquired loans:



(Dollars in thousands)	Commercial, Financial and Agricultural		Real Estate— Commercial		Real Estate— Construction		Real Estate— Residential Secured for Business Purpose		Total
At March 31, 2018
Grade:
1. Cash secured/ 2. Fully secured	$	1,125	$	—	$	—	$	—	$	1,125
3. Strong	—		—		—		—		—
4. Satisfactory	118		463		—		—		581
5. Acceptable	39,143		173,731		—		67,954		280,828
6. Pre-watch	8,496		97,057		4,452		12,738		122,743
7. Special Mention	891		4,504		—		—		5,395
8. Substandard	1,915		15,569		—		1,481		18,965
9. Doubtful	—		—		—		—		—
10.Loss	—		—		—		—		—
Total	$	51,688	$	291,324	$	4,452	$	82,173	$	429,637
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 March 31, 2018
Performing	$	278,357	$	171,597	$	27,468	$	127,933	$	605,355
Nonperforming	633		524		644		1,807		3,608
Total	$	278,990	$	172,121	$	28,112	$	129,740	$	608,963
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

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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 March 31, 2018
Performing	$	57,612	$	10,267	$	143	$	—	$	68,022
Nonperforming	571		1,080		—		—		1,651
Total	$	58,183	$	11,347	$	143	$	—	$	69,673
At December 31, 2017
Performing	$	60,477	$	12,084	$	144	$	—	$	72,705
Nonperforming	443		302		—		—		745
Total	$	60,920	$	12,386	$	144	$	—	$	73,450

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 months ended March 31, 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 March 31, 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	(601		)	(40		)	—			—			(92		)	(136		)	N/A			(869		)
Recoveries	226			73			251			57			30			34			N/A			671
Provision (recovery of provision)	575			1,306			(41		)	96			61			49			6			2,052
Provision for acquired credit impaired loans	—			—			—			1			—			—			—			1
Ending balance	$	6,942		$	11,178		$	1,871		$	1,908		$	372		$	1,079		$	60		$	23,410
Three Months Ended March 31, 2017
Reserve for loan and lease losses:
Beginning balance	$	7,037		$	7,505		$	774		$	993		$	364		$	788		$	38		$	17,499
Charge-offs	(178		)	—			(42		)	(94		)	(126		)	(257		)	N/A			(697		)
Recoveries	187			3			10			17			35			29			N/A			281
Provision (recovery of provision)	844			116			603			82			62			769			(34		)	2,442
Provision for acquired credit impaired loans	—			—			—			3			—			—			—			3
Ending balance	$	7,890		$	7,624		$	1,345		$	1,001		$	335		$	1,329		$	4		$	19,528

N/A – Not applicable

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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 March 31, 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 March 31, 2018
Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	34	$	684	$	14	$	—	$	—	$	—	N/A		$	732
Ending balance: collectively evaluated for impairment	6,776		10,378		1,815		1,908		372		1,079		60		22,388
Ending balance: acquired credit impaired loans evaluated for impairment	132		116		42		—		—		—		—		290
Total ending balance	$	6,942	$	11,178	$	1,871	$	1,908	$	372	$	1,079	$	60	$	23,410
Loans and leases held for investment:
Ending balance: individually evaluated for impairment	$	6,560	$	30,573	$	2,173	$	1,284	$	—	$	1,250			$	41,840
Ending balance: collectively evaluated for impairment	849,690		1,441,709		249,015		449,827		28,112		128,490				3,146,843
Loans measured at fair value	—		1,895		—		—		—		—				1,895
Acquired non-credit impaired loans	51,310		295,420		81,587		69,325		143		—				497,785
Acquired credit impaired loans	378		356		586		205		—		—				1,525
Total ending balance	$	907,938	$	1,769,953	$	333,361	$	520,641	$	28,255	$	129,740			$	3,689,888
At March 31, 2017
Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	8	$	26	$	364	$	1	$	—	$	580	N/A		$	979
Ending balance: collectively evaluated for impairment	7,882		7,598		981		1,000		335		749		4		18,549
Total ending balance	$	7,890	$	7,624	$	1,345	$	1,001	$	335	$	1,329	$	4	$	19,528
Loans and leases held for investment:
Ending balance: individually evaluated for impairment	$	9,524	$	21,658	$	5,178	$	1,054	$	—	$	5,021			$	42,435
Ending balance: collectively evaluated for impairment	740,818		1,160,406		175,652		373,852		27,915		127,843				2,606,486
Loans measured at fair value	—		2,092		—		—		—		—				2,092
Acquired non-credit impaired loans	90,069		395,838		110,820		87,412		148		—				684,287
Acquired credit impaired loans	560		5,261		582		213		—		—				6,616
Total ending balance	$	840,971	$	1,585,255	$	292,232	$	462,531	$	28,063	$	132,864			$	3,341,916

N/A – Not applicable

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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 March 31, 2018 and December 31, 2017. The impaired loans exclude acquired credit impaired loans.



	At March 31, 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	$	4,683	$	5,518			$	7,019	$	8,301
Real estate—commercial real estate	17,738		18,564				15,621		16,507
Real estate—construction	—		—				365		365
Real estate—residential secured for business purpose	1,697		1,819				3,430		4,620
Real estate—residential secured for personal purpose	635		691				508		566
Real estate—home equity secured for personal purpose	649		674				511		523
Total impaired loans with no related reserve recorded	$	25,402	$	27,266			$	27,454	$	30,882
Impaired loans with a reserve recorded:
Commercial, financial and agricultural	$	1,877	$	2,336	$	34	$	60	$	60	$	31
Real estate—commercial real estate	12,835		12,929		684		933		933		99
Real estate—residential secured for business purpose	476		549		14		35		37		1
Total impaired loans with a reserve recorded	$	15,188	$	15,814	$	732	$	1,028	$	1,030	$	131



Total impaired loans:
Commercial, financial and agricultural	$	6,560	$	7,854	$	34	$	7,079	$	8,361	$	31
Real estate—commercial real estate	30,573		31,493		684		16,554		17,440		99
Real estate—construction	—		—		—		365		365		—
Real estate—residential secured for business purpose	2,173		2,368		14		3,465		4,657		1
Real estate—residential secured for personal purpose	635		691		—		508		566		—
Real estate—home equity secured for personal purpose	649		674		—		511		523		—
Total impaired loans	$	40,590	$	43,080	$	732	$	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 March 31, 2018 and December 31, 2017, respectively. Specific reserves on other accruing impaired loans were $28 thousand and $99 thousand at March 31, 2018 and December 31, 2017, respectively.

