Univest Financial (UVSP) 10-Q 2011 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period endedJune 30, 2011.

or

o 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 of 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.þ Yeso 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).
þ Yeso No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yesþ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $5 par value	16,777,382
(Title of Class)	(Number of shares outstanding at July 29, 2011)

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

INDEX

	Page Number
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Consolidated Balance sheets at June 30, 2011 and December 31, 2010		2
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010		3
Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2011 and 2010		4
Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2011 and 2010		5
Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		50
Item 4. Controls and Procedures		50
Part II. Other Information
Item 1. Legal Proceedings		50
Item 1A. Risk Factors		50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51
Item 3. Defaults Upon Senior Securities		51
Item 4. Removed and Reserved		51
Item 5. Other Information		51
Item 6. Exhibits		51
Signatures		53
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED BALANCE SHEETS

	(UNAUDITED)			(SEE NOTE)
(Dollars in thousands, except per share data)	At June 30, 2011			At December 31, 2010
ASSETS
Cash and due from banks	$	32,433		$	11,624
Interest-earning deposits with other banks		6,781			17,563
Investment securities held-to-maturity (fair value $18 and $32 at June 30, 2011 and December 31, 2010, respectively)		18			32
Investment securities available-for-sale		418,002			466,992
Loans held for sale		2,102			4,178
Loans and leases		1,438,707			1,471,186
Less: Reserve for loan and lease losses		(32,601	)		(30,898	)
Net loans and leases		1,406,106			1,440,288
Premises and equipment, net		34,166			34,605
Goodwill		51,320			51,320
Other intangibles, net of accumulated amortization and fair value adjustments of $9,420 and $9,495 at June 30, 2011 and December 31, 2010, respectively		5,456			5,477
Bank owned life insurance		48,622			48,010
Accrued interest and other assets		53,371			53,804
Total assets	$	2,058,377		$	2,133,893
LIABILITIES
Demand deposits, noninterest-bearing	$	277,515		$	271,125
Demand deposits, interest-bearing		480,888			529,884
Savings deposits		486,666			467,511
Time deposits		376,225			417,750
Total deposits		1,621,294			1,686,270
Securities sold under agreements to repurchase		99,070			90,271
Other short-term borrowings		—			24,600
Accrued expenses and other liabilities		36,372			37,534
Long-term debt		5,000			5,000
Subordinated notes		3,000			3,375
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding junior subordinated debentures of Univest (Trust Preferred Securities)		20,619			20,619
Total liabilities		1,785,355			1,867,669
SHAREHOLDERS’ EQUITY
Common stock, $5 par value: 48,000,000 shares authorized at June 30, 2011 and December 31, 2010; 18,266,404 shares issued at June 30, 2011 and December 31, 2010; 16,777,379 and 16,648,303 shares outstanding at June 30, 2011 and December 31, 2010, respectively		91,332			91,332
Additional paid-in capital		58,326			59,080
Retained earnings		153,728			151,978
Accumulated other comprehensive loss, net of taxes		(3,099	)		(6,766	)
Treasury stock, at cost; 1,489,025 shares and 1,618,101 shares at June 30, 2011 and December 31, 2010, respectively		(27,265	)		(29,400	)
Total shareholders’ equity		273,022			266,224
Total liabilities and shareholders’ equity	$	2,058,377		$	2,133,893

Note: The consolidated balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

2

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Dollars in thousands, except per share data)
Interest income
Interest and fees on loans and leases:
Taxable	$	17,367		$	17,770		$	34,574		$	35,376
Exempt from federal income taxes		1,047			1,062			2,178			2,039
Total interest and fees on loans and leases		18,414			18,832			36,752			37,415
Interest and dividends on investment securities:
Taxable		2,166			2,855			4,412			5,616
Exempt from federal income taxes		1,112			1,172			2,231			2,302
Other interest income		12			19			15			30
Total interest income		21,704			22,878			43,410			45,363
Interest expense
Interest on deposits		2,290			3,588			4,756			7,808
Interest on short-term borrowings		80			653			160			1,455
Interest on long-term borrowings		353			361			704			719
Total interest expense		2,723			4,602			5,620			9,982
Net interest income		18,981			18,276			37,790			35,381
Provision for loan and lease losses		5,556			4,865			10,690			9,760
Net interest income after provision for loan and lease losses		13,425			13,411			27,100			25,621
Noninterest income
Trust fee income		1,625			1,500			3,250			3,000
Service charges on deposit accounts		1,356			1,812			2,692			3,594
Investment advisory commission and fee income		1,194			1,152			2,356			2,208
Insurance commission and fee income		2,072			1,896			4,272			4,139
Other service fee income		1,437			1,475			2,792			2,384
Bank owned life insurance income		268			202			612			534
Other-than-temporary impairment on equity securities		(3	)		(42	)		(10	)		(47	)
Net gain on sales of securities		569			38			569			87
Net gain on mortgage banking activities		328			475			303			935
Net loss on interest rate swap		—			(516	)		—			(826	)
Net loss on dispositions of fixed assets		(9	)		(5	)		(9	)		(11	)
Net loss on sales and write-downs of other real estate owned		(265	)		(16	)		(617	)		(363	)
Other		124			88			245			632
Total noninterest income		8,696			8,059			16,455			16,266
Noninterest expense
Salaries and benefits		9,634			9,469			18,617			19,280
Net occupancy		1,361			1,309			2,911			2,663
Equipment		965			900			1,942			1,838
Marketing and advertising		393			917			982			1,601
Deposit insurance premiums		427			663			1,140			1,260
Other		3,626			3,651			7,560			7,346
Total noninterest expense		16,406			16,909			33,152			33,988
Income before income taxes		5,715			4,561			10,403			7,899
Applicable income taxes		1,199			831			2,025			1,199
Net income	$	4,516		$	3,730		$	8,378		$	6,700
Net income per share:
Basic	$	.27		$	.23		$	.50		$	.40
Diluted		.27			.23			.50			.40
Dividends declared		.20			.20			.40			.40

Note: Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

3

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

				Accumulated
	Common			Other					Additional
	Shares			Comprehensive			Common		Paid-in			Retained			Treasury
(Dollars in thousands, except per share data)	Outstanding			(Loss) Income			Stock		Capital			Earnings			Stock			Total
For the Six Months Ended June 30, 2011
Balance at December 31, 2010:		16,648,303		$	(6,766	)	$	91,332	$	59,080		$	151,978		$	(29,400	)	$	266,224
Comprehensive income:
Net income		—			—			—		—			8,378			—			8,378
Other comprehensive income, net of income tax:
Unrealized gain on investment securities available for sale		—			3,744			—		—			—			—			3,744
Unrealized loss on swap		—			(242	)		—		—			—			—			(242	)
Unrecognized pension benefits		—			165			—		—			—			—			165
Total comprehensive income		—			—			—		—			—			—			12,045
Cash dividends declared ($0.40 per share)		—			—			—		—			(6,688	)		—			(6,688	)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs		73,345			—			—		62			13			1,215			1,290
Purchases of treasury stock		(3,005	)		—			—		—			—			(52	)		(52	)
Restricted stock awards granted		58,736			—			—		(1,019	)		47			972			—
Vesting of restricted stock awards		—			—			—		203			—			—			203
Balance at June 30, 2011		16,777,379		$	(3,099	)	$	91,332	$	58,326		$	153,728		$	(27,265	)	$	273,022

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

				Accumulated
	Common			Other					Additional
	Shares			Comprehensive			Common		Paid-in			Retained			Treasury
(Dollars in thousands, except per share data)	Outstanding			(Loss) Income			Stock		Capital			Earnings			Stock			Total
For the Six Months Ended June 30, 2010
Balance at December 31, 2009:		16,465,083		$	(524	)	$	91,332	$	60,126		$	150,507		$	(33,634	)	$	267,807
Comprehensive income:
Net income		—			—			—		—			6,700			—			6,700
Other comprehensive income, net of income tax:
Unrealized gain on investment securities available for sale		—			1,471			—		—			—			—			1,471
Unrealized loss on swap		—			(1,047	)		—		—			—			—			(1,047	)
Unrecognized pension benefits		—			149			—		—			—			—			149
Total comprehensive income		—			—			—		—			—			—			7,273
Cash dividends declared ($0.40 per share)		—			—			—		—			(6,631	)		—			(6,631	)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs		57,970			—			—		—			(321	)		1,351			1,030
Purchases of treasury stock		(325	)		—			—		—			—			(6	)		(6	)
Restricted stock awards granted		67,982			—			—		(1,197	)		(396	)		1,593			—
Vesting of restricted stock awards		—			—			—		51			—			—			51
Balance at June 30, 2010		16,590,710		$	49		$	91,332	$	58,980		$	149,859		$	(30,696	)	$	269,524

Note: Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

4

UNIVEST CORPORATION OF PENNSYLVANIA

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended
	June 30,
(Dollars in thousands)	2011			2010
Cash flows from operating activities:
Net income	$	8,378		$	6,700
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		10,690			9,760
Depreciation of premises and equipment		1,287			1,260
Other-than-temporary impairment on equity securities		10			47
Net gain on sales of investment securities		(569	)		(87	)
Net gain on mortgage banking activities		(303	)		(935	)
Net loss on interest rate swap		—			826
Net loss on dispositions of fixed assets		9			11
Net loss on sales and write-downs of other real estate owned		617			363
Bank owned life insurance income		(612	)		(534	)
Other adjustments to reconcile net income to cash provided by operating activities		1,829			2,795
Originations of loans held for sale		(71,240	)		(53,994	)
Proceeds from the sale of loans held for sale		74,087			53,840
Increase in interest receivable and other assets		(1,595	)		(1,894	)
Decrease in accrued expenses and other liabilities		(730	)		(2,331	)
Net cash provided by operating activities		21,858			15,827
Cash flows from investing activities:				��
Net cash paid due to acquisitions, net of cash acquired		—			(2	)
Net capital expenditures		(857	)		(1,809	)
Proceeds from maturities of securities held-to-maturity		15			37
Proceeds from maturities and calls of securities available-for-sale		105,018			151,516
Proceeds from sales of securities available-for-sale		5,928			3,616
Purchases of investment securities available-for-sale		(55,827	)		(166,286	)
Purchases of lease financings		—			(4,816	)
Net decrease (increase) in loans and leases		19,079			(23,137	)
Net decrease in interest-bearing deposits		10,782			28,385
Proceeds from sales of other real estate owned		1,390			1,425
Net cash provided by (used in) investing activities		85,528			(11,071	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(64,976	)		45,515
Net decrease in short-term borrowings		(15,801	)		(41,721	)
Repayment of subordinated debt		(375	)		(375	)
Purchases of treasury stock		(52	)		(6	)
Stock issued under dividend reinvestment and employee stock purchase plans and other employee benefit programs		1,290			1,030
Cash dividends paid		(6,663	)		(6,607	)
Net cash used in financing activities		(86,577	)		(2,164	)
Net increase in cash and due from banks		20,809			2,592
Cash and due from banks at beginning of year		11,624			20,535
Cash and due from banks at end of period	$	32,433		$	23,127
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest	$	5,923		$	12,069
Income taxes, net of refunds received		3,606			129
Noncash transfer of loans to other real estate owned	$	4,413		$	162

Note: Certain amounts have been reclassified to conform to the current-year presentation. See accompanying notes to the unaudited consolidated financial statements.

5

UNIVEST CORPORATION OF PENNSYLVANIA AND SUBSIDIARIES

Notes to the Unaudited Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Univest Corporation of Pennsylvania (the Corporation) and its wholly owned subsidiaries; the Corporation’s primary subsidiary is Univest Bank and Trust Co. (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations for interim financial information. The accompanying unaudited consolidated financial statements reflect all adjustments which are of a normal recurring nature and are, in the opinion of management, necessary for a fair presentation of the financial statements for the interim periods presented. Certain prior period amounts have been reclassified to conform to the current-year presentation. Operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010, which was filed with the SEC on March 4, 2011.

Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include fair value measurement of investment securities available for sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation expense.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) regarding the presentation of comprehensive income and to increase the prominence of items reported in other comprehensive income. The guidance requires entities to report the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. This update is effective for fiscal years and interim periods within those years, beginning after December 15, 2011, or March 31, 2012 for the Corporation, and is to be applied retrospectively. The Corporation does not expect the guidance will have a material impact on its financial statements but will result in a revised format for the presentation of comprehensive income and the components of other comprehensive income.

In May 2011, the FASB issued an ASU regarding fair value measurements which establishes a global standard in U.S. GAAP and International Financial Reporting Standards for applying fair value measurements and disclosures. Consequently, the amendments in this update change the wording to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendments do not require additional fair value measurements and most of the amendments are not intended to result in a change of the application of fair value measurement requirements. Additional disclosures required include 1) for fair value measurements categorized within Level 3 of the fair value hierarchy: a) the valuation processes used by the reporting entity b) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any and 2) the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. This amendment is effective for fiscal years and interim periods within those years, beginning after December 15, 2011, or March 31, 2012 for the Corporation, and is to be applied prospectively. The Corporation does not anticipate the guidance will have a material impact on its financial statements but will result in revised and expanded disclosures.

6

In April 2011, the FASB issued an ASU regarding a creditor’s determination of whether a restructuring is a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that the restructuring constitutes both a concession and the borrower is experiencing financial difficulties under the guidance provided by this update. In addition, the amendments clarify that a creditor is precluded from using the effective interest rate test in the borrower’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The guidance on identifying and disclosing troubled debt restructurings is effective for interim and annual periods beginning on or after June 15, 2011, or September 30, 2011 for the Corporation, and applies retrospectively to restructurings occurring on or after the beginning of the year or January 1, 2011 for the Corporation. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. The Corporation is in the process of evaluating the impact of the adoption of this troubled debt restructuring guidance on its financial statements.

In July 2010, the FASB issued an ASU for improving disclosures about the credit quality of financing receivables and the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, nonaccrual and past due loans and credit quality indicators. For disclosures required as of the end of a reporting period, the update was effective and implemented commencing as of December 31, 2010 for the Corporation’s financial statements. Disclosures that relate to activity during a reporting period were required for financial statements that include periods beginning on or after January 1, 2011, or March 31, 2011 for the Corporation. The application of the provisions of these standards did not have a material impact on the Corporation’s financial statements although it resulted in expanded disclosures effective March 31, 2011, which are included under Note 4, “Credit Quality of Loans and Leases and the Reserve for Loans and Lease Losses.” The guidance related to troubled debt restructurings is effective for interim and annual periods beginning after June 15, 2011, or September, 30, 2011 for the Corporation, in order to be concurrent with the effective date of guidance under the Accounting Standards Update issued in April 2011 regarding a creditor’s determination of whether a restructuring is a troubled debt restructuring. The guidance applies retrospectively to troubled debt restructurings occurring on or after January 1, 2011.

7

Note 2. Investment Securities

The following table shows the amortized cost and the approximate fair value of the held-to-maturity securities and available-for-sale securities at June 30, 2011 and December 31, 2010 by maturity within each type.