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The following presents by class of loans, the average recorded investment in impaired loans and an analysis of interest on impaired loans. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Therefore, interest income on accruing impaired loans is recognized using the accrual method.



	Three Months Ended March 31, 2018						Three Months Ended March 31, 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	$	7,703	$	40	$	77	$	11,418	$	43	$	85
Real estate—commercial real estate	19,916		172		287		23,949		233		73
Real estate—construction	183		—		2		—		—		—
Real estate—residential secured for business purpose	2,217		5		24		4,268		16		44
Real estate—residential secured for personal purpose	544		1		11		552		—		8
Real estate—home equity secured for personal purpose	549		—		8		525		—		5
Total	$	31,112	$	218	$	409	$	40,712	$	292	$	215


*	Includes interest income recognized on a cash basis for nonaccrual loans of $6 thousand and $1 thousand for the three months ended March 31, 2018 and 2017, respectively, and interest income recognized on the accrual method for accruing impaired loans of $212 thousand and $291 thousand for the three months ended March 31, 2018 and 2017, respectively.

Impaired Leases

The Corporation had impaired leases of $1.3 million at March 31, 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.

Troubled Debt Restructured Loans

There were no loans restructured during the three months ended March 31, 2018 and March 31, 2017.

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.

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The following presents, by class of loans, information regarding accruing and nonaccrual troubled debt restructured loans, for which there were payment defaults within twelve months of the restructuring date:



	Three Months Ended March 31,
	2018			2017
(Dollars in thousands)	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Accruing Troubled Debt Restructured Loans:
Total	—	$	—	—	$	—
Nonaccrual Troubled Debt Restructured Loans:
Commercial, financial and agricultural	1	$	953	—	$	—
Total	1	$	953	—	$	—

The following presents, by class of loans, information regarding consumer mortgages collateralized by residential real estate property that are in the process of foreclosure at March 31, 2018 and December 31, 2017:



(Dollars in thousands)	At March 31, 2018		At December 31, 2017
Real estate-residential secured for personal purpose	$	317	$	31
Real estate-home equity secured for personal purpose	79		—
Total	$	396	$	31

The following presents foreclosed residential real estate property included in other real estate owned at March 31, 2018 and December 31, 2017.



(Dollars in thousands)	At March 31, 2018		At December 31, 2017
Foreclosed residential real estate	$	80	$	80

Note 5. Goodwill and Other Intangible Assets

The Corporation has covenants not to compete agreements with certain individuals, 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 three months ended March 31, 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 March 31, 2018	$	138,476	$	15,434	$	18,649	$	172,559

The following table reflects the components of intangible assets at the dates indicated:



	At March 31, 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	$	645	$	65	$	710	$	580	$	130
Core deposit intangibles	6,788		2,399		4,389		6,788		2,135		4,653
Customer related intangibles	12,381		10,094		2,287		12,381		9,828		2,553
Servicing rights	16,192		9,587		6,605		15,855		9,282		6,573
Total amortized intangible assets	$	36,071	$	22,725	$	13,346	$	35,734	$	21,825	$	13,909

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The estimated aggregate amortization expense for covenants not to compete and 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		$	1,519
2019		1,565
2020		1,200
2021		923
2022		666
Thereafter		868

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 $11.2 million at March 31, 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 March 31, 2018 and December 31, 2017. The Corporation also records servicing rights on small business administration (SBA) loans. The value of these servicing rights was $20 thousand and $21 thousand at March 31, 2018 and December 31, 2017, respectively.

Changes in the servicing rights balance are summarized as follows:



	Three Months Ended March 31,
(Dollars in thousands)	2018			2017
Beginning of period	$	6,573		$	6,485
Servicing rights capitalized	337			343
Amortization of servicing rights	(305		)	(326		)
Changes in valuation allowance	—			—
End of period	$	6,605		$	6,502
Residential mortgage and SBA loans serviced for others	$	1,012,677		$	972,617

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		$	874
2019		774
2020		684
2021		602
2022		529
Thereafter		3,142

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Note 6. Deposits

Deposits and their respective weighted average interest rate at March 31, 2018 and December 31, 2017 consist of the following:



	At March 31, 2018				At December 31, 2017
	Weighted Average Interest Rate		Amount		Weighted Average Interest Rate		Amount
	(Dollars in thousands)
Noninterest-bearing deposits	—	%	$	1,002,021	—	%	$	1,040,026
Demand deposits	0.51		1,159,737		0.43		1,109,438
Savings deposits	0.30		815,032		0.26		830,706
Time deposits	1.18		520,503		1.12		574,749
Total	0.41	%	$	3,497,293	0.38	%	$	3,554,919

The aggregate amount of time deposits in denominations of $100 thousand or more was $181.0 million at March 31, 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 $53.2 million at March 31, 2018 and $118.4 million at December 31, 2017.

At March 31, 2018, the scheduled maturities of time deposits are as follows:



Year	(Dollars in thousands)	Amount
Remainder of 2018		$	207,697
2019		183,979
2020		65,427
2021		19,000
2022		32,457
Thereafter		11,943
Total		$	520,503

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 March 31, 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	$	148,285	1.87	%	$	30,225	1.54	%
Federal funds purchased	50,000		1.80		55,000		1.56
Customer repurchase agreements	18,141		0.05		20,206		0.05

Long-term debt:
FHLB advances	$	125,021	1.73	%	$	125,036	1.73	%
Security repurchase agreements	30,671		1.77		30,792		1.52

Subordinated notes	$	94,392	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 March 31, 2018 and December 31, 2017, the Bank had outstanding short-term letters of credit with the FHLB totaling $198.0 million and $234.2

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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 March 31, 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 $68.5 million and $52.0 million at March 31, 2018 and December 31, 2017, respectively. At March 31, 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 March 31, 2018, the Corporation had no outstanding borrowings under this line.

Long-term advances with the FHLB of Pittsburgh mature as follows:



(Dollars in thousands)	As of March 31, 2018		Weighted Average Rate
Remainder of 2018	$	10,021	0.70	%
2019	10,000		1.35
2020	40,000		1.70
2021	55,000		1.94
2022	10,000		2.09
Thereafter	—		—
Total	$	125,021	1.73	%

Long-term debt under security repurchase agreements with large commercial banks mature as follows:



(Dollars in thousands)	As of March 31, 2018		Weighted Average Rate
Remainder of 2018	$	10,138	1.29	%
2019	10,228		2.01
2020	10,305		2.01
2021	—		—
2022	—		—
Thereafter	—		—
Total	$	30,671	1.77	%

Long-term debt under security repurchase agreements totaling $25.6 million are variable based on the one-month LIBOR rate plus a spread. One borrowing for $5.1 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.

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



	Three Months Ended March 31,
	2018			2017			2018		2017
(Dollars in thousands)	Retirement Plans						Other Post Retirement Benefits
Service cost	$	140		$	151		$	22	$	12
Interest cost	441			465			23		29
Expected return on plan assets	(796		)	(753		)	—		—
Amortization of net actuarial loss	280			288			1		11
Accretion of prior service cost	(71		)	(70		)	—		—
Net periodic benefit (income) cost	$	(6	)	$	81		$	46	$	52

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 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 three months ended March 31, 2018, the Corporation contributed $40 thousand to its non-qualified retirement plans and $27 thousand to its other postretirement plans. During the three months ended March 31, 2018, $649 thousand was paid to participants from the retirement plans and $27 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 three months ended March 31, 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 March 31, 2018
Outstanding at December 31, 2017	512,735		$	21.90
Granted	193,778		28.50
Expired	—		—
Forfeited	—		—
Exercised	(14,158	)	18.93
Outstanding at March 31, 2018	692,355		23.81		8.0	$	2,930
Exercisable at March 31, 2018	302,459		20.19		6.5	2,297

The following is a summary of nonvested stock options at March 31, 2018 including changes during the three 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	—		—
Nonvested stock options at March 31, 2018	389,896		6.48

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The following aggregated assumptions were used to estimate the fair value of options granted during the three months ended March 31, 2018 and 2017:



	Three months ended March 31,
	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 March 31, 2018 including changes during the three 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	(13,750	)	18.52
Nonvested share awards at March 31, 2018	232,029		24.43

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:



	Three months ended March 31,
(Dollars in thousands, except per share data)	2018		2017
Shares granted	59,953		58,448
Weighted average grant date fair value	$	28.39	$	28.15
Intrinsic value of awards vested	$	1,193	$	1,333

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 March 31, 2018 is presented below:



(Dollars in thousands)	Unrecognized Compensation Cost		Weighted-Average Period Remaining (Years)
Stock options	$	2,293	2.3
Restricted stock awards	3,374		2.0
	$	5,667	2.1

The following table presents information related to the Corporation’s compensation expense related to stock incentive plans recognized for the periods indicated:



	Three months ended March 31,
(Dollars in thousands)	2018		2017
Stock-based compensation expense:
Stock options	$	228	$	221
Restricted stock awards	619		610
Employee stock purchase plan	15		15
Total	$	862	$	846
Tax benefit on nonqualified stock option expense, restricted stock awards and disqualifying dispositions of incentive stock options	$	243	$	507

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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	(5,015		)	183			166			(4,666		)
Balance, March 31, 2018	$	(10,477	)	$	194		$	(16,508	)	$	(26,791	)
Balance, December 31, 2016	$	(4,988	)	$	(141	)	$	(14,325	)	$	(19,454	)
Net Change	263			51			148			462
Balance, March 31, 2017	$	(4,725	)	$	(90	)	$	(14,177	)	$	(18,992	)

(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 March 31, 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 March 31, 2018. At March 31, 2018, the notional amount of the interest rate swap was $17.6 million, with a positive fair value of $294 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 $497 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

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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 and foreign currency swap 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 and foreign currency swap 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 March 31, 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 $75.0 million, and remaining maturities ranging from one to 10 years. At March 31, 2018, the fair value of the swaps to the customers was a liability of $31 thousand and all swaps were in paying positions to the third-party financial institution.

At March 31, 2018, there were no material foreign currency swap transactions between the third-party institution and loan customers.

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 exchange 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 March 31, 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 March 31, 2018
Interest rate swap - cash flow hedge	$	17,648	Other assets	$	294		$	—
Interest rate swap - fair value hedge	1,377		Other assets	6			—
Total	$	19,025		$	300		$	—
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

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The following table presents the notional amounts and fair values of derivatives not designated as hedging instruments recorded on the consolidated balance sheets at March 31, 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 March 31, 2018
Interest rate swap	$	497		$	—	Other liabilities	$	30
Credit derivatives	75,044			—		Other liabilities	31
Interest rate locks with customers	26,090		Other assets	395			—
Forward loan sale commitments	26,768		Other assets	12			—
Total	$	128,399		$	407		$	61
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 March 31,
(Dollars in thousands)	Statement of Income Classification	2018			2017
Interest rate swap—cash flow hedge—net interest payments	Interest expense	$	20		$	71
Interest rate swap—fair value hedge—ineffectiveness	Other noninterest income	—			3
Net loss		$	(20	)	$	(68	)

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 March 31,
(Dollars in thousands)	Statement of Income Classification	2018			2017
Credit derivatives	Other noninterest income	$	4		$	71
Interest rate locks with customers	Net gain on mortgage banking activities	(132		)	407
Forward loan sale commitments	Net loss on mortgage banking activities	(49		)	(254		)
Total		$	(177	)	$	224

The following table presents amounts included in accumulated other comprehensive (loss) income for derivatives designated as hedging instruments at March 31, 2018 and December 31, 2017:



(Dollars in thousands)	Accumulated Other Comprehensive (Loss) Income	At March 31, 2018		At December 31, 2017
Interest rate swap—cash flow hedge	Fair value, net of taxes	$	193	$	9
Total		$	193	$	9

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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 March 31, 2018.