	June 30, 2011									December 31, 2010
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Securities Held-to-Maturity
Residential mortgage-backed securities:
Within 1 year	$	—	$	—	$	—		$	—	$	15	$	—	$	—		$	15
		—		—		—			—		15		—		—			15
Other securities:
Within 1 year		18		—		—			18		17		—		—			17
		18		—		—			18		17		—		—			17
Total	$	18	$	—	$	—		$	18	$	32	$	—	$	—		$	32
Securities Available-for-Sale
U.S. government corporations and agencies:
Within 1 year	$	5,000	$	35	$	—		$	5,035	$	7,000	$	—	$	—		$	7,000
After 1 year to 5 years		132,511		615		(458	)		132,668		182,585		515		(2,000	)		181,100
		137,511		650		(458	)		137,703		189,585		515		(2,000	)		188,100
State and political subdivisions:
Within 1 year		755		11		—			766		451		—		—			451
After 1 year to 5 years		9,406		352		—			9,758		8,801		281		—			9,082
After 5 years to 10 years		11,692		370		(57	)		12,005		14,042		281		(69	)		14,254
Over 10 years		88,065		2,057		(380	)		89,742		86,315		639		(2,693	)		84,261
		109,918		2,790		(437	)		112,271		109,609		1,201		(2,762	)		108,048
Residential mortgage-backed securities:
After 5 years to 10 years		12,488		793		—			13,281		14,709		743		—			15,452
Over 10 years		71,931		3,069		(481	)		74,519		66,919		3,222		(492	)		69,649
		84,419		3,862		(481	)		87,800		81,628		3,965		(492	)		85,101
Commercial mortgage obligations:
After 5 years to 10 years		7,013		219		—			7,232		8,855		252		—			9,107
Over 10 years		61,113		905		(380	)		61,638		63,827		1,321		(1,164	)		63,984
		68,126		1,124		(380	)		68,870		72,682		1,573		(1,164	)		73,091
Other securities:
Within 1 year		3,548		—		—			3,548		4,692		30		—			4,722
After 1 year to 5 years		4,990		5		—			4,995		4,988		—		(43	)		4,945
		8,538		5		—			8,543		9,680		30		(43	)		9,667
Equity securities:
No stated maturity		2,369		662		(216	)		2,815		2,447		680		(142	)		2,985
		2,369		662		(216	)		2,815		2,447		680		(142	)		2,985
Total	$	410,881	$	9,093	$	(1,972	)	$	418,002	$	465,631	$	7,964	$	(6,603	)	$	466,992

Expected maturities may differ from contractual maturities because debt issuers may have the right to call or prepay obligations without call or prepayment penalties.

Securities with a fair value of $299.4 million and $347.3 million at June 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and for other purposes as required by law.

During the six months ended June 30, 2011 and 2010, available-for-sale securities with a fair value at the date of sale of $5.9 million and $3.6 million, respectively, were sold. Gross realized gains on such sales totaled $569 thousand in 2011 and $108 thousand in 2010. Gross realized losses on sales were $0 thousand in 2011 and $21 thousand in 2010. Tax expense related to net realized gains from the sales of investment securities for the six months ended June 30, 2011 and 2010 was $199 thousand and $30 thousand, respectively. Accumulated other comprehensive income related to securities of $4.6 million and $884 thousand, net of taxes, has been included in shareholders’ equity at June 30, 2011 and December 31, 2010, respectively. Unrealized losses in investment securities at June 30, 2011 and December 31, 2010 do not represent other-than-temporary impairments.

8

The Corporation realized other-than-temporary impairment charges to noninterest income of $10 thousand and $47 thousand, respectively, on its equity portfolio during the six months ended June 30, 2011 and 2010. The Corporation determined that it was probable that certain equity securities would not regain market value equivalent to the Corporation’s cost basis within a reasonable period of time due to a decline in the financial stability of the underlying companies. The Corporation carefully monitors all of its equity securities and has not taken impairment losses on certain other equity securities in an unrealized loss position, at this time, as the financial performance of the underlying companies is not indicative of the market deterioration of their stock and it is probable that the market value of the equity securities will recover to the Corporation’s cost basis in the individual securities in a reasonable amount of time. The equity securities within the following table consist of common stocks of other financial institutions, which have experienced recent declines in value consistent with the industry as a whole. Management evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Corporation has the positive intent to hold these securities and believes it is more likely than not, that it will not have to sell these securities until recovery to the Corporation’s cost basis occurs. The Corporation does not consider these investments to be other-than-temporarily impaired at June 30, 2011 and December 31, 2010.

Management evaluates debt securities, which are comprised of U. S. Government, Government Sponsored Agencies, municipalities and other issuers, for other-than-temporary impairment and considers the current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. All of the debt securities are rated as investment grade and management believes that it will not incur any losses. The unrealized losses on the Corporation’s investments in debt securities are temporary in nature since they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers within our investment portfolio. The Corporation does not have the intent to sell the debt securities and believes it is more likely than not, that it will not have to sell the securities before recovery of their cost basis. The Corporation has not recognized any other-than-temporary impairment charges on debt securities for the six months ended June 30, 2011 and 2010.

At June 30, 2011 and December 31, 2010, there were no investments in any single non-federal issuer representing more than 10% of shareholders’ equity.

The following table shows the amount of securities that were in an unrealized loss position at June 30, 2011 and December 31, 2010:

	At June 30, 2011
	Less than Twelve Months					Twelve Months or Longer					Total
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. government corporations and agencies	$	59,466	$	(458	)	$	—	$	—		$	59,466	$	(458	)
State and political subdivisions		14,920		(290	)		2,654		(147	)		17,574		(437	)
Residential mortgage-backed securities		—		—			3,906		(481	)		3,906		(481	)
Commercial mortgage obligations		19,537		(380	)		—		—			19,537		(380	)
Equity securities		873		(216	)		—		—			873		(216	)
Total	$	94,796	$	(1,344	)	$	6,560	$	(628	)	$	101,356	$	(1,972	)

	At December 31, 2010
	Less than Twelve Months					Twelve Months or Longer					Total
			Unrealized					Unrealized					Unrealized
(Dollars in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. government corporations and agencies	$	107,978	$	(2,000	)	$	—	$	—		$	107,978	$	(2,000	)
State and political subdivisions		52,531		(2,589	)		1,589		(173	)		54,120		(2,762	)
Residential mortgage-backed securities		10,096		(38	)		4,419		(454	)		14,515		(492	)
Commercial mortgage obligations		19,322		(1,164	)		—		—			19,322		(1,164	)
Other securities		4,945		(43	)		—		—			4,945		(43	)
Equity securities		951		(140	)		17		(2	)		968		(142	)
Total	$	195,823	$	(5,974	)	$	6,025	$	(629	)	$	201,848	$	(6,603	)

9

Note 3. Loans and Leases

The following is a summary of the major loan and lease categories:

	At June 30,			At December 31,
(Dollars in thousands)	2011			2010
Commercial, financial and agricultural	$	479,670		$	463,518
Real estate-commercial		511,162			516,546
Real estate-construction		84,857			119,769
Real estate-residential secured for business purpose		32,717			42,459
Real estate-residential secured for personal purpose		132,554			121,876
Real estate-home equity secured for personal purpose		80,230			80,875
Loans to individuals		42,577			44,087
Lease financings		84,777			92,617
Total gross loans and leases		1,448,544			1,481,747
Less: Unearned income		(9,837	)		(10,561	)
Total loans and leases, net of unearned income	$	1,438,707		$	1,471,186

Note 4. Credit Quality of Loans and Leases and the Reserve for Loan and Lease Losses

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 greater than 90 days past due which are accruing interest at June 30, 2011 and December 31, 2010:

													Recorded
													Investment
													Greater than
					Greater								90 Days
					Than								Past Due
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		and Accruing
(Dollars in thousands)	Past Due*		Past Due*		Past Due*		Past Due*		Current*		and Leases		Interest*
At June 30, 2011
Commercial, financial and agricultural	$	153	$	214	$	4	$	371	$	473,312	$	479,670	$	4
Real estate-commercial real estate and construction:
Commercial real estate		828		—		468		1,296		477,615		511,162		468
Construction		—		—		—		—		75,959		84,857		—
Real estate-residential and home equity:
Residential secured for business purpose		100		52		—		152		32,347		32,717		—
Residential secured for personal purpose		55		—		—		55		132,280		132,554		—
Home equity secured for personal purpose		356		69		44		469		79,730		80,230		44
Loans to individuals		306		173		133		612		41,913		42,577		133
Lease financings		894		399		10		1,303		72,752		74,940		10
Total	$	2,692	$	907	$	659	$	4,258	$	1,385,908	$	1,438,707	$	659

* Excludes impaired loans and leases.

10

													Recorded
													Investment
													Greater than
					Greater								90 Days
					Than								Past Due
	30-59 Days		60-89 Days		90 Days		Total				Total Loans		and Accruing
(Dollars in thousands)	Past Due*		Past Due*		Past Due*		Past Due*		Current*		and Leases		Interest*
At December 31, 2010
Commercial, financial and agricultural	$	924	$	—	$	—	$	924	$	454,792	$	463,518	$	—
Real estate-commercial real estate and construction:
Commercial real estate		3,836		—		—		3,836		484,527		516,546		—
Construction		156		—		—		156		112,739		119,769		—
Real estate-residential and home equity:
Residential secured for business purpose		—		—		—		—		42,008		42,459		—
Residential secured for personal purpose		92		—		270		362		120,250		121,876		270
Home equity secured for personal purpose		118		74		44		236		80,639		80,875		44
Loans to individuals		537		153		382		1,072		42,934		44,087		382
Lease financings		1,071		421		—		1,492		79,437		82,056		—
Total	$	6,734	$	648	$	696	$	8,078	$	1,417,326	$	1,471,186	$	696

* Excludes impaired loans and leases.

Nonaccrual and Troubled Debt Restructured Loans and Leases

The following presents, by class of loans and leases, nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and leases) and accruing troubled debt restructured loans and leases at June 30, 2011 and December 31, 2010. Troubled debt restructured loans and leases include concessions primarily related to extensions of interest-only payment periods and an occasional payment modification. These modifications typically are on a short-term basis up to one year.

	At June 30, 2011						At December 31, 2010
			Accruing						Accruing
			Troubled		Total				Troubled		Total
			Debt		Impaired				Debt		Impaired
	Nonaccrual		Restructured		Loans		Nonaccrual		Restructured		Loans
	Loans and		Loans and		and		Loans and		Loans and		and
(Dollars in thousands)	Leases*		Leases		Leases		Leases*		Leases		Leases
Commercial, financial and agricultural	$	5,979	$	8	$	5,987	$	7,627	$	175	$	7,802
Real estate-commercial real estate and construction:
Commercial real estate		29,797		2,454		32,251		28,183		—		28,183
Construction		6,831		2,067		8,898		6,874		—		6,874
Real estate-residential and home equity:
Residential secured for business purpose		109		109		218		361		90		451
Residential secured for personal purpose		61		158		219		1,264		—		1,264
Home equity secured for personal purpose		—		31		31		—		—		—
Loans to individuals		—		52		52		21		60		81
Lease financings		736		149		885		902		225		1,127
Total	$	43,513	$	5,028	$	48,541	$	45,232	$	550	$	45,782

* Includes non-accrual troubled debt restructured loans and leases of $2.8 million and $1.2 million at June 30, 2011 and December, 31, 2010, respectively.

Credit Quality Indicators

The following tables present by class, the recorded investment in loans and leases by credit quality indicator at June 30, 2011 and December 31, 2010.

11

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

1. Cash Secured — No credit risk

2. Fully Secured — Negligible credit risk

3. Strong — Minimal credit risk

4. Satisfactory — Nominal credit risk

5. Acceptable — Moderate credit risk

6. Pre-Watch — Marginal, but stable credit risk

7. Special Mention — Potential weakness

8. Substandard — Well-defined weakness

9. Doubtful — Collection in-full improbable

10. Loss — Considered uncollectible

Commercial Credit Exposure Credit Risk by Internally Assigned Grades

													Real Estate-Residential
	Commercial, Financial												Secured for
	and Agricultural				Real Estate-Commercial				Real Estate-Construction				Business Purpose
	At June 30,		At December 31,		At June 30,		At December 31,		At June 30,		At December 31,		At June 30,		At December 31,
(Dollars in thousands)	2011		2010		2011		2010		2011		2010		2011		2010
Grade:
1. Cash secured/ 2. Fully secured	$	1,160	$	2,714	$	—	$	—	$	—	$	—	$	—	$	—
3. Strong		5,275		16,350		10,024		11,542		1,284		2,674		—		28
4. Satisfactory		34,315		71,258		30,591		47,755		1,634		12,217		1,386		1,836
5. Acceptable		291,171		254,422		278,855		261,520		42,235		78,116		19,761		24,987
6. Pre-watch		87,861		70,259		116,331		109,493		22,511		11,296		8,530		6,322
7. Special Mention		16,133		8,476		22,580		17,596		5,701		684		741		700
8. Substandard		40,692		36,933		51,788		67,379		11,492		14,782		2,299		8,586
9. Doubtful		3,063		3,106		993		1,261		—		—		—		—
10. Loss		—		—		—		—		—		—		—		—
Total	$	479,670	$	463,518	$	511,162	$	516,546	$	84,857	$	119,769	$	32,717	$	42,459

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 by payment activity. Nonperforming loans and leases are loans past due 90 days or more and loans and leases on non-accrual of interest as well as troubled debt restructured loans. Performing loans and leases are reviewed only if the loan becomes 60 days or more past due. Nonperforming loans and leases are reviewed monthly. Performing loans and leases have a nominal to moderate risk of loss. Nonperforming loans and leases are loans with a well-defined weakness as well as loans where collection in-full is improbable.

12

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

	Real Estate-Residential				Real Estate-Home Equity
	Secured for				Secured for
	Personal Purpose				Personal Purpose				Loans to individuals				Lease Financing
	At June 30,		At December 31,		At June 30,		At December 31,		At June 30,		At December 31,		At June 30,		At December 31,
(Dollars in thousands)	2011		2010		2011		2010		2011		2010		2011		2010
Performing	$	132,336	$	120,342	$	80,155	$	80,831	$	42,392	$	43,624	$	74,045	$	80,929
Nonperforming		218		1,534		75		44		185		463		895		1,127
Total	$	132,554	$	121,876	$	80,230	$	80,875	$	42,577	$	44,087	$	74,940	$	82,056

Risks associated with lending activities include, among other things, the impact of changes in interest rates and economic conditions, which may adversely impact the ability of borrowers to repay outstanding loans, and impact the value of the associated collateral.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.

Commercial, financial and agricultural business loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the collateral securing the loans often depreciates over time, is difficult to appraise and liquidate and fluctuates in value based on the success of the business.

Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest). During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral. Included in real estate-construction is track development financing. Risk factors related to track development financing include the demand for residential housing and the real estate valuation market. When projects move slower than anticipated, the properties may have significantly lower values than when the original underwriting was completed, resulting in lower collateral values to support the loan. Extended time frames also cause the interest carrying cost for a project to be higher than the builder projected, negatively impacting the builder’s profit and cash flow and, therefore, their ability to make principal and interest payments.

Commercial real estate loans and residential real estate loans with a business purpose secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.

Commercial, financial and agricultural loans, commercial real estate loans, construction loans and residential real estate loans secured for a business purpose are more susceptible to a risk of loss during a downturn in the business cycle. The Corporation has strict underwriting, review, and monitoring procedures in place, however, these procedures cannot eliminate all of the risks related to these loans.

13

The Corporation focuses on both assessing the borrower’s capacity and willingness to repay and on obtaining sufficient collateral. Commercial, financial and agricultural loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the Eastern Pennsylvania market area at conservative loan-to-value ratios and often by a guarantee of the borrowers. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that any credit concentrations by borrower or industry are closely monitored.

The Corporation originates fixed-rate and adjustable-rate real estate-residential mortgage loans that are secured by the underlying 1- to 4-family residential properties for personal purposes. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

In the real estate-home equity loan portfolio secured for a personal purpose, combined loan-to-value ratios at origination are generally limited to 80%. Other credit considerations may warrant higher combined loan-to-value ratios and are generally insured by private mortgage insurance.

Credit risk in the loans to individuals portfolio, which includes, direct consumer loans and credit cards, is controlled by strict adherence to conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.

The primary risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations. The Corporation has strict underwriting, review, and monitoring procedures in place to mitigate this risk. Risk also lies in the residual value of the underlying equipment. Residual values are subject to judgments as to the value of the underlying equipment that can be affected by changes in economic and market conditions and the financial viability of the residual guarantors and insurers. To the extent not guaranteed or assumed by a third party, or otherwise insured against, the Corporation bears the risk of ownership of the leased assets. This includes the risk that the actual value of the leased assets at the end of the lease term will be less than the residual value. The Corporation greatly reduces this risk by using $1.00 buyout leases, in which the entire cost of the leased equipment is included in the contractual payments, leaving no residual payment at the end of the lease terms.

14

Reserve for Loan and Lease Losses and Recorded Investment in Loans and Leases

The following presents, by portfolio segment, a summary of the activity in the reserve for loan and lease losses, the balance in the reserve for loan and lease losses disaggregated on the basis of impairment method and the recorded investment in loans and leases disaggregated on the basis of impairment method for the three and six months ended June 30, 2011 and 2010:

										Real Estate-
										Residential
							Real Estate-			and
	Commercial,			Real Estate-			Residential			Home Equity
	Financial			Commercial			Secured for			Secured for			Loans
	and			and			Business			Personal			to			Lease
(Dollars in thousands)	Agricultural			Construction			Purpose			Purpose			Individuals			Financings			Unallocated		Total
For the Three Months Ended June 30, 2011
Reserve for loan and lease losses:
Beginning balance	$	11,098		$	16,464		$	995		$	594		$	701		$	1,946		$	1,006	$	32,804
Charge-offs		(1,644	)		(3,375	)		(136	)		(35	)		(396	)		(391	)				(5,977	)
Recoveries		49			17			3			1			34			114					218
Provision (recovery of provision)		1,374			2,986			157			136			356			243			304		5,556
Ending balance	$	10,877		$	16,092		$	1,019		$	696		$	695		$	1,912		$	1,310	$	32,601
For the Three Months Ended June 30, 2010
Reserve for loan and lease losses:
Beginning balance	$	14,088		$	8,311		$	860		$	486		$	822		$	1,499		$	999	$	27,065
Charge-offs		(1,180	)		(1,638	)		(5	)		—			(194	)		(603	)		—		(3,620	)
Recoveries		43			485			9			—			66			196			—		799
Provision (recovery of provision)		(420	)		4,170			(10	)		(4	)		111			931			87		4,865
Ending balance	$	12,531		$	11,328		$	854		$	482		$	805		$	2,023		$	1,086	$	29,109

										Real Estate-
										Residential
							Real Estate-			and
	Commercial,			Real Estate-			Residential			Home Equity
	Financial			Commercial			Secured for			Secured for			Loans
	and			and			Business			Personal			to			Lease
(Dollars in thousands)	Agricultural			Construction			Purpose			Purpose			Individuals			Financings			Unallocated			Total
For the Six Months Ended June 30, 2011
Reserve for loan and lease losses:
Beginning balance	$	9,630		$	15,288		$	1,333		$	544		$	734		$	1,950		$	1,419		$	30,898
Charge-offs		(2,774	)		(5,063	)		(194	)		(38	)		(597	)		(859	)		—			(9,525	)
Recoveries		181			80			6			3			78			190			—			538
Provision (recovery of provision)		3,840			5,787			(126	)		187			480			631			(109	)		10,690
Ending balance	$	10,877		$	16,092		$	1,019		$	696		$	695		$	1,912		$	1,310		$	32,601
For the Six Months Ended June 30, 2010
Reserve for loan and lease losses:
Beginning balance	$	12,148		$	7,975		$	1,058		$	501		$	887		$	1,175		$	1,054		$	24,798
Charge-offs		(2,348	)		(2,438	)		(5	)		—			(479	)		(1,192	)		—			(6,462	)
Recoveries		68			489			10			—			142			304			—			1,013
Provision (recovery of provision)		2,663			5,302			(209	)		(19	)		255			1,736			32			9,760
Ending balance	$	12,531		$	11,328		$	854		$	482		$	805		$	2,023		$	1,086		$	29,109

15

							Real Estate-
							Residential
					Real Estate-		and
	Commercial,		Real Estate-		Residential		Home Equity
	Financial		Commercial		Secured for		Secured for		Loans
	and		and		Business		Personal		to		Lease
(Dollars in thousands)	Agricultural		Construction		Purpose		Purpose		Individuals		Financings		Unallocated		Total
As of June 30, 2011
Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	372	$	933	$	—	$	—	$	—	$	—	$	N/A	$	1,305
Ending balance: collectively evaluated for impairment		10,505		15,159		1,019		696		695		1,912		1,310		31,296
Total ending balance	$	10,877	$	16,092	$	1,019	$	696	$	695	$	1,912	$	1,310	$	32,601
Loans and leases:
Ending balance: individually evaluated for impairment	$	5,987	$	41,149	$	218	$	250	$	52	$	885			$	48,541
Ending balance: collectively evaluated for impairment		473,683		554,870		32,499		212,534		42,525		74,055				1,390,166
Total ending balance	$	479,670	$	596,019	$	32,717	$	212,784	$	42,577	$	74,940			$	1,438,707
As of June 30, 2010
Reserve for loan and lease losses:
Ending balance: individually evaluated for impairment	$	668	$	3,395	$	65	$	—	$	—	$	—	$	N/A	$	4,128
Ending balance: collectively evaluated for impairment		11,863		7,933		789		482		805		2,023		1,086		24,981
Total ending balance	$	12,531	$	11,328	$	854	$	482	$	805	$	2,023	$	1,086	$	29,109
Loans and leases:
Ending balance: individually evaluated for impairment	$	2,253	$	25,741	$	661	$	1,338	$	62	$	985			$	31,040
Ending balance: collectively evaluated for impairment		461,489		571,219		43,178		209,425		44,906		87,890				1,418,107
Total ending balance	$	463,742	$	596,960	$	43,839	$	210,763	$	44,968	$	88,875			$	1,449,147

16

Impaired Loans and Leases

The following presents, by class of loans and leases, the recorded investment and unpaid principal balance of impaired loans and leases, the amounts of the impaired loans and leases for which there is not an allowance for credit losses and the amounts for which there is an allowance for credit losses at June 30, 2011 and December 31, 2010:

	At June 30, 2011						At December 31, 2010
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans and leases with no related allowance recorded:
Commercial, financial and agricultural	$	5,143	$	6,028			$	4,761	$	5,074
Real estate-commercial real estate		25,011		28,869				21,403		23,094
Real estate-construction		7,469		9,453				6,225		8,025
Real estate-residential secured for business purpose		218		729				361		730
Real estate-residential secured for personal purpose		219		219				632		632
Real estate-home equity secured for personal purpose		31		31				—		—
Loans to individuals		52		52				81		81
Lease financings		885		885				1,127		1,127
Total impaired loans and leases with no related allowance recorded:	$	39,028	$	46,266			$	34,590	$	38,763
Impaired loans and leases with an allowance recorded:
Commercial, financial and agricultural	$	844	$	867	$	372	$	3,041	$	3,058	$	650
Real estate-commercial real estate		7,240		7,676		860		6,780		8,321		909
Real estate-construction		1,429		1,444		73		649		649		33
Real estate-residential secured for business purpose		—		—		—		90		90		29
Real estate-residential secured for personal purpose		—		—		—		632		632		2
Total impaired loans and leases with an allowance recorded	$	9,513	$	9,987	$	1,305	$	11,192	$	12,750	$	1,623
Total impaired loans and leases:
Commercial, financial and agricultural	$	5,987	$	6,895	$	372	$	7,802	$	8,132	$	650
Real estate-commercial real estate		32,251		36,545		860		28,183		31,415		909
Real estate-construction		8,898		10,897		73		6,874		8,674		33
Real estate-residential secured for business purpose		218		729		—		451		820		29
Real estate-residential secured for personal purpose		219		219		—		1,264		1,264		2
Real estate-home equity secured for personal purpose		31		31		—		—		—		—
Loans to individuals		52		52		—		81		81		—
Lease financings		885		885		—		1,127		1,127		—
Total impaired loans and leases:	$	48,541	$	56,253	$	1,305	$	45,782	$	51,513	$	1,623

17

The following presents by class of loans and leases, the average recorded investment in impaired loans and leases and an analysis of interest on impaired loans and leases:

	Three Months Ended June 30, 2011						Three Months Ended June 30, 2010
					Interest						Interest
					Income That						Income That
					Would Have						Would Have
					Been						Been
					Recognized						Recognized
	Average		Interest		Under		Average		Interest		Under
	Recorded		Income		Original		Recorded		Income		Original
(Dollars in thousands)	Investment		Recognized*		Terms		Investment		Recognized*		Terms
Commercial, financial and agricultural	$	6,387	$	12	$	105	$	2,461	$	3	$	35
Real estate-commercial real estate		26,802		48		452		17,841		36		270
Real estate-construction		9,093		28		88		9,159		—		96
Real estate-residential secured for business purpose		327		1		3		879		9		7
Real estate-residential secured for personal purpose		544		2		5		1,122		—		18
Real estate-home equity secured for personal purpose		23		—		—		249		—		3
Loans to individuals		58		2		—		62		2		—
Lease financings		972		—		—		990		—		—
Total	$	44,206	$	93	$	653	$	32,763	$	50	$	429

* Includes interest income recognized on accruing troubled debt restructured loans of $73 thousand and $26 thousand for the three months ended June 30, 2011 and 2010, respectively.

	Six Months Ended June 30, 2011						Six Months Ended June 30, 2010
					Interest						Interest
					Income That						Income That
					Would Have						Would Have
					Been						Been
					Recognized						Recognized
	Average		Interest		Under		Average		Interest		Under
	Recorded		Income		Original		Recorded		Income		Original
(Dollars in thousands)	Investment		Recognized*		Terms		Investment		Recognized*		Terms
Commercial, financial and agricultural	$	6,753	$	14	$	193	$	2,937	$	6	$	89
Real estate-commercial real estate		26,225		52		844		17,016		58		520
Real estate-construction		8,141		28		175		11,607		—		289
Real estate-residential secured for business purpose		380		3		9		869		18		13
Real estate-residential secured for personal purpose		750		19		20		1,182		13		23
Real estate-home equity secured for personal purpose		13		—		—		249		—		5
Loans to individuals		62		3		1		63		3		—
Lease financings		1,034		—		—		949		—		—
Total	$	43,358	$	119	$	1,242	$	34,872	$	98	$	939

* Includes interest income recognized on accruing troubled debt restructured loans of $79 thousand and $74 thousand for the six months ended June 30, 2011 and 2010, respectively.

18

Note 5. Mortgage Servicing Rights

The Corporation has originated mortgage servicing rights which are included in other intangible assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method using an accelerated amortization method and are subject to periodic impairment testing. The aggregate fair value of these rights was $3.4 million and $2.9 million at June 30, 2011 and December 31, 2010. The fair value of mortgage servicing rights was determined using discount rates ranging from 3.50% to 7.32% for the six months ended June 30, 2011.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Beginning of period	$	2,772		$	1,620		$	2,441		$	1,437
Servicing rights capitalized		236			258			688			508
Amortization of servicing rights		(112	)		(75	)		(189	)		(140	)
Changes in valuation		(18	)		(4	)		(62	)		(6	)
End of period	$	2,878		$	1,799		$	2,878		$	1,799
Mortgage loans serviced for others	$	355,356		$	216,760		$	355,356		$	216,760

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Valuation allowance, beginning of period	$	(245	)	$	(252	)	$	(201	)	$	(250	)
Additions		(18	)		(4	)		(62	)		(6	)
Reductions		—			—			—			—
Direct write-downs		—			—			—			—
Valuation allowance, end of period	$	(263	)	$	(256	)	$	(263	)	$	(256	)

The estimated amortization expense of mortgage servicing rights for each of the five succeeding fiscal years is as follows:

Year (Dollars in thousands)	Amount
2011	$	246
2012		433
2013		372
2014		322
2015		277
Thereafter		1,228

Note 6. Income Taxes

As of June 30, 2011 and December 31, 2010, the Corporation had no material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in non-interest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in non-interest expense in the year it is assessed and is treated as a deductible expense for tax purposes. As of June 30, 2011, the Corporation’s 2007 federal tax return was examined and tax years 2007 through 2010 remain subject to federal examination as well as examination by state taxing jurisdictions.

19

Note 7. Retirement Plans and Other Postretirement Benefits

Substantially all employees who were hired before December 8, 2009 are covered by a noncontributory retirement plan. Effective December 31, 2009, the benefits under the noncontributory retirement plan, in its current form, were frozen and the plan was amended and converted to a cash balance plan, with participants not losing any pension benefits already earned in the plan. Prior to the cash balance plan conversion effective December 31, 2009, the plan provided benefits based on a formula of each participant’s final average pay. Future benefits under the cash balance plan accrue by crediting participants annually with an amount equal to a percentage of earnings in that year based on years of credited service as defined in the plan. Additionally, employees hired on or after December 8, 2009 are not eligible to participate in the noncontributory retirement plan. The Corporation also provides supplemental executive retirement benefits, a portion of which is in excess of limits imposed on qualified plans by federal tax law. These plans are non-qualified benefit plans. Information on these plans are aggregated and reported under “Retirement Plans” within this footnote.

The Corporation also provides certain postretirement healthcare and life insurance benefits for retired employees. Information on these benefits is reported under “Other Postretirement Benefits” within this footnote.

The Corporation sponsors a Supplemental Non-Qualified Pension Plan (SNQPP) which was established in 1981 for employees who have served for several years, with ability and distinction, in one of the primary policy-making senior level positions, with the understanding that the future growth and continued success of the Corporation’s business may well reflect the continued services to be rendered by these employees and the Corporation’s desire to be reasonably assured that these employees will continue to serve and realizing that if these employees would enter into competition with the Corporation, it would suffer severe financial loss. The SNQPP was established prior to the existence of a 401(k) Deferred Savings Plan, the Employee Stock Purchase Plan and the Long-Term Incentive Plans and therefore is not actively offered to new participants.

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

Components of net periodic benefit cost were as follows:

	For the Three Months Ended June 30,
	2011			2010			2011			2010
							Other Post Retirement
(Dollars in thousands)	Retirement Plans						Benefits
Service cost	$	184		$	81		$	17		$	18
Interest cost		433			427			30			27
Expected return on plan assets		(476	)		(404	)		—			—
Amortization of net loss		176			168			—			(3	)
Amortization (accretion) of prior service cost		12			(6	)		(5	)		(5	)
Accretion of transition asset		(70	)		(71	)		—			—
Net periodic cost	$	259		$	195		$	42		$	37

	For the Six Months Ended June 30,
	2011			2010			2011			2010
							Other Post Retirement
(Dollars in thousands)	Retirement Plans						Benefits
Service cost	$	278		$	182		$	33		$	38
Interest cost		863			856			59			53
Expected return on plan assets		(948	)		(835	)		—			—
Amortization of net loss		364			337			17			7
Amortization (accretion) of prior service cost		24			24			(10	)		(10	)
Accretion of transition asset		(141	)		(142	)		—			—
Net periodic cost	$	440		$	422		$	99		$	88

20

The Corporation previously disclosed in its financial statements for the year ended December 31, 2010, that it expected to make contributions of $54 thousand to its qualified and non-qualified retirement plans and $97 thousand to its other postretirement benefit plans in 2011. During the six months ended June 30, 2011, the Corporation contributed $20 thousand and $40 thousand to its qualified and non-qualified retirement plans and other postretirement plans, respectively. As of June 30, 2011, $726 thousand has been paid to participants from the qualified and non-qualified retirement plans and $40 thousand has been paid to participants from the other postretirement plans.