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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 $27 thousand at March 31, 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 March 31, 2018 and December 31, 2017, classified using the fair value hierarchy:



	At March 31, 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	$	—	$	16,882	$	—	$	16,882
State and political subdivisions	—		72,808		—		72,808
Residential mortgage-backed securities	—		174,585		—		174,585
Collateralized mortgage obligations	—		3,368		—		3,368
Corporate bonds	—		71,048		26,922		97,970
Money market mutual funds	11,174		—		—		11,174
Total available-for-sale securities	11,174		338,691		26,922		376,787
Equity securities - financial services industry	1,072		—		—		1,072
Loans*	—		—		1,895		1,895
Interest rate swaps*	—		300		—		300
Interest rate locks with customers*	—		395		—		395
Forward loan sale commitments*	—		12		—		12
Total assets	$	12,246	$	339,398	$	28,817	$	380,461
Liabilities:
Contingent consideration liability	$	—	$	—	$	322	$	322
Interest rate swaps*	—		30		—		30
Credit derivatives*	—		—		31		31
Total liabilities	$	—	$	30	$	353	$	383

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	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
Money market mutual funds	5,985		—		—		5,985
Equity securities	1,076		—		—		1,076
Total available-for-sale securities	7,061		363,471		27,986		398,518
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 three months ended March 31, 2018 and 2017:



	Three Months Ended March 31, 2018
(Dollars in thousands)	Balance at December 31, 2017			Purchases/additions		Sales		Payments received			Premium amortization, net		(Decrease) increase in value			Balance at March 31, 2018
Corporate bonds	$	27,986		$	—	$	—				$	—	$	(1,064	)	$	26,922
Loans	1,958			—		—		(37		)	—		(26		)	1,895
Credit derivatives	(36		)	—		—		—			—		5			(31		)
Net total	$	29,908		$	—	$	—	$	(37	)	$	—	$	(1,085	)	$	28,786



	Three Months Ended March 31, 2017
(Dollars in thousands)	Balance at December 31, 2016			Purchases/additions			Sales		Payments received			Premium amortization, net		(Decrease) increase in value			Balance at March 31, 2017
Corporate bonds	$	28,778		$	—		$	—	$	—		$	—	$	(584	)	$	28,194
Loans	$	2,138		$	—		$	—	$	(33	)	$	—	$	(13	)	$	2,092
Credit derivatives	(9		)	(120		)	—		—			—		72			(57		)
Net total	$	30,907		$	(120	)	$	—	$	(33	)	$	—	$	(525	)	$	30,229

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The following table presents the change in the balance of the contingent consideration liability related to acquisitions for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31, 2018
(Dollars in thousands)	Balance at December 31, 2017		Contingent Consideration from New Acquisition		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at March 31, 2018
Girard Partners	$	339	$	—	$	34	$	17	$	322
Total contingent consideration liability	$	339	$	—	$	34	$	17	$	322



	Three Months Ended March 31, 2017
(Dollars in thousands)	Balance at December 31, 2016		Contingent Consideration from New Acquisition		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at March 31, 2017
Sterner Insurance Associates	$	331	$	—	$	—	$	—	$	331
Girard Partners	5,668		$	—	5,284		14		398
Total contingent consideration liability	$	5,999	$	—	$	5,284	$	14	$	729

The Corporation may be required to periodically measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market accounting or impairment charges of individual assets. The following table represents assets measured at fair value on a non-recurring basis at March 31, 2018 and December 31, 2017:



	At March 31, 2018
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Impaired loans held for investment	$	—	$	—	$	39,858	$	39,858
Impaired leases held for investment	—		—		1,250		1,250
Other real estate owned	—		—		1,843		1,843
Total	$	—	$	—	$	42,951	$	42,951



	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

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The following table presents assets and liabilities and off-balance sheet items not measured at fair value on a recurring or non-recurring basis in the Corporation’s consolidated balance sheets but for which the fair value is required to be disclosed at March 31, 2018 and December 31, 2017. The disclosed fair values are classified using the fair value hierarchy.



	At March 31, 2018
(Dollars in thousands)	Level 1		Level 2			Level 3		Fair Value			Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	48,631	$	—		$	—	$	48,631		$	48,631
Held-to-maturity securities	—		82,975			—		82,975			84,393
Federal Home Loan Bank, Federal Reserve Bank and other stock	NA		NA			NA		NA			32,801
Loans held for sale	—		705			—		705			687
Net loans and leases held for investment	—		—			3,611,759		3,611,759			3,623,475
Servicing rights	—		—			11,257		11,257			6,605
Total assets	$	48,631	$	83,680		$	3,623,016	$	3,755,327		$	3,796,592
Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	2,976,790	$	—		$	—	$	2,976,790		$	2,976,790
Time deposits	—		519,494			—		519,494			520,503
Total deposits	2,976,790		519,494			—		3,496,284			3,497,293
Short-term borrowings	—		216,426			—		216,426			216,426
Long-term debt	—		157,109			—		157,109			155,692
Subordinated notes	—		97,600			—		97,600			94,392
Total liabilities	$	2,976,790	$	990,629		$	—	$	3,967,419		$	3,963,803
Off-Balance-Sheet:
Commitments to extend credit	$	—	$	(2,437	)	$	—	$	(2,437	)	$	—

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	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
Other real estate owned	—		—			—		—			—
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	)	$	—

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 March 31, 2018 and December 31, 2017.

Loans and leases held for investment: As of March 31, 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.

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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 March 31, 2018, impaired loans held for investment had a carrying amount of $40.6 million with a valuation allowance of $732 thousand. 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 March 31, 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 March 31, 2018 and December 31, 2017, servicing rights had a carrying amount of $6.6 million with no valuation allowance.

Goodwill and other identifiable assets: Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other identifiable intangible assets. During the three months ended March 31, 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. At March 31, 2018 and December 31, 2017, OREO had a carrying amount of $1.8 million. New appraisals are generally obtained on an annual basis if an agreement of sale does not exist. 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 March 31, 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

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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 March 31, 2018		At December 31, 2017		At March 31, 2017
Banking	$	4,519,423	$	4,466,301	$	4,187,607
Wealth Management	36,848		34,600		31,178
Insurance	28,651		27,846		24,412
Other	29,037		26,115		30,734
Consolidated assets	$	4,613,959	$	4,554,862	$	4,273,931

The following tables provide reportable segment-specific information and reconciliations to consolidated financial information for the three months ended March 31, 2018 and 2017.