Note 8. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(Dollars and shares in thousands, except per share data)	2011		2010		2011		2010
Numerator:
Numerator for basic and diluted earnings per share — Income available to common shareholders	$	4,516	$	3,730	$	8,378	$	6,700
Denominator:
Denominator for basic earnings per share — weighted-average shares outstanding		16,772		16,590		16,742		16,563
Effect of dilutive securities:
Employee stock options		—		—		—		—
Denominator for diluted earnings per share — adjusted weighted-average shares outstanding		16,772		16,590		16,742		16,563
Basic earnings per share	$	0.27	$	0.23	$	0.50	$	0.40
Diluted earnings per share	$	0.27	$	0.23	$	0.50	$	0.40

Anti-dilutive options have been excluded in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common stock. For the three months ended June 30, 2011 and 2010, there were 518,032 and 403,032 average anti-dilutive options at an average exercise price of $22.06 and $23.41, per share, respectively. For the six months ended June 30, 2011 and 2010, there were 503,115 and 403,032 average anti-dilutive options at an average exercise price of $22.20 and $23.41, per share, respectively.

21

Note 9. Comprehensive Income and Accumulated Other Comprehensive (Loss) Income

The following table shows the components of comprehensive income, net of income taxes, for the periods presented:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Net income	$	4,516		$	3,730		$	8,378		$	6,700
Net unrealized gains on available-for-sale investment securities:
Net unrealized gains arising during the period		3,355			1,506			4,107			1,497
Less: reclassification adjustment for net gains (losses) on sales realized in net income		370			25			370			57
Less: reclassification adjustment for other-than-temporary impairment on equity securities realized in net income		(2	)		(28	)		(7	)		(31	)
Total net unrealized gains on available-for-sale investment securities		2,987			1,509			3,744			1,471
Net change in fair value of derivatives used for cash flow hedges		(391	)		(828	)		(242	)		(1,047	)
Defined benefit pension plans:
Less: amortization of net loss included in net periodic pension costs		(115	)		(116	)		(248	)		(232	)
Less: accretion (amortization) of prior service cost included in net periodic pension costs		(4	)		7			(9	)		(9	)
Less: accretion of transition asset included in net periodic pension costs		46			46			92			92
Total defined benefit pension plans		73			63			165			149
Total comprehensive income, net of tax	$	7,185		$	4,474		$	12,045		$	7,273

The following table shows the components of accumulated other comprehensive (loss) income, net of taxes, for the periods presented:

	Net Unrealized		Net Change
	Gains on		in Fair Value			Net Change			Accumulated
	Available for		of Derivative			Related to			Other
	Sale Investment		Used for Cash			Defined Benefit			Comprehensive
(Dollars in thousands)	Securities		Flow Hedges			Pension Plan			(Loss) Income
Balance, December 31, 2009	$	5,373	$	1,150		$	(7,047	)	$	(524	)
Net Change		1,471		(1,047	)		149			573
Balance, June 30, 2010	$	6,844	$	103		$	(6,898	)	$	49
Balance, December 31, 2010	$	884	$	320		$	(7,970	)	$	(6,766	)
Net Change		3,744		(242	)		165			3,667
Balance, June 30, 2011	$	4,628	$	78		$	(7,805	)	$	(3,099	)

Note 10. Derivative Instruments and Hedging Activities

The Corporation may use interest-rate swap agreements to modify the interest rate characteristics from variable to fixed or fixed to floating in order to reduce the impact of interest rate changes on future net interest income. The Corporation accounts for its interest-rate swap contracts in cash flow and fair value hedging relationships by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows or fair value of assets or liabilities that are being hedged. To determine effectiveness, the Corporation performs an analysis to identify if changes in fair value or cash flow of the derivative correlate to the equivalent changes in the forecasted interest receipts related to a specified hedged item. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The change in fair value of the ineffective part of the instrument would need to be charged to the statement of operations, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods.

22

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 equity until the underlying forecasted transactions occur, at which time the deferred gains and losses are recognized in income. For a qualifying fair value hedge, the gain or loss on the hedging relationship is recognized in earnings, and the change in fair value on the hedged item to the extent attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognized in earnings.

Derivative loan commitments represent agreements for delayed delivery of financial instruments in which the buyer agrees to purchase and the seller agrees to deliver, at a specified future date, a specified instrument at a specified price or yield. The Corporation’s derivative loan commitments are commitments to sell loans secured by 1-to-4 family residential properties whose predominant risk characteristic is interest rate risk. The fair values of these derivative loan commitments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Loans held for sale are included as forward loan commitments. At June 30, 2011, the notional amounts of interest rate locks with customers and forward loan commitments were $18.9 million and $21.0 million, respectively, with fair values of a positive $299 thousand and $33 thousand, respectively. At December 31, 2010, the notional amounts of interest rate locks with customers and forward loan commitments were $37.7 million and $41.8 million, respectively, with positive fair values of $530 thousand and $269 thousand, respectively. For the interest rate locks with customers, the Corporation recognized fair value adjustments which resulted in gains of $29 thousand and $562 thousand for the three months ended June 30, 2011 and 2010, respectively and losses of $533 thousand and gains of $723 thousand for the six months ended June 30, 2011 and 2010, respectively. For the forward loan commitments, the Corporation recognized fair value adjustments which resulted in gains of $116 thousand and losses of $365 thousand for the three months ended June 30, 2011 and 2010, respectively and gains of $65 thousand and losses of $426 thousand for the six months ended June 30, 2011 and 2010, respectively. The fair value gains and losses related to interest rate locks and forward loan commitments are classified as a component of net gain on mortgage banking activities in the Corporation’s consolidated statements of income.

On March 24, 2009, the Corporation entered into a $22.0 million notional interest rate swap, which had been classified as a fair value hedge on a real estate-commercial loan. Under the terms of the swap agreement, the Corporation paid a fixed rate of 6.49% and received a floating rate which was based on the one month U.S. London Interbank Borrowing Rate (LIBOR) with a 357 basis point spread and a maturity date of April 1, 2019. The Corporation performed an assessment of the hedge at inception and at re-designation. During the fourth quarter of 2009, the Corporation participated $5.0 million of the hedged real estate-commercial loan and de-designated the hedge relationship. During the first quarter of 2010, the Corporation re-designated $17.0 million of the interest rate swap. Upon re-designation, $17.0 million of the swap had some ineffectiveness and the $5.0 million remained undesignated. During the third quarter of 2010, the Corporation terminated the swap. The underlying commercial loan had a positive fair value adjustment on the termination date of $859 thousand which is being amortized through a reduction of interest income over the remaining life. For this interest rate swap, the Corporation recognized fair value adjustments which resulted in losses of $516 thousand and $826 thousand for the three and six months ended June 30, 2010. The fair value gains and losses related to this interest rate swap are classified as a component of net (loss) gain on interest rate swap in the Corporation’s consolidated statements of income.

23

On December 23, 2008, the Corporation entered into a cash flow hedge with a notional amount of $20.0 million that had the effect of converting the variable rates on trust preferred securities to a fixed rate. Under the terms of the swap agreement, the Corporation pays a fixed rate of 2.65% and receives a floating rate based on the three month LIBOR with a maturity date of January 7, 2019. The Corporation has performed an assessment of the hedge at inception and determined that this derivative is highly effective in offsetting the changes in the cash flows of the hedged item. At June 30, 2011, the interest rate swap had a positive fair value of $120 thousand, which was classified on the balance sheet as a component of other assets, and was determined to be highly effective in offsetting the changes in the cash flows of the hedged item. The fair value of the interest rate swap, net of taxes, of $78 thousand was recorded as a component of accumulated other comprehensive loss on the balance sheet. At December 31, 2010, the interest rate swap had a positive fair value of $492 thousand, which was classified on the balance sheet as a component of other assets, and was determined to be highly effective in offsetting the changes in the cash flows of the hedged item. The fair value of the interest rate swap, net of taxes, of $320 thousand was recorded as a component of accumulated other comprehensive loss on the balance sheet. The cash payments on the interest rate swap of $120 thousand and $119 thousand during the three months ended June 30, 2011 and 2010, respectively, and $237 thousand and $239 thousand during the six months ended June 30, 2011 and 2010, respectively, were recorded as a component of interest expense on the income statement. The Corporation expects that approximately $467 thousand of the net gain in accumulated other comprehensive loss will be reclassified as a reduction of interest expense within the next twelve months.

Note 11. Fair Value Disclosures

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Corporation determines the fair value of its financial instruments based on the fair value hierarchy. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that the market participants would use in pricing the asset or liability based on the best information available in the circumstances. 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.

• Level 1—Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access. 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. Assets and liabilities utilizing Level 1 inputs include: Exchange-traded equity and most U.S. treasury securities.

• 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. Assets and liabilities generally utilizing Level 2 inputs include: most U.S. Government agency mortgage-backed debt securities (MBS), corporate debt securities, corporate and municipal bonds, residential mortgage loans held for sale, certain commercial loans, certain equity securities, mortgage servicing rights and derivative financial instruments.

• 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. These assets and liabilities include: certain commercial mortgage obligations (CMO’s) securities.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

24

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 highly liquid U.S. Treasury securities and most 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. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. Government sponsored enterprises, certain MBS, CMOs, and municipal bonds and certain equity securities. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Investment securities classified within Level 3 include certain CMO securities.

Derivative Financial Instruments

The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Derivative financial instruments are classified within Level 2 of the valuation hierarchy.

The following table presents the assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, classified using the fair value hierarchy:

	At June 30, 2011
							Assets/
							Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available-for-sale securities:
U.S government corporations and agencies	$	—	$	137,703	$	—	$	137,703
State and political subdivisions		—		112,271		—		112,271
Mortgage-backed securities		—		87,800		—		87,800
Commercial mortgage obligations		—		68,870		—		68,870
Other securities		—		8,543		—		8,543
Equity securities		2,815		—		—		2,815
Total available-for-sale securities		2,815		415,187		—		418,002
Interest rate swap		—		120		—		120
Interest rate locks with customers		—		299		—		299
Forward loan commitments		—		33		—		33
Total assets	$	2,815	$	415,639	$	—	$	418,454
Liabilities:
Liabilities	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—

	At December 31, 2010
							Assets/
							Liabilities at
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available-for-sale securities:
U.S government corporations and agencies	$	—	$	188,100	$	—	$	188,100
State and political subdivisions		—		108,048		—		108,048
Mortgage-backed securities		—		85,101		—		85,101
Commercial mortgage obligations		—		68,760		4,331		73,091
Other securities		—		9,667		—		9,667
Equity securities		2,985		—		—		2,985
Total available-for-sale securities		2,985		459,676		4,331		466,992
Interest rate swaps		—		492		—		492
Interest rate locks with customers		—		530		—		530
Forward loan commitments		—		269		—		269
Total assets	$	2,985	$	460,967	$	4,331	$	468,283
Liabilities:
Liabilities	$	—	$	—	$	—	$	—
Total liabilities	$	—	$	—	$	—	$	—

25

The following table presents a reconciliation for all assets measured at fair value on a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value for the three months ended June 30, 2010. There was no activity to report for the three months ended June 30, 2011.

	Three Months Ended June 30, 2010
			Total			Total
	Balance at		Unrealized			Realized					Balance at
	March 31,		Gains or			Gains or					June 30,
(Dollars in thousands)	2010		(Losses)			(Losses)		Paydowns			2010
Available-for-sale securities:
Commercial mortgage obligations	$	5,051	$	24		$	—	$	(323	)	$	4,752
Asset-backed securities		438		(3	)		—		(134	)		301
Total Level 3 assets	$	5,489	$	21		$	—	$	(457	)	$	5,053

The following table presents a reconciliation for all assets measured at fair value on a recurring basis and for which the Corporation utilized Level 3 inputs to determine fair value for the six months ended June 30, 2011 and 2010.

	Six Months Ended June 30, 2011
			Total			Total
	Balance at		Unrealized			Realized								Balance at
	December 31,		Gains or			Gains or					Transfers			June 30,
(Dollars in thousands)	2010		(Losses)			(Losses)		Paydowns			to Level 2			2011
Available-for-sale securities:
Commercial mortgage obligations	$	4,331	$	(26	)	$	—	$	(135	)	$	(4,170	)	$	—
Total Level 3 assets	$	4,331	$	(26	)	$	—	$	(135	)	$	(4,170	)	$	—

	Six Months Ended June 30, 2010
			Total			Total
	Balance at		Unrealized			Realized					Balance at
	December 31,		Gains or			Gains or					June 30,
(Dollars in thousands)	2009		(Losses)			(Losses)		Paydowns			2010
Available-for-sale securities:
Commercial mortgage obligations	$	5,172	$	146		$	—	$	(566	)	$	4,752
Asset-backed securities		573		(8	)		—		(264	)		301
Total Level 3 assets	$	5,745	$	138		$	—	$	(830	)	$	5,053

Realized gains or losses are recognized in the consolidated statements of income. There were no realized gains or losses recognized on Level 3 assets during the three or six month periods ended June 30, 2011 or 2010. The CMO security which was previously classified at Level 3 at June 30, 2010 and December 31, 2010 was transferred to Level 2 at March 31, 2011 as the CMO market for these types of securities are again being actively traded in the market and quoted prices are again observable at June 30, 2011.

26

The following table represents assets measured at fair value on a non-recurring basis as of June 30, 2011 and December 31, 2010.

	At June 30, 2011
							Assets/Liabilities
(Dollars in thousands)	Level 1		Level 2		Level 3		at Fair Value
Real estate-commercial loan	$	—	$	17,427	$	—	$	17,427
Impaired loans and leases		—		—		47,236		47,236
Mortgage servicing rights		—		2,878		—		2,878
Total	$	—	$	20,305	$	47,236	$	67,541

	At December 31, 2010
							Assets/Liabilities
(Dollars in thousands)	Level 1		Level 2		Level 3		at Fair Value
Loans held for sale	$	—	$	4,178	$	—	$	4,178
Real estate-commercial loan		—		17,650		—		17,650
Impaired loans and leases		—		—		44,159		44,159
Mortgage servicing rights		—		2,441		—		2,441
Total	$	—	$	24,269	$	44,159	$	68,428

The fair value of the Corporation’s loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including, interest rates, and bids or indications provided by market participants on specific loans that are actively marketed for sale. The Corporation’s loans held for sale are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data. Loans held for sale at June 30, 2011 were carried at the lower of cost or estimated fair value.

The fair value of the hedged real estate-commercial loan (as discussed in Note 10) was based on a discounted cash flow model which takes into consideration the changes in market value due to changes in LIBOR. Commercial loans are classified within Level 2 of the valuation hierarchy. During the fourth quarter of 2009, the Corporation participated $5.0 million of the hedged real estate-commercial loan and at that time the remaining $17.0 million loan was marked to fair value due to the de-designation of the fair value hedge. During the first quarter of 2010, the swap was re-designated and the hedged loan was being marked to fair value on a recurring basis. During the third quarter of 2010 the swap was terminated and the loan was marked to fair value. The fair value is being amortized to par value over the remaining life of the loan using the level-yield method.