	Three Months Ended
	March 31, 2018
(Dollars in thousands)	Banking			Wealth Management		Insurance		Other			Consolidated
Interest income	$	43,522		$	5	$	—	$	7		$	43,534
Interest expense	5,001			—		—		1,261			6,262
Net interest income	38,521			5		—		(1,254		)	37,272
Provision for loan and lease losses	2,053			—		—		—			2,053
Noninterest income	4,789			5,740		5,086		(33		)	15,582
Intangible expenses	329			142		141		—			612
Restructuring charges	571			—		—		—			571
Other noninterest expense	27,661			3,658		3,245		(622		)	33,942
Intersegment (revenue) expense*	(291		)	153		138		—			—
Income (expense) before income taxes	12,987			1,792		1,562		(665		)	15,676
Income tax expense (benefit)	1,998			545		456		(173		)	2,826
Net income (loss)	$	10,989		$	1,247	$	1,106	$	(492	)	$	12,850
Capital expenditures	$	970		$	49	$	7	$	55		$	1,081

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	Three Months Ended
	March 31, 2017
(Dollars in thousands)	Banking			Wealth Management		Insurance		Other			Consolidated
Interest income	$	38,392		$	1	$	—	$	3		$	38,396
Interest expense	2,852			—		—		1,261			4,113
Net interest income	35,540			1		—		(1,258		)	34,283
Provision for loan and lease losses	2,445			—		—		—			2,445
Noninterest income	5,162			5,138		4,547		123			14,970
Intangible expenses	396			170		193		—			759
Other noninterest expense	25,055			3,421		3,069		(274		)	31,271
Intersegment (revenue) expense*	(264		)	146		118		—			—
Income (expense) before income taxes	13,070			1,402		1,167		(861		)	14,778
Income tax expense (benefit)	3,527			526		492		(623		)	3,922
Net income (loss)	$	9,543		$	876	$	675	$	(238	)	$	10,856
Capital expenditures	$	4,320		$	11	$	7	$	50		$	4,388

*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 months ended March 31, 2018 and 2017.



	Three Months Ended
	March 31, 2018
(Dollars in thousands)	Banking		Wealth Management		Insurance			Other			Consolidated
Net interest income (1)	$	38,521	$	5	$	—		$	(1,254	)	$	37,272

Noninterest income:
Trust fee income	—		1,996		—			—			1,996
Service charges on deposit accounts	1,327		—		—			—			1,327
Investment advisory commission and fee income	—		3,683		—			—			3,683
Insurance commission and fee income	—		—		4,888			—			4,888
Other service fee income (2)	1,909		60		200			—			2,169
Bank owned life insurance income (1)	698		—		—			(29		)	669
Net gain on sales of investment securities (1)	10		—		—			—			10
Net gain on mortgage banking activities (1)	716		—		—			—			716
Other income (2)	129		1		(2		)	(4		)	124
Total noninterest income	$	4,789	$	5,740	$	5,086		$	(33	)	$	15,582

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	Three Months Ended
	March 31, 2017
(Dollars in thousands)	Banking		Wealth Management		Insurance		Other			Consolidated
Net interest income (1)	$	35,540	$	1	$	—	$	(1,258	)	$	34,283

Noninterest income:
Trust fee income	—		1,907		—		—			1,907
Service charges on deposit accounts	1,243		—		—		—			1,243
Investment advisory commission and fee income	—		3,181		—		—			3,181
Insurance commission and fee income	—		—		4,410		—			4,410
Other service fee income (2)	1,801		50		136		—			1,987
Bank owned life insurance income (1)	662		—		—		121			783
Net gain on sales of investment securities (1)	13		—		—		2			15
Net gain on mortgage banking activities (1)	1,113		—		—		—			1,113
Other income (2)	330		—		1		—			331
Total noninterest income	$	5,162	$	5,138	$	4,547	$	123		$	14,970


(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.

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.

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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.

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 three months ended March 31, 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	(70		)	—		(8		)	(78		)
Accrued at March 31, 2018	$	296		$	48	$	172		$	516

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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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 March 31,						Change
(Dollars in thousands, except per share data)	2018			2017			Amount		Percent
Net income	$	12,850		$	10,856		$	1,994	18.4	%
Net income per share:
Basic	$	0.44		$	0.41		$	0.03	7.3
Diluted	0.44			0.41			0.03		7.3
Return on average assets	1.14		%	1.04		%	10 BP		9.6
Return on average equity	8.60			8.65			(5) BP		(0.6	)

The Corporation reported net income of $12.9 million, or $0.44 diluted earnings per share, for the quarter ended March 31, 2018, compared to net income of $10.9 million, or $0.41 diluted earnings per share, for the quarter ended March 31, 2017. The financial results for the quarter ended March 31, 2018 included restructuring costs related to financial center closures of $451 thousand, net of tax, or $0.01 of diluted earnings per share. There were no restructuring costs during the quarter ended March 31, 2017. The financial results for the quarter ended March 31, 2018 included the impact of the Corporation's public offering of 2,645,000 shares of common stock at a price of $28.25 per share which resulted in an increase in shareholder's equity of $70.5 million in the fourth quarter of 2017; as well as the benefit of 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”).

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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 months ended March 31, 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 months ended March 31, 2018 and was 35% for the three months ended March 31, 2017.

Three months ended March 31, 2018 versus 2017

Reported net interest income for the three months ended March 31, 2018 was $37.3 million, an increase of $3.0 million, or 8.7%, compared to the same period in 2017. Net interest income on a tax-equivalent basis for the three months ended March 31, 2018 was $37.9 million, an increase of $2.3 million, or 6.3%, compared to the same period in 2017. The increase in reported and tax-equivalent net interest income was primarily due to the growth in average loans of 9.9%, and a interest free funding through a combination of growth in average noninterest-bearing deposits of 9.9% and average equity of 19.0%, during the last year.

The net interest margin on a tax-equivalent basis for the first quarter of 2018 was 3.72%, compared to 3.80% for the first quarter of 2017. The favorable impact of purchase accounting accretion was 2 basis points ($146 thousand) for the three months ended March 31, 2018 compared to eight basis points ($764 thousand) for the three months ended March 31, 2017.