Impaired loans and leases include those collateral-dependent loans and leases for which the practical expedient was applied, resulting in a fair-value adjustment to the loan or lease. Impaired loans and leases are evaluated and valued at the time the loan and lease is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and leases less cost to sell and is classified at a Level 3 in the fair value hierarchy. The fair value of collateral is based on appraisals performed by qualified licensed appraisers hired by the Corporation. At June 30, 2011, impaired loans and leases had a carrying amount of $48.5 million with a valuation allowance of $1.3 million. At December 31, 2010, impaired loans and leases had a carrying amount of $45.8 million with a valuation allowance of $1.6 million.

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 current interest rates of the portfolios serviced. Mortgage servicing rights are classified within Level 2 of the valuation hierarchy. The Corporation reviews the mortgage servicing rights portfolio on a quarterly basis for impairment and the mortgage servicing rights are carried at the lower of amortized cost or estimated fair value.

Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other intangible assets. During the six months ended June 30, 2011, there were no triggering events to fair value goodwill and other intangible assets.

27

The following table represents the estimates of fair value of financial instruments:

	At June 30, 2011					At December 31, 2010
	Carrying,					Carrying,
	Notional or					Notional or
	Contract					Contract
(Dollars in thousands)	Amount		Fair Value			Amount		Fair Value
Assets:
Cash and short-term interest-earning assets	$	39,214	$	39,214		$	29,187	$	29,187
Investment securities		418,020		418,020			467,024		467,024
Loans held for sale		2,102		2,127			4,178		4,178
Net loans and leases		1,406,106		1,467,908			1,440,288		1,499,065
Interest rate swaps		20,000		120			20,000		492
Interest rate locks with customers		18,926		299			37,691		530
Forward loan commitments		21,015		33			41,842		269
Liabilities:
Deposits		1,621,294		1,574,419			1,686,270		1,666,566
Short-term borrowings		99,070		95,023			114,871		114,908
Long-term borrowings		28,619		28,885			28,994		29,363
Off-Balance-Sheet:
Commitments to extend credit		—		(1,187	)		—		(1,069	)

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and short-term interest-earning assets:The carrying amounts reported in the balance sheets for cash and due from banks, interest-earning deposits with other banks, and federal funds sold and other short-term investments approximates those assets’ fair values.

Investment securities:Fair values for the held-to-maturity and available-for-sale investment securities are based on quoted market prices that are available in an active market for identical instruments. 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.

Loans held for sale:The fair value of the Corporation’s loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including, interest rates, and bids or indications provided by market participants on specific loans that are actively marketed for sale. The Corporation’s loans held for sale are primarily residential mortgage loans. Loans held for sale are carried at the lower of cost or estimated fair value.

Loans and leases:The fair values for loans are estimated using discounted cash flow analyses, using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense and embedded prepayment options. As permitted, the fair value of the loans and leases are not based on the exit price concept as discussed in the first paragraph of this note.

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.

Deposit liabilities:The fair values for deposits with fixed maturities are estimated by discounting the final maturity. At June 30, 2011, the fair values for non-maturing deposits are established based on expected cash flows and repricing characteristics for the instruments and incorporates Corporation developed, market-based assumptions regarding the impact of changing interest rates on these financial instruments. At December 31, 2010, the fair value for non-maturing deposits were established using a decay factor estimate of cash flows based upon industry-accepted assumptions with the discount rate consisting of an appropriate risk free rate and including components for operating expense.

28

Short-term borrowings:The carrying amounts of securities sold under repurchase agreements, and fed funds purchased approximate their fair values. Short-term FHLB advances with embedded options are estimated using a discounted cash flow analysis using a discount rate consisting of an appropriate risk free rate, as well as operating expense, and embedded prepayment options

Long-term borrowings:The fair values of the Corporation’s long-term borrowings (other than deposits) are estimated using a discounted cash flow analysis using a discount rate consisting of an appropriate risk free rate, as well as components for credit risk, operating expense, and embedded prepayment options.

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.

29

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

(All dollar amounts presented within tables are in thousands, except per share data. “N/M” equates to “not meaningful”; “—” equates to “zero” or “doesn’t round to a reportable number”; and “N/A” equates to “not applicable.” Certain amounts have been reclassified to conform to the current-year presentation.)

Forward-Looking Statements

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

• Operating, legal and regulatory risks

• Economic, political and competitive forces impacting various lines of business

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

• Volatility in interest rates

• Other risks and uncertainties, including those occurring in the U.S. and world financial systems

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Corporation’s expectations with regard to any change in events, conditions or circumstances on which any such statement is based.

Critical Accounting Policies

Management, in order to prepare the Corporation’s financial statements in conformity with U.S. generally accepted accounting principles, is required to make estimates and assumptions that affect the amounts reported in the Corporation’s financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies, discussed below, could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the fair value measurement of investment securities available for sale and assessment for impairment of certain investment securities, reserve for loan and lease losses, valuation of goodwill and other intangible assets, mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation as areas with critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation’s 2010 Annual Report on Form 10-K.

General

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

Effective as of the close of the business on June 29, 2011 and following receipt of required regulatory approvals, Univest National Bank and Trust Co. converted from a national bank to a Pennsylvania state-chartered bank and trust company, as authorized by the National Bank Act and Pennsylvania law. As a result of the conversion, the bank opened on June 30, 2011 as an FDIC-insured Pennsylvania bank and trust company operating under the name, “Univest Bank and Trust Co.” The Corporation believes that the charter conversion will allow greater flexibility to execute its strategy as a community bank and remain competitive in the markets it chooses to serve. As a state-chartered member bank of the Federal Reserve System, the Bank will be regulated primarily by the Pennsylvania Department of Banking and the Federal Reserve Bank of Philadelphia. The conversion to a state charter will not have any significant financial or regulatory impact or affect the Corporation’s current activities or customers.

30

The Bank is engaged in the general commercial banking business and provides a full range of banking services and trust services to its customers. The Bank is the parent company of Delview, Inc., which is the parent company of Univest Insurance, Inc., an independent insurance agency, and Univest Investments, Inc., a full-service broker-dealer and investment advisory firm. The Bank is also the parent company of Univest Capital, Inc., a small ticket commercial finance business, and TCG Investment Advisory, a registered investment advisor which provides discretionary investment consulting and management services. Through its wholly-owned subsidiaries, the Bank provides a variety of financial services to individuals, municipalities and businesses throughout its markets of operation.

Executive Overview

The Corporation reported net income for the three months ended June 30, 2011 of $4.5 million or $0.27 diluted earnings per share compared to net income of $3.7 million or $0.23 diluted earnings per share for the three months ended June 30, 2010. Net income for the six months ended June 30, 2011 was $8.4 million or $0.50 diluted earnings per share compared to net income of $6.7 million or $0.40 diluted earnings per share for the same period in the prior year.

Net interest income on a tax-equivalent basis for the three months ended June 30, 2011 was up $805 thousand, or 4.1% compared to the same period in 2010. The second quarter 2011 net interest margin was 4.24%, level with 4.24% for the first quarter of 2011 and an improvement of 13 basis points over the 4.11% level for the second quarter of 2010. Net interest income on a tax-equivalent basis for the six months ended June 30, 2011 was up $2.7 million, or 7.1% compared to the same period in 2010. The tax equivalent net interest margin for the first six months of 2011 was 4.24% compared to 4.05% for the first six months of 2010. The increase in net interest income and the net interest margin for the three and six months ended June 30, 2011 was mainly attributable to declines in the cost of interest-bearing liabilities, primarily time deposits as well as regular savings accounts, and declines in the volume of Federal Home Loan Bank of Pittsburgh (FHLB) borrowings, exceeding the declines in yields on total interest-earning assets. The Corporation repaid its maturing FHLB advances in 2010, reducing FHLB advances from $54.0 million at June 30, 2010 to $5.0 million at December 31, 2010. FHLB advances at June 30, 2011 remained at $5.0 million.

The provision for loan and lease losses increased by $691 thousand for the three months ended June 30, 2011 compared to the same period in 2010 and by $930 thousand for the six months ended June 30, 2011 from the comparable period in 2010.

Non-interest income increased $637 thousand, or 7.9% during the three months ended June 30, 2011 compared to the same period in 2010 and $189 thousand or 1.2% for the six months ended June 30, 2011 compared to the same period in the prior year primarily due to increased income from trust fees and insurance commissions and fees and a net gain on sales of securities of $569 thousand. Additionally, the three and six months ended June 30, 2010 were impacted by a net loss on the ineffective portion of a fair value swap of $516 thousand and $826 thousand, respectively, which was terminated in the third quarter of 2010. These favorable variances were partially offset by a decline in service charges on deposit accounts for the three and six months of 2011 compared to the same periods in 2010 of $456 thousand and $902 thousand, respectively, mostly due to amendments to Regulation E which were implemented in August 2010. In addition, the six months ended June 30, 2011 compared to 2010 was impacted by a decrease of $632 thousand in the net gain on mortgage banking activities, as a result of negative fair value adjustments on the mortgage pipeline as mortgage demand has softened due to a continued slow purchase market for housing, and a decrease in other income mainly due to a litigation settlement in the first quarter of 2010 and increased servicing fee income.

31

Non-interest expense decreased $503 thousand, or 3.0% for the three months ended June 30, 2011 compared to the same period in 2010 and $836 thousand, or 2.5% for the six months ended June 30, 2011 compared to the same period in 2010. Marketing and advertising expense decreased $524 thousand and $619 thousand for the three and six months ended June 30, 2011, compared to the same periods in 2010, respectively, mainly due to higher advertising in 2010 to support a major brand campaign. Deposit insurance premiums decreased $236 thousand during the second quarter of 2011 from the comparable quarter in the prior year mainly due to the change in the assessment calculation requirement through the FDIC rule implemented April 1, 2011. The payment was formerly based on deposits whereas the rule change now bases the payment on average consolidated total assets less average tangible equity. Additionally, salaries and benefit expense decreased $663 thousand for the six months ended June 30, 2011 compared to the same period in 2010 mainly due to increased deferred loan origination costs on loan credits partially offset by higher commissions expense, restricted stock expense and salaries and benefits expense to grow the mortgage banking business. Occupancy expenses increased by $248 thousand for the six months ended June 30, 2011 from the same period in 2010.

Nonperforming loans and leases were $49.2 million at June 30, 2011 compared to $44.3 million at March 31, 2011, $46.5 million at December 31, 2010 and $32.3 million at June 30, 2010. The increase in non-accrual loans at June 30, 2011 compared to March 31, 2011 was primarily due to the migration of one large Shared National Credit to a theatre to non-accrual status. This commercial real estate loan relationship represented $11.3 million in the aggregate of which $2.6 million was charged-off during the second quarter of 2011 and the remaining $8.7 million was moved to non-accrual with sufficient estimated collateral at June 30, 2011. Nonperforming loans and leases as a percentage of total loans and leases were 3.42% at June 30, 2011 compared to 3.16% at December 31, 2010 and 2.23% at June 30, 2010. Net charge-offs for the three months ended June 30, 2011 were $5.8 million compared to $2.8 million for the three months ended June 30, 2010. Net charge-offs for the six months ended June 30, 2011 were $9.0 million compared to $5.4 million for the same period in the prior year. The increase in loan and lease charge-offs was mainly due to deterioration of underlying collateral and economic factors. The increase occurred primarily in the commercial real estate category, mostly due to the aforementioned Shared National Credit to a theatre. Charge-offs also occurred in the commercial, financial and agricultural and lease financing categories.

The Corporation earns its revenues primarily from the margins and fees it generates from loans and leases and depository services it provides as well as from trust fees and insurance and investment commissions. The Corporation seeks to achieve adequate and reliable earnings by growing its business while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk to Board of Directors approved levels. As interest rates increase, fixed-rate assets that banks hold will tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold will tend to increase in value. The Corporation is in a more asset sensitive position; although interest rates are expected to remain low for the foreseeable future, it anticipates increasing interest rates over the longer term, which it expects would benefit its net interest margin.

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

32

Results of Operations

The Corporation’s consolidated net income and earnings per share for the three and six months ended June 30, 2011 and 2010 were as follows:

	For the Three Months									For the Six Months
(Dollars in thousands,	Ended June 30,				Change					Ended June 30,				Change
except per share data)	2011		2010		Amount		Percent			2011		2010		Amount		Percent
Net income	$	4,516	$	3,730	$	786		21.1	%	$	8,378	$	6,700	$	1,678		25.0	%
Net income per share:
Basic	$	0.27	$	0.23	$	0.04		17.4	%	$	0.50	$	0.40	$	0.10		25.0	%
Diluted		0.27		0.23		0.04		17.4			0.50		0.40		0.10		25.0

Return on average shareholders’ equity was 6.64% and return on average assets was 0.86% for the three months ended June 30, 2011, compared to 5.54% and 0.72%, respectively, for the same period in 2010. Return on average shareholders’ equity was 6.24% and return on average assets was 0.80% for the six months ended June 30, 2011, compared to 5.01% and 0.65%, respectively, for the same period in 2010.

Net Interest Income

Net interest income is the difference between interest earned on loans and leases, investments and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. Net interest income is the principal source of the Corporation’s revenue. Table 1 presents a summary of the Corporation’s average balances, the tax-equivalent yields earned on average assets, and the cost of average liabilities, and shareholders’ equity on a tax-equivalent basis for the three and six months ended June 30, 2011 and 2010. The tax-equivalent net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread represents the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of net interest free funding sources represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity. Table 2 analyzes the changes in the tax-equivalent net interest income for the periods broken down by their rate and volume components. Sensitivities associated with the mix of assets and liabilities are numerous and complex. The Investment Asset/Liability Management Committee works to maintain an adequate and stable net interest margin for the Corporation.

Net interest income on a tax-equivalent basis for the three months ended June 30, 2011 increased $805 thousand, or 4.1% compared to the same period in 2010. The tax-equivalent net interest margin for the three months ended June 30, 2011 increased 13 basis points to 4.24% from 4.11% for the three-months ended June 30, 2010. Net interest income on a tax-equivalent basis increased $2.7 million, or 7.1% for the six months ended June 30, 2011 compared to the same period in 2010. The tax-equivalent net interest margin for the six months ended June 30, 2011 increased 19 basis points to 4.24% from 4.05% for the first six months of 2010. The increase in net interest income and the net interest margin for the three and six months ended June 30, 2011 was mainly attributable to declines in the cost of interest-bearing liabilities, primarily time deposits as well as regular savings accounts, and a decline in the volume of FHLB borrowings, exceeding the declines in yields on total interest-earning assets. The Corporation repaid its maturing FHLB advances in 2010, reducing FHLB advances from $54.0 million at June 30, 2010 to $5.0 million at December 31, 2010. FHLB advances remained at $5.0 million at June 30, 2011.

33

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

	For the Three Months Ended June 30,
	2011								2010
	Average			Income/		Average			Average			Income/		Average
(Dollars in thousands)	Balance			Expense		Rate			Balance			Expense		Rate
Assets:
Interest-earning deposits with other banks	$	19,401		$	12		0.25	%	$	26,700		$	19		0.29	%
U.S. Government obligations		153,239			639		1.67			158,505			922		2.33
Obligations of states and political subdivisions		110,187			1,712		6.23			108,820			1,803		6.65
Other debt and equity securities		176,180			1,527		3.48			175,577			1,933		4.42
Total interest-earning deposits and investments		459,007			3,890		3.40			469,602			4,677		3.99
Commercial, financial and agricultural loans		431,427			4,947		4.60			415,943			4,892		4.72
Real estate-commercial and construction loans		541,862			7,399		5.48			523,306			7,752		5.94
Real estate-residential loans		245,996			2,757		4.50			256,296			2,785		4.36
Loans to individuals		41,924			597		5.71			46,185			599		5.20
Municipal loans and leases		128,799			1,680		5.23			104,720			1,564		5.99
Lease financings		61,068			1,667		10.95			78,828			1,742		8.86
Gross loans and leases		1,451,076			19,047		5.26			1,425,278			19,334		5.44
Total interest-earning assets		1,910,083			22,937		4.82			1,894,880			24,011		5.08
Cash and due from banks		29,706								37,510
Reserve for loan and lease losses		(33,995	)							(28,864	)
Premises and equipment, net		34,302								35,002
Other assets		156,077								152,402
Total assets	$	2,096,173							$	2,090,930
Liabilities:
Interest-bearing checking deposits	$	210,487			59		0.11		$	182,156			62		0.14
Money market savings		277,420			174		0.25			293,697			277		0.38
Regular savings		481,312			374		0.31			445,781			661		0.59
Time deposits		405,829			1,683		1.66			435,969			2,588		2.38
Total time and interest-bearing deposits		1,375,048			2,290		0.67			1,357,603			3,588		1.06
Securities sold under agreements to repurchase		101,093			78		0.31			98,802			111		0.45
Other short-term borrowings		3,498			2		0.23			51,936			542		4.19
Long-term debt		5,000			47		3.77			5,717			48		3.37
Subordinated notes and capital securities		23,619			306		5.20			25,119			313		5.00
Total borrowings		133,210			433		1.30			181,574			1,014		2.24
Total interest-bearing liabilities		1,508,258			2,723		0.72			1,539,177			4,602		1.20
Demand deposits, non-interest bearing		280,764								249,018
Accrued expenses and other liabilities		34,199								32,833
Total liabilities		1,823,221								1,821,028
Shareholders’ Equity:
Common stock		91,332								91,332
Additional paid-in capital		61,469								61,420
Retained earnings and other equity		120,151								117,150
Total shareholders’ equity		272,952								269,902
Total liabilities and shareholders’ equity	$	2,096,173							$	2,090,930
Net interest income				$	20,214							$	19,409
Net interest spread							4.10								3.88
Effect of net interest-free funding sources							0.14								0.23
Net interest margin							4.24	%							4.11	%
Ratio of average interest-earning assets to average interest-bearing liabilities		126.64	%							123.11	%

34

	For the Six Months Ended June 30,
	2011								2010
	Average			Income/		Average			Average			Income/		Average
(Dollars in thousands)	Balance			Expense		Rate			Balance			Expense		Rate
Assets:
Interest-earning deposits with other banks	$	12,876		$	15		0.23	%	$	20,531		$	30		0.29	%
U.S. Government obligations		161,900			1,356		1.69			136,457			1,663		2.46
Obligations of states and political subdivisions		109,610			3,433		6.32			107,733			3,543		6.63
Other debt and equity securities		170,610			3,056		3.61			181,948			3,953		4.38
Total interest-earning deposits and investments		454,996			7,860		3.48			446,669			9,189		4.15
Commercial, financial and agricultural loans		430,039			10,118		4.74			412,820			9,557		4.67
Real estate-commercial and construction loans		550,038			14,650		5.37			523,693			15,314		5.90
Real estate-residential loans		245,155			5,398		4.44			258,615			5,643		4.40
Loans to individuals		42,464			1,223		5.81			46,843			1,397		6.01
Municipal loans and leases		125,656			3,411		5.47			101,104			2,989		5.96
Lease financings		62,677			3,185		10.25			79,991			3,465		8.74
Gross loans and leases		1,456,029			37,985		5.26			1,423,066			38,365		5.44
Total interest-earning assets		1,911,025			45,845		4.84			1,869,735			47,554		5.13
Cash and due from banks		32,886								34,582
Reserve for loan and lease losses		(33,203	)							(27,728	)
Premises and equipment, net		34,462								34,931
Other assets		155,904								153,450
Total assets	$	2,101,074							$	2,064,970
Liabilities:
Interest-bearing checking deposits	$	201,630			123		0.12		$	177,095			119		0.14
Money market savings		293,022			375		0.26			286,843			593		0.42
Regular savings		481,358			837		0.35			430,940			1,442		0.67
Time deposits		408,416			3,421		1.69			435,072			5,654		2.62
Total time and interest-bearing deposits		1,384,426			4,756		0.69			1,329,950			7,808		1.18
Securities sold under agreements to repurchase		98,782			149		0.30			97,330			228		0.47
Other short-term borrowings		6,865			11		0.32			61,547			1,227		4.02
Long-term debt		5,000			94		3.79			5,732			94		3.31
Subordinated notes and capital securities		23,805			610		5.17			25,305			625		4.98
Total borrowings		134,452			864		1.30			189,914			2,174		2.31
Total interest-bearing liabilities		1,518,878			5,620		0.75			1,519,864			9,982		1.32
Demand deposits, non-interest bearing		278,473								242,388
Accrued expenses and other liabilities		33,062								33,249
Total liabilities		1,830,413								1,795,501
Shareholders’ Equity:
Common stock		91,332								91,332
Additional paid-in capital		61,441								61,420
Retained earnings and other equity		117,888								116,717
Total shareholders’ equity		270,661								269,469
Total liabilities and shareholders’ equity	$	2,101,074							$	2,064,970
Net interest income				$	40,225							$	37,572
Net interest spread							4.09								3.81
Effect of net interest-free funding sources							0.15								0.24
Net interest margin							4.24	%							4.05	%
Ratio of average interest-earning assets to average interest-bearing liabilities		125.82	%							123.02	%

Notes: For rate calculation purposes, average loan and lease categories include unearned discount.   Nonaccrual loans and leases have been included in the average loan and lease balances.   Loans held for sale have been included in the average loan balances.   Tax-equivalent amounts for the three and six months ended June 30, 2011 and 2010 have been calculated using the Corporation’s federal applicable rate of 35.0%.

35

Table 2 — Analysis of Changes in Net Interest Income

The rate-volume variance analysis set forth in the table below compares changes in tax-equivalent net interest income for the periods indicated by their rate and volume components. The change in interest income/expense due to both volume and rate has been allocated proportionately.

	Three Months Ended June 30,									Six Months Ended June 30,
	2011 Versus 2010									2011 Versus 2010
	Volume			Rate						Volume			Rate
	Change			Change			Total			Change			Change			Total
	(Dollars in thousands)
Interest income:
Interest-earning deposits with other banks	$	(4	)	$	(3	)	$	(7	)	$	(10	)	$	(5	)	$	(15	)
U.S. Government obligations		(30	)		(253	)		(283	)		274			(581	)		(307	)
Obligations of states and political subdivisions		23			(114	)		(91	)		60			(170	)		(110	)
Other debt and equity securities		7			(413	)		(406	)		(234	)		(663	)		(897	)
Interest on deposits, investments and federal funds sold		(4	)		(783	)		(787	)		90			(1,419	)		(1,329	)
Commercial, financial and agricultural loans and leases		180			(125	)		55			413			148			561
Real estate-commercial and construction loans		266			(619	)		(353	)		750			(1,414	)		(664	)
Real estate-residential loans		(115	)		87			(28	)		(296	)		51			(245	)
Loans to individuals		(58	)		56			(2	)		(129	)		(45	)		(174	)
Municipal loans and leases		330			(214	)		116			683			(261	)		422
Lease financings		(438	)		363			(75	)		(822	)		542			(280	)
Interest and fees on loans and leases		165			(452	)		(287	)		599			(979	)		(380	)
Total interest income		161			(1,235	)		(1,074	)		689			(2,398	)		(1,709	)
Interest expense:
Interest-bearing checking deposits		10			(13	)		(3	)		19			(15	)		4
Money market savings		(14	)		(89	)		(103	)		13			(231	)		(218	)
Regular savings		48			(335	)		(287	)		150			(755	)		(605	)
Time deposits		(168	)		(737	)		(905	)		(328	)		(1,905	)		(2,233	)
Interest on time and interest-bearing deposits		(124	)		(1,174	)		(1,298	)		(146	)		(2,906	)		(3,052	)
Securities sold under agreement to repurchase		3			(36	)		(33	)		3			(82	)		(79	)
Other short-term borrowings		(268	)		(272	)		(540	)		(597	)		(619	)		(1,216	)
Long-term debt		(7	)		6			(1	)		—			—			—
Subordinated notes and capital securities		(20	)		13			(7	)		(38	)		23			(15	)
Interest on borrowings		(292	)		(289	)		(581	)		(632	)		(678	)		(1,310	)
Total interest expense		(416	)		(1,463	)		(1,879	)		(778	)		(3,584	)		(4,362	)
Net interest income	$	577		$	228		$	805		$	1,467		$	1,186		$	2,653

Notes:	For rate calculation purposes, average loan and lease categories include unearned discount.
	Nonaccrual loans and leases have been included in the average loan and lease balances.
	Loans held for sale have been included in the average loan balances.
	Tax-equivalent amounts for the three and six months ended June 30, 2011 and 2010 have been calculated using the Corporation’s federal applicable rate of 35.0%.

Interest Income

Three months ended June 30, 2011 versus 2010

Interest income on a tax-equivalent basis for the three months ended June 30, 2011 decreased $1.1 million, or 4.5% from the same period in 2010. This decrease was mainly due to a 59 basis point decrease in the average rate earned on investment securities and deposits at other banks as well as an 18 basis point decrease in the average rate earned on loans partially offset by a $25.8 million increase in average loan volume. The decline in interest income on investment securities and deposits at other banks of $787 thousand for the three months ended June 30, 2011 compared to the same period in 2010 was mostly due to maturities, pay-downs and calls of investment securities and replacement with lower yielding investments due to the lower interest rate environment. Interest and fees on loans and leases declined by $287 thousand during the three months ended June 30, 2011 compared to the same period in 2010. The Corporation experienced decreases in the average rates on commercial real estate and construction loans as well as decreases in average volume for lease financings and residential real estate loans. These decreases were mostly attributable to the lower interest rate environment and increased refinancing activity as well as reduced leasing origination volume. These unfavorable variances were partially offset by growth of commercial business loans as well as growth in commercial real estate and construction loans and municipal loans and leases.

36

Six months ended June 30, 2011 versus 2010

Interest income on a tax-equivalent basis for the six months ended June 30, 2011 decreased $1.7 million, or 3.6% from the same period in 2010. This decrease was mainly due to a 67 basis point decrease in the average rate earned on investment securities and deposits at other banks as well as an 18 basis point decrease in the average rate earned on loans partially offset by a $33.0 million increase in average loan volume. The decline in interest income on investment securities and deposits at other banks of $1.3 million for the six months ended June 30, 2011 compared to the same period in 2010 was mostly due to maturities, pay-downs and calls of investment securities and replacement with lower yielding investments due to the lower interest rate environment. Interest and fees on loans and leases declined by $380 thousand during the six months ended June 30, 2011 compared to the same period in 2010. The Corporation experienced decreases in the average rates on commercial real estate and construction loans as well as decreases in average volume for lease financings and residential real estate loans. These decreases were mostly attributable to the lower interest rate environment and increased refinancing activity as well as reduced leasing origination volume. These unfavorable variances were partially offset by growth of commercial business loans as well as growth in commercial real estate and construction loans and municipal loans and leases.

Interest Expense

Three months ended June 30, 2011 versus 2010

Interest expense on a tax-equivalent basis for the three months ended June 30, 2011 decreased $1.9 million, or 40.8% from the comparable period in 2010. This decrease was mainly due to a 39 basis point decrease in the Corporation’s average cost of deposits as well as a $48.4 million decrease in average borrowings and a 94 basis point decrease in the average borrowing rate. The decrease in the Corporation’s cost of deposits was largely attributable to re-pricing of time deposit accounts as well as regular savings accounts. For the three months ended June 30, 2011, interest expense on time deposits decreased $905 thousand and interest expense on savings accounts decreased by $287 thousand. For the three months ended June 30, 2011, average deposits increased by $17.4 million with increases in average regular savings of $35.5 million, interest-bearing checking of $28.3 million partially offset by decreases in average money market savings of $16.3 million and average time deposits of $30.1 million. The Corporation’s focus on growing low cost core deposits and the lower interest rate environment has resulted in a shift in customer deposits from time deposits to savings accounts. Interest on other short-term borrowings mainly includes interest paid on federal funds purchased and short-term FHLB borrowings. In addition, the Bank offers an automated cash management checking account that sweeps funds daily into a repurchase agreement account. Interest expense on other short-term borrowings decreased $540 thousand for the three months ended June 30, 2011 compared to the same period in 2010 primarily due to a decrease in average volume of $48.4 million and a reduction in average rate of 396 basis points. The decreases in average rate and volume were due to maturities of FHLB advances.

Six months ended June 30, 2011 versus 2010

Interest expense on a tax-equivalent basis for the six months ended June 30, 2011 decreased $4.4 million, or 43.7% from the comparable period in 2010. This decrease was mainly due to a 49 basis point decrease in the Corporation’s average cost of deposits as well as a $55.5 million decrease in average borrowings and a 101 basis point decrease in the average borrowing rate. The decrease in the Corporation’s cost of deposits was largely attributable to re-pricing of time deposit accounts as well as regular savings accounts. For the six months ended June 30, 2011, interest expense on time deposits decreased $2.2 million and interest expense on savings accounts decreased by $605 thousand. For the six months ended June 30, 2011, average deposits increased by $54.5 million with increases in average regular savings of $50.4 million, interest-bearing checking of $24.5 million and money market savings of $6.2 million partially offset by a decrease in average time deposits of $26.7 million. The Corporation’s focus on growing low cost core deposits and the lower interest rate environment has resulted in a shift in customer deposits from time deposits to savings accounts. Interest expense on other short-term borrowings decreased $1.2 million for the six months ended June 30, 2011 compared to the same period in 2010 primarily due to a decrease in average volume of $54.7 million and a reduction in average rate of 370 basis points. The decreases in average rate and volume were due to maturities of FHLB advances.

37

Provision for Loan and Lease Losses

The reserve for loan and lease losses is determined through a periodic evaluation that takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charged-off activity. Loans and leases are also reviewed for impairment based on discounted cash flows using the loans’ and leases’ initial effective interest rates or the fair value of the collateral for certain collateral dependent loans and leases. Any of the above criteria may cause the reserve to fluctuate. The provision for the three months ended June 30, 2011 and 2010 was $5.6 million and $4.9 million, respectively. The provision for the six months ended June 30, 2011 and 2010 was $10.7 million and $9.8 million, respectively.

Noninterest Income

Noninterest income consists of trust department fee income, service charges on deposit accounts, commission income, net gains (losses) on sales of securities and loans, net gains (losses) on mortgage banking activities, net gains (losses) on interest rate swaps, net gains (losses) on sales and write-downs of other real estate owned and other miscellaneous types of income. Other service fee income primarily consists of fees from credit card companies for a portion of merchant charges paid to the credit card companies for the Bank’s customer debit card usage (Mastermoney fees), non-customer debit card fees, other merchant fees, mortgage servicing income and mortgage placement income. Bank owned life insurance income represents changes in the cash surrender value of bank-owned life insurance policies, which is affected by the market value of the underlying assets, and also includes any excess proceeds from death benefit claims. Other non-interest income includes gains (losses) on investments in partnerships, gains (losses) on sales of other real estate owned, reinsurance income and other miscellaneous income.