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



	Three Months Ended March 31,
	2018							2017
(Dollars in thousands)	Average Balance			Income/ Expense		Average Rate		Average Balance			Income/ Expense		Average Rate
Assets:
Interest-earning deposits with other banks	$	19,184		$	76	1.61	%	$	8,592		$	16	0.76	%
U.S. government obligations	23,921			94		1.59		34,038			106		1.26
Obligations of states and political subdivisions	74,554			593		3.23		85,854			922		4.36
Other debt and equity securities	359,451			2,095		2.36		350,408			1,582		1.83
Federal funds sold and other earning assets	29,057			504		7.03		25,909			358		5.60
Total interest-earning deposits, investments, federal funds sold and other earning assets	506,167			3,362		2.69		504,801			2,984		2.40
Commercial, financial and agricultural loans	782,200			8,900		4.61		721,050			7,841		4.41
Real estate—commercial and construction loans	1,600,394			17,618		4.46		1,460,029			15,740		4.37
Real estate—residential loans	837,495			9,675		4.69		738,211			8,236		4.52
Loans to individuals	27,960			413		5.99		29,575			400		5.49
Municipal loans and leases	311,752			2,892		3.76		279,379			3,120		4.53
Lease financings	74,709			1,344		7.30		78,633			1,483		7.65
Gross loans and leases	3,634,510			40,842		4.56		3,306,877			36,820		4.52
Total interest-earning assets	4,140,677			44,204		4.33		3,811,678			39,804		4.24
Cash and due from banks	42,506							41,942
Reserve for loan and lease losses	(22,022		)					(18,200		)
Premises and equipment, net	61,738							64,507
Other assets	333,078							330,501
Total assets	$	4,555,977						$	4,230,428
Liabilities:
Interest-bearing checking deposits	$	425,027		292		0.28		$	426,373		105		0.10
Money market savings	658,367			1,343		0.83		531,658			563		0.43
Regular savings	834,375			557		0.27		807,802			349		0.18
Time deposits	541,478			1,499		1.12		591,813			1,174		0.80
Total time and interest-bearing deposits	2,459,247			3,691		0.61		2,357,646			2,191		0.38
Short-term borrowings	175,824			645		1.49		150,155			262		0.71
Long-term debt	155,765			665		1.73		148,031			399		1.09
Subordinated notes	94,359			1,261		5.42		94,116			1,261		5.43
Total borrowings	425,948			2,571		2.45		392,302			1,922		1.99
Total interest-bearing liabilities	2,885,195			6,262		0.88		2,749,948			4,113		0.61
Noninterest-bearing deposits	1,024,797							932,639
Accrued expenses and other liabilities	40,012							38,786
Total liabilities	3,950,004							3,721,373
Shareholders’ Equity:
Common stock	157,784							144,559
Additional paid-in capital	290,209							230,104
Retained earnings and other equity	157,980							134,392
Total shareholders’ equity	605,973							509,055
Total liabilities and shareholders’ equity	$	4,555,977						$	4,230,428
Net interest income				$	37,942						$	35,691
Net interest spread						3.45							3.63
Effect of net interest-free funding sources						0.27							0.17
Net interest margin						3.72	%						3.80	%
Ratio of average interest-earning assets to average interest-bearing liabilities	143.51		%					138.61		%

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 March 31, 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
	March 31, 2018 Versus 2017
(Dollars in thousands)	Volume Change			Rate Change			Total
Interest income:
Interest-earning deposits with other banks	$	32		$	28		$	60
U.S. government obligations	(36		)	24			(12		)
Obligations of states and political subdivisions	(111		)	(218		)	(329		)
Other debt and equity securities	42			471			513
Federal funds sold and other earning assets	47			99			146
Interest on deposits, investments, federal funds sold and other earning assets	(26		)	404			378
Commercial, financial and agricultural loans	690			369			1,059
Real estate—commercial and construction loans	1,547			331			1,878
Real estate—residential loans	1,125			314			1,439
Loans to individuals	(22		)	35			13
Municipal loans and leases	338			(566		)	(228		)
Lease financings	(72		)	(67		)	(139		)
Interest and fees on loans and leases	3,606			416			4,022
Total interest income	3,580			820			4,400
Interest expense:
Interest-bearing checking deposits	—			187			187
Money market savings	159			621			780
Regular savings	13			195			208
Time deposits	(107		)	432			325
Interest on time and interest-bearing deposits	65			1,435			1,500
Short-term borrowings	52			331			383
Long-term debt	22			244			266
Subordinated notes	—			—			—
Interest on borrowings	74			575			649
Total interest expense	139			2,010			2,149
Net interest income	$	3,441		$	(1,190	)	$	2,251

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Interest Income

Three months ended March 31, 2018 versus 2017

Interest income on a tax-equivalent basis for the three months ended March 31, 2018 was $44.2 million, an increase of $4.4 million, or 11.1% from the same period in 2017. The increase in interest income (tax-equivalent) for the three months ended March 31, 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 a total of 100 basis points in 2017 and the first quarter of 2018. Purchase accounting accretion had no impact on the yield on interest-earning assets for the three months ended March 31, 2018 compared to a favorable impact of two basis points ($149 thousand) for the same period in the prior year.

Interest Expense

Three months ended March 31, 2018 versus 2017

Interest expense for the three months ended March 31, 2018 was $6.3 million, an increase of $2.1 million, or 52.2% from the same period in 2017. The increase in interest expense for the three months ended March 31, 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 quarter of 2018. The favorable impact of purchase accounting accretion on interest-bearing liabilities was three basis points ($186 thousand) for the three months ended March 31, 2018 compared to a favorable impact of nine basis points ($615 thousand) for the same period in the prior year.

Provision for Loan and Lease Losses

The provision for loan and lease losses for the three months ended March 31, 2018 was $2.1 million compared to $2.4 million for the same period in 2017. The level of provision for loan and lease losses is based on growth in the originated loan portfolio, changes in specific reserves for impaired loans and net loan charge-offs. During the three months ended March 31, 2018, a specific reserve in the amount of $656 thousand was provided for one $12.3 million nonaccrual commercial real estate loan. Net loan and lease charge-offs were $198 thousand for the three months ended March 31, 2018 compared to $416 thousand for the same period in the prior year.

Noninterest Income

The following table presents noninterest income for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,				Change
(Dollars in thousands)	2018		2017		Amount			Percent
Trust fee income	$	1,996	$	1,907	$	89		4.7	%
Service charges on deposit accounts	1,327		1,243		84			6.8
Investment advisory commission and fee income	3,683		3,181		502			15.8
Insurance commission and fee income	4,888		4,410		478			10.8
Other service fee income	2,169		1,987		182			9.2
Bank owned life insurance income	669		783		(114		)	(14.6	)
Net gain on sales of investment securities	10		15		(5		)	(33.3	)
Net gain on mortgage banking activities	716		1,113		(397		)	(35.7	)
Other income	124		331		(207		)	(62.5	)
Total noninterest income	$	15,582	$	14,970	$	612		4.1	%

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Three months ended March 31, 2018 versus 2017

Noninterest income for the three months ended March 31, 2018 was $15.6 million, an increase of $612 thousand, or 4.1%, from the three months ended March 31, 2017. Investment advisory commission and fee income increased $502 thousand, or 15.8%, for the three months ended March 31, 2018 primarily due to new customer relationships and favorable market performance during 2017. Insurance commission and fee income increased $478 thousand, or 10.8%, for the three months ended March 31, 2018, primarily due to an increase in contingent commission income of $422 thousand, which was $1.4 million for the three months ended March 31, 2018 compared to $963 thousand for the three months ended March 31, 2017.