The following table presents noninterest income for the periods indicated:

	Three Months Ended												Six Months Ended
	June 30,						Change						June 30,						Change
	2011			2010			Amount			Percent			2011			2010			Amount			Percent
	(Dollars in thousands)
Trust fee income	$	1,625		$	1,500		$	125			8.3	%	$	3,250		$	3,000		$	250			8.3	%
Service charges on deposit accounts		1,356			1,812			(456	)		(25.2	)		2,692			3,594			(902	)		(25.1	)
Investment advisory commission and fee income		1,194			1,152			42			3.6			2,356			2,208			148			6.7
Insurance commission and fee income		2,072			1,896			176			9.3			4,272			4,139			133			3.2
Other service fee income		1,437			1,475			(38	)		(2.6	)		2,792			2,384			408			17.1
Bank owned life insurance income		268			202			66			32.7			612			534			78			14.6
Other-than-temporary impairment on equity securities		(3	)		(42	)		39			92.9			(10	)		(47	)		37			78.7
Net gain on sales of securities		569			38			531			N/M			569			87			482			N/M
Net gain on mortgage banking activities		328			475			(147	)		(30.9	)		303			935			(632	)		(67.6	)
Net loss on interest rate swap		—			(516	)		516			N/M			—			(826	)		826			N/M
Net loss on dispositions of fixed assets		(9	)		(5	)		(4	)		(80.0	)		(9	)		(11	)		2			18.2
Net loss on sales and write-downs of other real estate owned		(265	)		(16	)		(249	)		N/M			(617	)		(363	)		(254	)		(70.0	)
Other		124			88			36			40.9			245			632			(387	)		(61.2	)
Total noninterest income	$	8,696		$	8,059		$	637			7.9		$	16,455		$	16,266		$	189			1.2

38

Three months ended June 30, 2011 versus 2010

Total non-interest income increased $637 thousand, or 7.9% during the three months ended June 30, 2011 compared to the same period in 2010 primarily due to increased income from trust fees and insurance commissions and fees and an increase in net gain on sales of securities. Additionally, the three months ended June 30, 2010 was impacted by a net loss on the ineffective portion of a fair value swap of $516 thousand which was terminated in the third quarter of 2010. These favorable variances were partially offset by a decline in service charges on deposit accounts mostly due to Regulation E and a negative valuation adjustment on other real estate owned.

Trust fee income increased by $125 thousand and insurance commission and fee income increased by $176 thousand during the three months ended June 30, 2011 from the comparable period in 2010 primarily related to increases in the market values of trust assets and increased insurance volume.

Service charges on deposit accounts decreased $456 thousand during the three months ended June 30, 2011 from the comparable period in 2010 primarily due to decreased levels of insufficient fund charges. In November 2009, the Federal Reserve Board issued a final rule that, effective July 1, 2010, in accordance with Regulation E, prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The Corporation implemented the provisions of Regulation E in the third quarter of 2010.

During the three months ended June 30, 2011, the Corporation sold $5.9 million in available for sale securities that resulted in a net gain of $569 thousand primarily from the sale of mortgage-backed securities. During the three months ended June 30, 2010, the Corporation sold $3.5 million in available for sale securities that resulted in a net gain of $38 thousand. The Corporation did not realize any significant other-than-temporary impairment charges on its equity portfolio during the three months ended June 30, 2011 and 2010. The Corporation carefully monitors all of its equity securities and has not taken impairment losses on certain other securities in an unrealized loss position, at this time, as the financial performance and near-term prospects of the underlying companies are not indicative of the market deterioration of their stock. The Corporation has the positive intent and ability to hold these securities and believes it is more likely than not, that it will not have to sell these securities until recovery to the Corporation’s cost basis occurs.

For the three months ended June 30, 2011, the Corporation recognized a net gain on mortgage banking activities of $328 thousand compared to a net gain of $475 thousand for the same period in 2010. The net gain consists of gains on sales of mortgages held for sale and fair value adjustments on interest-rate locks and forward loan commitments. The decrease in the net gain on mortgage banking activities during the second quarter of 2011 resulted mainly from a decreased volume of sales and a net decrease in the fair market value adjustments on the interest rate locks.

For the three months ended June 30, 2010, the Corporation recognized a loss of $516 thousand on the ineffective portion of a fair value interest rate swap for a commercial real estate loan due to the decline in interest rates during the quarter. This interest rate swap was terminated in the third quarter of 2010 due to the forecasted low interest rate environment. The underlying commercial loan had a positive fair value adjustment at the termination date of $859 thousand which is being amortized through a reduction of interest income over the remaining life of the loan.

For the three months ended June 30, 2011, the Corporation recognized a net loss on sales and write-downs of other real estate owned of $265 thousand compared to a net loss of $16 thousand for the same period in 2010. During the second quarter of 2011, the Corporation recognized a negative valuation adjustment on a commercial property of $260 thousand based on the updated fair value.

39

Six months ended June 30, 2011 versus 2010

Total non-interest income increased by $189 thousand, or 1.2% during the six months ended June 30, 2011 compared to the same period in 2010. The Corporation experienced increases in income from trust fees, investment advisory commissions and fees, insurance commission and fees and other service fees and an increase in net gain on sales of securities. Additionally, the six months ended June 30, 2010 was impacted by a net loss on the ineffective portion of a fair value swap of $826 thousand which was terminated in the third quarter of 2010. These favorable variances were partially offset by a decline in service charges on deposit accounts mostly due to Regulation E, a decrease in the net gain on mortgage banking activities, an increase in the net loss on sales and write-downs of other real estate owned and a reduction in other income mainly due to a litigation settlement during the first quarter of 2010.

Trust fee income increased by $250 thousand and investment advisory commission and fee income increased by $148 thousand during the six months ended June 30, 2011 from the comparable period in 2010 primarily related to increases in the market values of the assets and increased volume. Insurance commission and fee income increased $133 thousand during the six months ended June 30, 2011 mainly attributable to increased volume. Other service fee income increased $408 thousand for the six months ended June 30, 2011 primarily attributable to increases in Mastermoney interchange fees, mortgage servicing fee income and check charges.

Service charges on deposit accounts decreased $902 thousand during the six months ended June 30, 2011 from the comparable period in 2010 primarily due to decreased levels of insufficient fund charges. In November 2009, the Federal Reserve Board issued a final rule that, effective July 1, 2010, in accordance with Regulation E, prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The Corporation implemented the provisions of Regulation E in the third quarter of 2010.

During the six months ended June 30, 2011, the Corporation sold $5.9 million in available for sale securities, primarily from the mortgage-backed securities portfolio, which resulted in a net gain of $569 thousand. During the six months ended June 30, 2010, the Corporation sold $3.6 million in available for sale securities, mainly from the municipal securities portfolio, which resulted in a net gain of $87 thousand

For the six months ended June 30, 2011, the Corporation recognized a net gain on mortgage banking activities of $303 thousand compared to a net gain of $935 thousand for the same period in 2010. The net gain consists of gains on sales of mortgages held for sale and fair value adjustments on interest-rate locks and forward loan commitments. The decrease in the net gain on mortgage banking activities during the six months of 2011 resulted mainly from a net decrease in the fair market value adjustments on the interest rate locks.

For the six months ended June 30, 2010, the Corporation recognized a loss of $826 thousand on the ineffective portion of a fair value interest rate swap for a commercial real estate loan mainly related to re-designation of the swap during the first quarter of 2010 and a decline in interest rates. This interest rate swap was terminated in the third quarter of 2010 due to the forecasted low interest rate environment. The underlying commercial loan had a positive fair value adjustment at the termination date of $859 thousand which is being amortized through a reduction of interest income over the remaining life of the loan.

For the six months ended June 30, 2011, the Corporation recognized a net loss on sales and write-downs of other real estate owned of $617 thousand compared to a net loss of $363 thousand for the same period in 2010. The net losses were mainly due to the recognition of negative valuation adjustments on three commercial properties in 2011 and one commercial property in 2010 based on the updated fair values.

Other income for the six months ended June 30, 2011 decreased $387 thousand from the same period in the prior year mainly due to income received from a litigation settlement during the first quarter of 2010.

Noninterest Expense

The operating costs of the Corporation are known as non-interest expense, and include, but are not limited to, salaries and benefits, equipment expense, and occupancy costs. Expense control is very important to the management of the Corporation, and every effort is made to contain and minimize the growth of operating expenses, and to provide technological innovation whenever practical, as operations change or expand.

40

The following table presents noninterest expense for the periods indicated:

	Three Months Ended										Six Months Ended
	June 30,				Change						June 30,				Change
	2011		2010		Amount			Percent			2011		2010		Amount			Percent
	(Dollars in thousands)
Salaries and benefits	$	9,634	$	9,469	$	165			1.7	%	$	18,617	$	19,280	$	(663	)		(3.4	)%
Net occupancy		1,361		1,309		52			4.0			2,911		2,663		248			9.3
Equipment		965		900		65			7.2			1,942		1,838		104			5.7
Marketing and advertising		393		917		(524	)		(57.1	)		982		1,601		(619	)		(38.7	)
Deposit insurance premiums		427		663		(236	)		(35.6	)		1,140		1,260		(120	)		(9.5	)
Other		3,626		3,651		(25	)		(0.7	)		7,560		7,346		214			2.9
Total noninterest expense	$	16,406	$	16,909	$	(503	)		(3.0	)	$	33,152	$	33,988	$	(836	)		(2.5	)

Three months ended June 30, 2011 versus 2010

Total non-interest expense decreased $503 thousand, or 3.0% for the three months ended June 30, 2011 compared to the same period in 2010 primarily due to decreases in advertising expense and deposit insurance premiums partially offset by a slight increase in salaries and benefit expense. Marketing and advertising expense decreased $524 thousand for the three months ended June 30, 2011 mostly due to higher advertising expense in 2010 to support a major brand campaign. Deposit insurance premiums decreased $236 thousand for the three months ended June 30, 2011 mainly due to the change in the assessment calculation requirement through the FDIC rule implemented April 1, 2011. The payment was formerly based on the amount of deposits whereas the rule change now bases the payment on average consolidated total assets less average tangible equity.

Six months ended June 30, 2011 versus 2010

Total non-interest expense decreased $836 thousand, or 2.5% for the six months ended June 30, 2011 compared to the same period in 2010. Salaries and benefit expense decreased $663 thousand during the six months ended June 30, 2011 compared to the same period in 2010 mainly due to increased deferred loan origination costs on loan credits partially offset by higher commissions expense, restricted stock expense and salaries and benefits expense to grow the mortgage banking business. The Corporation implemented higher deferred loan origination costs on loan credits, commencing during the fourth quarter of 2010, based upon an in-depth study performed which incorporated management’s additional review time spent as a result of increased scrutiny of loan credits. Additionally, as more loan approvals are currently being approved at the Committee level as opposed to individual relationship managers and as the Corporation proactively manages its credit risk given the current economic environment, increased costs for each loan credit are being incurred in connection with the loan approval process; and as a result, a higher level of costs are being deferred. Marketing and advertising expense decreased $619 thousand for the six months ended June 30, 2011 mostly due to higher advertising expense in 2010 to support a major brand campaign. Occupancy expense increased $248 thousand for the six months ended June 30, 2011 primarily due to increased rent, taxes and other occupancy costs related to a branch relocation and branch improvements. Other expenses increased $214 thousand primarily due to increased loan processing expenses and bank shares tax.

Tax Provision

The provision for income taxes for the three months ended June 30, 2011 and 2010 was $1.2 million and $831 thousand, at effective rates of 20.98% and 18.22%, respectively. The provision for income taxes for the six months ended June 30, 2011 and 2010 was $2.0 million and $1.2 million, at effective rates of 19.47% and 15.18%, respectively. The effective tax rates reflect the benefits of tax-exempt income from investments in municipal securities and loans and bank-owned life insurance. The increase in the effective tax rate between the three-month and six-month periods is primarily due to a smaller percentage of tax-exempt income to pre-tax income.

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Financial Condition

Assets

Total assets decreased $75.5 million since December 31, 2010 primarily due to a decrease in loans and leases and investment securities. The following table presents the assets for the periods indicated:

	At June 30,			At December 31,			Change
(Dollars in thousands)	2011			2010			Amount			Percent
Cash, interest-earning deposits and federal funds sold	$	39,214		$	29,187		$	10,027			34.4	%
Investment securities		418,020			467,024			(49,004	)		(10.5	)
Loans held for sale		2,102			4,178			(2,076	)		(49.7	)
Total loans and leases		1,438,707			1,471,186			(32,479	)		(2.2	)
Reserve for loan and lease losses		(32,601	)		(30,898	)		(1,703	)		(5.5	)
Premises and equipment, net		34,166			34,605			(439	)		(1.3	)
Goodwill and other intangibles, net		56,776			56,797			(21	)		—
Bank owned life insurance		48,622			48,010			612			1.3
Accrued interest and other assets		53,371			53,804			(433	)		(0.8	)
Total assets	$	2,058,377		$	2,133,893		$	(75,516	)		(3.5	)

Cash, Interest-earning Deposits and Federal Funds Sold

Cash, interest-earning deposits and federal funds sold increased as of June 30, 2011 as compared to December 31, 2010 primarily due to an increase in cash maintained at the Federal Reserve Bank.

Investment Securities

The investment portfolio is managed as part of the overall asset and liability management process to optimize income and market performance over an entire interest rate cycle while mitigating risk. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create more economically attractive returns on these investments, and to collateralize public funds deposits. The securities portfolio consists primarily of U.S. Government agency, residential mortgage-backed and municipal securities.

Total investments decreased by $49.0 million at June 30, 2011 compared to December 31, 2010. Maturities and paydowns of $34.4 million, calls of $67.1 million, and sales of $9.4 million were partially offset by purchases of $55.8 million.

Loans and Leases

Total gross loans and leases decreased by $32.5 million at June 30, 2011 as compared to December 31, 2010 mainly due to continued light credit demand and utilization of lines by both business and consumers as a result of the prolonged challenging and uncertain economic environment. Declines occurred in construction loans of $34.9 million, commercial real estate of $5.4 million, residential mortgages secured for business purposes of $9.7 million, lease financings of $7.1 million and consumer loans of $1.5 million while commercial, financial and agricultural loans increased by $16.2 million and residential loans secured for personal purposes increased by $10.7 million.

Asset Quality

Performance of the entire loan and lease portfolio is reviewed on a regular basis by bank management and loan officers. A number of factors regarding the borrower, such as overall financial strength, collateral values and repayment ability, are considered in deciding what actions should be taken when determining the collectability of interest for accrual purposes.

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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 classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest, even though the loan or lease is currently performing. A loan or lease may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan or lease is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans and leases is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.

Loans or leases are usually restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Total cash basis, troubled debt restructured and nonaccrual loans and leases totaled $48.5 million at June 30, 2011, $45.8 million at December 31, 2010, and $31.0 million at June 30, 2010; the balance at June 30, 2011 primarily consisted of commercial real estate, construction and commercial, financial and agricultural loans. For the six months ended June 30, 2011 and 2010, impaired loans and leases resulted in lost interest income of $1.2 million and $939 thousand, respectively. The Corporation’s ratio of nonperforming assets to total loans and leases and other real estate owned was 3.75% as of June 30, 2011, compared to 3.32% as of December 31, 2010 and 2.35% as of June 30, 2010. The ratio of nonperforming assets to total assets was 2.63% at June 30, 2011, 2.29% at December 31, 2010 and 1.63% at June 30, 2010.