These increases were partially offset by a decrease in the net gain on mortgage banking of $397 thousand, or 35.7%, for the three months ended March 31, 2018, primarily due to a decrease in mortgage volume due to a shortage of housing supply and the extended winter weather in March 2018. In addition, BOLI income decreased $114 thousand, or 14.6% for the three months ended March 31, 2018, primarily due to a decrease in value of the Corporation's non-qualified annuity portfolio, which is subject to equity market volatility. Other income decreased $207 thousand for the three months ended March 31, 2018, mainly due to a decrease in swap fee income of $70 thousand and a net gain on sale of other real estate owned of $114 thousand during the three months ended March 31, 2017.

Noninterest Expense

The following table presents noninterest expense for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,				Change
(Dollars in thousands)	2018		2017		Amount			Percent
Salaries, benefits and commissions	$	20,647	$	18,737	$	1,910		10.2	%
Net occupancy	2,757		2,665		92			3.5
Equipment	1,023		993		30			3.0
Data processing	2,232		2,058		174			8.5
Professional fees	1,355		1,239		116			9.4
Marketing and advertising	381		379		2			0.5
Deposit insurance premiums	391		402		(11		)	(2.7	)
Intangible expenses	612		759		(147		)	(19.4	)
Restructuring charges	571		—		571			N/M
Other expense	5,156		4,798		358			7.5
Total noninterest expense	$	35,125	$	32,030	$	3,095		9.7	%

Three months ended March 31, 2018 versus 2017

Noninterest expense for the three months ended March 31, 2018 was $35.1 million, an increase of $3.1 million, or 9.7%, from the same period in the prior year. Restructuring costs related to financial center closures and staffing rationalization were $571 thousand for the three months ended March 31, 2018. There were no restructuring costs during the three months ended March 31, 2017.

Salaries, benefits and commissions increased $1.9 million for the three months ended March 31, 2018, primarily attributable to additional staff hired to support revenue generation across all business lines, expansion of the Bank's financial center footprint in Lancaster County and the Lehigh Valley and annual merit increases. Data processing expense increased $174 thousand for the three months ended March 31, 2018 primarily due to increased investments in customer relationship management software, internal infrastructure improvements and outsourced data processing solutions. Other expense increased $358 thousand for the three months ended March 31, 2018 primarily due to increases in deferred director stock expense and loan processing expense.

Tax Provision

The provision for income taxes for the three months ended March 31, 2018 and 2017 was $2.8 million and $3.9 million, at effective rates of 18.0% and 26.5%, 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 three months ended March 31, 2018 was impacted by discrete tax benefits related to vesting of restricted stock and exercise of stock options

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totaling $118 thousand. Excluding these discrete items, the effective tax rate was 18.8% for the three months ended March 31, 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 March 31, 2018			At December 31, 2017			Change
(Dollars in thousands)	At March 31, 2018			At December 31, 2017			Amount			Percent
Cash and interest-earning deposits	$	48,631		$	75,409		$	(26,778	)	(35.5	)
Investment securities	462,252			454,082			8,170			1.8
Federal Home Loan Bank, Federal Reserve Bank and other stock, at cost	32,801			27,204			5,597			20.6
Loans held for sale	687			1,642			(955		)	(58.2	)
Loans and leases held for investment	3,689,888			3,620,067			69,821			1.9
Reserve for loan and lease losses	(23,410		)	(21,555		)	(1,855		)	(8.6	)
Premises and equipment, net	61,397			61,797			(400		)	(0.6	)
Goodwill and other intangibles, net	185,905			186,468			(563		)	(0.3	)
Bank owned life insurance	109,692			108,246			1,446			1.3
Accrued interest receivable and other assets	46,116			41,502			4,614			11.1
Total assets	$	4,613,959		$	4,554,862		$	59,097		1.3	%

Investment Securities

Total investments securities at March 31, 2018 increased $8.2 million from December 31, 2017. Purchases of $38.3 million were partially off-set by maturities and pay-downs of $18.2 million, calls of $4.0 million, sales of $1.0 million and decreases in the fair value of available-for-sale investment securities of $6.3 million which was due to increased interest rates during the quarter.

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 $18.1 million and $12.5 million at March 31, 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 quarter.

The Bank held $14.6 million in Federal Reserve Bank stock as required by the Federal Reserve Bank at March 31, 2018 and December 31, 2017.

Loans and Leases

Gross loans and leases held for investment grew $69.8 million, or 1.9%, from December 31, 2017. The growth in loans was primarily in commercial real estate, commercial business and residential real estate loans.

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.

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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 March 31, 2018, the recorded investment in loans and leases held for investment that were considered to be impaired was $41.8 million. The related reserve for loan and lease losses was $732 thousand. 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. 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 $1.8 million at March 31, 2018 and December 31, 2017.

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.

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 $411 thousand and $390 thousand at March 31, 2018 and December 31, 2017, respectively.

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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 March 31, 2018			At December 31, 2017
Nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*:
Commercial, financial and agricultural	$	4,192		$	4,448
Real estate—commercial	19,014			4,285
Real estate—construction	—			365
Real estate—residential	2,808			3,820
Lease financings	1,680			1,599
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*	27,694			14,517
Accruing troubled debt restructured loans and lease modifications not included in the above	1,032			11,435
Accruing loans and leases 90 days or more past due:
Real estate—residential	1,524			310
Loans to individuals	644			195
Lease financings	127			256
Total accruing loans and leases, 90 days or more past due	2,295			761
Total nonperforming loans and leases	31,021			26,713
Other real estate owned	1,843			1,843
Total nonperforming assets	$	32,864		$	28,556
Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment	0.75		%	0.40		%
Nonperforming loans and leases / loans and leases held for investment	0.84			0.74
Nonperforming assets / total assets	0.71			0.63

Allowance for loan and lease losses	$	23,410		$	21,555
Allowance for loan and lease losses / loans and leases held for investment	0.63		%	0.60		%
Allowance for loan and lease losses / loans and leases held for investment (excluding acquired loans at period-end)	0.73			0.70
Allowance for loan and lease losses / nonaccrual loans and leases held for investment	84.53			148.48
Allowance for loan and lease losses / nonperforming loans and leases held for investment	75.47			80.69
Acquired credit impaired loans	$	1,525		$	1,583


Nonperforming loans and leases and acquired credit impaired loans / loans and leases held for investment	0.88		%	0.78		%
Nonperforming assets and acquired credit impaired loans / total assets	0.75			0.66
* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table	$	1,679		$	2,513

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



(Dollars in thousands)	At March 31, 2018			At December 31, 2017
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications	$	27,694		$	14,517
Nonaccrual loans and leases with partial charge-offs	4,247			5,397
Life-to-date partial charge-offs on nonaccrual loans and leases	3,255			4,107
Charge-off rate of nonaccrual loans and leases with partial charge-offs	43.4		%	43.2		%
Specific reserves on impaired loans	$	732		$	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 covenants not to compete, 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 $899 thousand and $1.1 million for the three months ended March 31, 2018 and 2017, respectively. See Note 5 to the Consolidated Financial Statements, "Goodwill and Other Intangible Assets," for a summary of intangible assets at March 31, 2018 and December 31, 2017. The Corporation also has goodwill with a net carrying value of $172.6 million at March 31, 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 three months ended March 31, 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 March 31, 2018		At December 31, 2017		Change
(Dollars in thousands)	At March 31, 2018		At December 31, 2017		Amount			Percent
Deposits	$	3,497,293	$	3,554,919	$	(57,626	)	(1.6	)%
Short-term borrowings	216,426		105,431		110,995			N/M
Long-term debt	155,692		155,828		(136		)	(0.1	)
Subordinated notes	94,392		94,331		61			0.1
Accrued interest payable and other liabilities	43,437		40,979		2,458			6.0
Total liabilities	$	4,007,240	$	3,951,488	$	55,752		1.4	%

Deposits

Total deposits declined $57.6 million, or 1.6%, from December 31, 2017, primarily due to a decrease in commercial noninterest- bearing deposits and a seasonal decline in public funds deposits.

Borrowings

Total borrowings increased $110.9 million from December 31, 2017, primarily due to an increase in short-term borrowings of $111.0 million. The Corporation increased its short-term borrowings to fund loan growth and replace the decrease in deposits during the first quarter of 2018.

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Shareholders’ Equity

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



(Dollars in thousands)	At March 31, 2018			At December 31, 2017			Change
(Dollars in thousands)	At March 31, 2018			At December 31, 2017			Amount			Percent
Common stock	$	157,784		$	157,784		$	—		N/M
Additional paid-in capital	290,095			290,133			(38		)	N/M
Retained earnings	228,097			216,761			11,336			5.2
Accumulated other comprehensive loss	(26,791		)	(17,771		)	(9,020		)	(50.8	)
Treasury stock	(42,466		)	(43,533		)	1,067			2.5
Total shareholders’ equity	$	606,719		$	603,374		$	3,345		0.6	%

The increase in shareholder's equity at March 31, 2018 of $3.3 million from December 31, 2017 was primarily related to an increase in retained earnings of $11.3 million. Retained earnings at March 31, 2018 were impacted by the three months of net income of $12.9 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 $5.9 million. Accumulated other comprehensive loss increased by $9.0 million mainly attributable to decreases in the fair value of available-for-sale investment securities of $5.0 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 $1.1 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 March 31, 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 March 31, 2018
Total Capital (to Risk-Weighted Assets):
Corporation	$	577,229	14.04	%	$	328,961	8.00	%	$	411,201	10.00	%
Bank	473,523		11.60		326,646		8.00		408,307		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	458,722		11.16		246,721		6.00		328,961		8.00
Bank	449,408		11.01		244,984		6.00		326,646		8.00
Tier 1 Common Capital (to Risk-Weighted Assets):
Corporation	458,722		11.16		185,041		4.50		267,281		6.50
Bank	449,408		11.01		183,738		4.50		265,400		6.50
Tier 1 Capital (to Average Assets):
Corporation	458,722		10.47		175,247		4.00		219,059		5.00
Bank	449,408		10.32		174,134		4.00		217,668		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 March 31, 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 March 31, 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 March 31, 2018 and December 31, 2017, the carrying amount of overnight borrowings with the FHLB was $148.3 million and $30.2 million, respectively. At March 31, 2018 and December 31, 2017, the carrying amount of long-term borrowings with the FHLB was $125.0 million. At March 31, 2018 and December 31, 2017, the Bank had outstanding short-term letters of credit with the FHLB totaling $198.0 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 March 31, 2018 and December 31, 2017. At March 31, 2018 and December 31, 2017, the Corporation had $50.0 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 has a $10.0 million line of credit with a correspondent bank. At March 31, 2018, 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.”


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, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31, 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 March 31, 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


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
January 1 – 31, 2018	—	$	—	—	1,014,246
February 1 – 28, 2018	—	—		—	1,014,246
March 1 – 31, 2018	—	—		—	1,014,246
Total	—	$	—	—


1.	Transactions are reported as of trade dates.

On October 23, 2013, the Corporation’s Board of Directors approved a new stock repurchase plan for the repurchase of up to 800,000 shares, or approximately 5% of the shares outstanding. 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	Amended and Restated Articles of Incorporation are incorporated by reference to Exhibit 3.1 of Form 8-K, filed with the SEC on April 22, 2015.

	Exhibit 3.2	Amended By-Laws effective November 23, 2016 are incorporated by reference to Exhibit 3.2 of Form 8-K, filed with the SEC on November 23, 2016.

	Exhibit 31.1	Certification of Jeffrey M. Schweitzer, President and Chief Executive Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.

	Exhibit 31.2	Certification of Roger S. Deacon, Senior Executive Vice President and Chief Financial Officer of the Corporation, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.

	Exhibit 32.1	Certification of Jeffrey M. Schweitzer, President and Chief Executive Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

	Exhibit 32.2	Certification of Roger S. Deacon, Senior Executive Vice President and Chief Financial Officer of the Corporation, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

	Exhibit 101.INS	XBRL Instance Document

	Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document

	Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

	Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document

	Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

	Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Univest Corporation of Pennsylvania
	(Registrant)

Date: May 4, 2018	/s/ Jeffrey M. Schweitzer
	Jeffrey M. Schweitzer President and Chief Executive Officer (Principal Executive Officer)

Date: May 4, 2018	/s/ Roger S. Deacon
	Roger S. Deacon Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

UNIVEST FINANCIAL Corp - FORM 10-Q - May 4, 2018

Attached files

UNIVEST FINANCIAL Corp Reports