At June 30, 2011, the recorded investment in loans and leases that were considered to be impaired was $48.5 million, all of which were on a nonaccrual basis or accruing trouble debt restructured. The related reserve for loan and lease losses for those loans was $1.3 million. At December 31, 2010, the recorded investment in loans and leases that were considered to be impaired was $45.8 million, all of which were on a nonaccrual basis or accruing trouble debt restructured. The related reserve for loan and lease losses for those loans was $1.6 million. 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. The increase in impaired loans and leases at June 30, 2011 compared to December 31, 2010 was mainly due to the migration of one large Shared National Credit to a theatre to non-accrual status. This commercial real estate loan relationship represented $11.3 million in aggregate of which $2.6 million was charged-off during the second quarter of 2011 and the remaining $8.7 million was moved to non-accrual and is secured with sufficient estimated collateral at June 30, 2011; therefore, there is no specific reserve on this credit at June 30, 2011. The theatre continues to be open and operating. In addition, two large real estate construction loan relationships were transferred to accruing troubled debt restructured status totaling $2.8 million during the first quarter of 2011. Due to the stagnant real estate market, these borrowers’ properties have not been selling or are selling slowly, and therefore, the maturity dates on these construction loans have been extended. There is no specific reserve related to these loans. Partially offsetting these increases were the foreclosures on four commercial loan relationships and one consumer relationship and transfers of the collateral to other real estate owned during the first six months of 2011 of $4.4 million. Impaired loans at June 30, 2011 also included several large commercial real estate, construction, and commercial business credits which migrated to non-accrual status during the fourth quarter of 2010 and were not concentrated in any one industry consisting of hotel/office space; investment commercial real estate; a construction company; and a manufacturing company. In addition, impaired loans at June 30, 2011 included one large credit which went on non-accrual during the third quarter of 2009 and is for four separate facilities to a local commercial real estate developer/home builder, aggregating to $14.5 million at June 30, 2011. There is a specific allowance on this credit of $66 thousand at June 30, 2011 to cover deficiencies in the underlying real estate value under current market conditions. The borrower does not have the resources to develop these properties; therefore, the properties must be sold. The Corporation will continue to closely monitor this credit relationship and may have to provide additional reserve in future quarters related to this credit. The Corporation will continue to closely monitor the impaired loans and may have to provide additional reserves in future quarters related to these credits. At June 30, 2010, the recorded investment in loans and leases that were considered to be impaired was $31.0 million, all of which were on a nonaccrual basis or accruing trouble debt restructured. The related reserve for loan and lease losses for those loans was $4.1 million.

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The other real estate owned balance increased from $2.4 million at December 31, 2010 to $5.0 million at June 30, 2011 and consisted of six commercial properties and one residential property. During the first half of 2011, six properties were acquired, one property was sold, and three properties had negative valuation adjustments totaling $612 thousand based on the updated fair value.

Table 3 — Nonaccrual, Past Due and Troubled Debt Restructured Loans and Leases, and Other Real Estate Owned

The following table details the aggregate principal balance of loans and leases classified as nonaccrual (including nonaccrual trouble debt restructured loans and leases), past due loans and leases and accruing troubled debt restructured loans and leases as well as other real estate owned as of the dates indicated:

	At June 30,		At December 31,		At June 30,
(Dollars in thousands)	2011		2010		2010
Nonaccruing loans and leases, including nonaccrual troubled debt restructured loans and leases*:
Commercial, financial and agricultural	$	5,979	$	7,627	$	2,064
Real estate — commercial		29,797		28,183		17,683
Real estate — construction		6,831		6,874		7,236
Real estate — residential		170		1,625		1,741
Loans to individuals		—		21		—
Leases financings		736		902		817
Total nonaccruing loans and leases, including nonaccrual troubled debt restructured loans and leases*		43,513		45,232		29,541
Accruing troubled debt restructured loans and leases, not included above		5,028		550		1,499
Total impaired loans and leases	$	48,541	$	45,782	$	31,040
Accruing loans and leases 90 days or more past due:
Commercial, financial and agricultural	$	4	$	—	$	596
Real estate — commercial		468		—		—
Real estate — residential		44		314		542
Loans to individuals		133		382		138
Lease financings		10		—		—
Total accruing loans and leases, 90 days or more past due	$	659	$	696	$	1,276
Total non-performing loans and leases	$	49,200	$	46,478	$	32,316
Other real estate owned	$	4,952	$	2,438	$	1,827
Total non-performing assets	$	54,152	$	48,916	$	34,143

* Includes non-accrual troubled debt restructured loans and leases of $2.8 million, $1.2 million and $1.1 million at June 30, 2011, December, 31, 2010 and June 30, 2010, respectively.

Reserve for Loan and Lease Losses

Management believes the reserve for loan and lease losses is maintained at a level that is adequate as of June 30, 2011 to absorb probable losses in the loan and lease portfolio. Management’s methodology to determine the adequacy of and the provisions to the reserve considers specific credit reviews, past loan and lease loss experience, current economic conditions and trends, and the volume, growth, and composition of the portfolio.

The reserve for loan and lease losses is determined through a monthly evaluation of reserve adequacy. This analysis takes into consideration the growth of the loan and lease portfolio, the status of past-due loans and leases, current economic conditions, various types of lending activity, policies, real estate and other loan commitments, and significant changes in charge-off activity. Non-accrual loans and leases, and those which are troubled debt restructured, are evaluated individually. All other loans and leases are evaluated as pools. Based on historical loss experience, loss factors are determined giving consideration to the areas noted in the preceding paragraph and applied to the pooled loan and lease categories to develop the general or allocated portion of the reserve. Loans are also reviewed for impairment based on discounted cash flows using the loans’ initial effective interest rate or the fair value of the collateral for certain collateral-dependent loans. Management also reviews the activity within the reserve to determine what actions, if any, should be taken to address differences between estimated and actual losses. Any of the above factors may cause the provision to fluctuate.

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Wholesale leasing portfolios are purchased by the Bank’s subsidiary, Univest Capital, Inc. Credit losses on these purchased portfolios are largely the responsibility of the seller up to pre-set dollar amounts initially equal to 10 to 20 percent of the portfolio purchase amount. The dollar amount of recourse for purchased portfolios is inclusive of cash holdbacks and purchase discounts. Purchased wholesale leasing portfolios outstanding equaled $5.1 million at June 30, 2011 and $9.4 million at December 31, 2010.

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

The reserve for loan and lease losses consists of an allocated reserve and unallocated reserve categories. The allocated reserve is comprised of reserves established on specific loans and leases, and class reserves based on historical loan and lease loss experience, current trends, and management assessments. The unallocated reserve is based on both general economic conditions and other risk factors in the Corporation’s individual markets and portfolios.

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

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

The Corporation maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded in categories with historical loss experience.

The reserve for loan and lease losses increased $1.7 million from December 31, 2010 to June 30, 2011, primarily due to deterioration of underlying collateral and economic factors. As a result of the provision exceeding net-charge-offs combined with the decline in outstanding loans during the year, the ratio of the reserve for loan and lease losses to total loans and leases increased to 2.27% at June 30, 2011 from 2.10% at December 31, 2010 and 2.01% at June 30, 2010. Management believes that, as of June 30, 2011, the reserve is maintained at a level that is adequate to absorb losses in the loan and lease portfolio.

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, intangible assets due to branch acquisitions, core deposit intangibles, customer-related intangibles and mortgage servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life using the present value of projected cash flows. The amortization of intangible assets was $358 thousand and $342 thousand for the three months ended June 30, 2011 and 2010, respectively and $707 thousand and $704 thousand for the six months ended June 30, 2011 and 2010, respectively. The Corporation also has goodwill with a net carrying amount of $51.3 million at June 30, 2011 and December 31, 2010, which is deemed to be an indefinite intangible asset and is not amortized.

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Goodwill and other identifiable intangibles are reviewed for potential impairment on an annual basis, or more often, if events or circumstances indicate there may be impairment. Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Corporation completed an annual impairment test for the intangible asset category during 2010 and there were no impairments recorded in 2010. There can be no assurance that future impairment tests will not result in a charge to earnings. Since the last annual impairment date, there were no circumstances to indicate impairment.

Other Assets

At June 30, 2011 and December 31, 2010, the Bank held $3.3 million in Federal Reserve Bank stock as required by member banks of the Federal Reserve System. The Bank is also required to hold stock in the FHLB in relation to the level of outstanding FHLB borrowings by the Bank. The Bank held FHLB stock of $6.4 million and $7.1 million as of June 30, 2011 and December 31, 2010, respectively. On December 23, 2008, the FHLB announced that it would be suspending the payment of its dividends and the repurchase of excess capital stock in order to rebuild its capital levels. This is due to the other-than-temporary impairment write down required on the FHLB’s private-label mortgage portfolio which could reduce their capital below required levels. Additionally, the FHLB might require its members to increase its capital stock requirement. During the fourth quarter of 2010 and the first and second quarters of 2011, the FHLB repurchased a limited amount of excess capital stock. The FHLB will make decisions on future repurchases of excess capital stock on a quarterly basis. Effective February 28, 2011, the FHLB entered into a Joint Capital Enhancement Agreement with the other 11 Federal Home Loan Banks (collectively, the FHLBanks). The agreement calls for a plan for each FHLBank to build additional retained earnings and enhance capital. This will commence later in 2011, upon completion of the FHLBank’s currently required Resolution Funding Corporation assessment. Under the plan, each FHLBank will, on a quarterly basis, allocate at least 20 percent of its net income to a separate restricted retained earnings account until the balance of the account equals one percent of that FHLBank’s balance of outstanding obligations. Based on current information from the FHLB, management believes that if there is any impairment in the FHLB stock it is temporary. Therefore, as of June 30, 2011 and December 31, 2010, the FHLB stock is recorded at cost.

Liabilities

Total liabilities decreased since December 31, 2010 primarily due to decreases in deposits and short-term borrowings. The following table presents the liabilities for the periods indicated:

	At June 30,		At December 31,		Change
(Dollars in thousands)	2011		2010		Amount			Percent
Deposits	$	1,621,294	$	1,686,270	$	(64,976	)		(3.9	)%
Short-term borrowings		99,070		114,871		(15,801	)		(13.8	)
Long-term borrowings		28,619		28,994		(375	)		(1.3	)
Accrued expenses and other liabilities		36,372		37,534		(1,162	)		(3.1	)
Total liabilities	$	1,785,355	$	1,867,669	$	(82,314	)		(4.4	)

Deposits

Total deposits decreased by $65.0 million primarily the result of a decline of public fund balances of approximately $49.2 million, due to anticipated seasonal runoff of tax deposits. The decreases in public fund balances consisted of $19.6 million of time deposits and $29.6 million of core deposits.

Interest-bearing demand deposits decreased $49.0 million and time deposits decreased $41.5 million. These decreases were partially offset by increases in regular savings of $19.2 million and noninterest-bearing demand deposits of $6.4 million. The lower interest rate environment has resulted in a shift in customer deposits from time deposits to savings accounts.

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Borrowings

Long-term borrowings at June 30, 2011, included $3.0 million in Subordinated Capital Notes, $20.6 million of Trust Preferred Securities and $5.0 million in long-term borrowings from the FHLB. Short-term borrowings typically include securities sold under agreement to repurchase, federal funds purchased, Federal Reserve Bank discount window borrowings and short-term FHLB borrowings. Short-term borrowings decreased mainly due to a decrease in federal funds purchased of $24.6 million partially offset by an increase in securities sold under agreements to repurchase.

Shareholders’ Equity

Total shareholders’ equity at June 30, 2011 increased $6.8 million since December 31, 2010. This increase was primarily due to the issuance of stock under the dividend reinvestment and employee stock purchase plans, reductions in unrealized losses on the investment portfolio, and net income exceeding dividends declared.

The following table presents the shareholders’ equity for the periods indicated:

	At June 30,			At December 31,			Change
(Dollars in thousands)	2011			2010			Amount			Percent
Common stock	$	91,332		$	91,332		$	—			—	%
Additional paid-in capital		58,326			59,080			(754	)		(1.3	)
Retained earnings		153,728			151,978			1,750			1.2
Accumulated other comprehensive loss		(3,099	)		(6,766	)		3,667			54.2
Treasury stock		(27,265	)		(29,400	)		2,135			7.3
Total shareholders’ equity	$	273,022		$	266,224		$	6,798			2.6

Retained earnings at June 30, 2011 were impacted by the six months of net income of $8.4 million offset by cash dividends of $6.7 million declared during the first six months of 2011. Additional paid-in capital decreased mainly due to shares issued for restricted stock awards. The decrease in accumulated other comprehensive loss was mainly a result of increases in the fair values of municipal bonds and U.S. government agency securities. Treasury stock decreased primarily due to shares issued for the employee stock purchase plan, the dividend reinvestment plan and restricted stock awards.

Capital Adequacy

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Capital adequacy guidelines, and additionally for the Bank the prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

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Table 4 — Regulatory Capital

											To Be Well-
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2011:
Total Capital (to Risk-Weighted Assets):
Corporation	$	262,804		16.25	%	$	129,373		8.00	%	$	161,717		10.00	%
Bank		246,108		15.45			127,409		8.00			159,262		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation		241,934		14.96			64,687		4.00			97,030		6.00
Bank		226,041		14.19			63,705		4.00			95,557		6.00
Tier 1 Capital (to Average Assets):
Corporation		241,934		11.87			81,511		4.00			101,889		5.00
Bank		226,041		11.19			80,834		4.00			101,042		5.00
As of December 31, 2010:
Total Capital (to Risk-Weighted Assets):
Corporation	$	260,244		15.47	%	$	134,623		8.00	%	$	168,279		10.00	%
Bank		243,908		14.71			132,674		8.00			165,842		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation		238,393		14.17			67,312		4.00			100,968		6.00
Bank		223,050		13.45			66,337		4.00			99,505		6.00
Tier 1 Capital (to Average Assets):
Corporation		238,393		11.45			82,649		4.00			103,311		5.00
Bank		223,050		10.89			81,911		4.00			102,389		5.00

As of June 30, 2011 and December 31, 2010, management believes that the Corporation and the Bank met all capital adequacy requirements to which they are subject. The Corporation, like other bank holding companies, currently is required to maintain Tier 1 Capital and Total Capital (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as standby letters of credit). The Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and Total Capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. As of June 30, 2011, 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.

Asset/Liability Management

The primary functions of Asset/Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of customers and corporate needs. Interest-rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing rates.

The Corporation uses both interest-sensitivity gap analysis and simulation techniques to quantify its exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure the short-term rate exposures. The Corporation runs various earnings simulation scenarios to quantify the effect of declining or rising interest rates on the net interest margin over a one-year horizon. The simulation uses existing portfolio rate and repricing information, combined with assumptions regarding future loan and deposit growth, future spreads, prepayments on residential mortgages, and the discretionary pricing of non-maturity assets and liabilities.

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Liquidity

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

Sources of Funds

Core deposits and cash management repurchase agreements (Repos) have historically been the most significant funding sources for the Corporation. These deposits and Repos are generated from a base of consumer, business and public customers primarily located in Bucks and Montgomery counties, Pennsylvania. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, thrifts, mutual funds, security dealers and others.

The Corporation supplements its core funding with money market funds it holds for the benefit of various trust accounts. These funds are fully collateralized by the Bank’s investment portfolio and are at current money market mutual fund rates. This funding source is subject to changes in the asset allocations of the trust accounts.

The Corporation, through the Bank, has short-term and long-term credit facilities with the FHLB with a maximum borrowing capacity of approximately $361.6 million. At June 30, 2011 and December 31, 2010, total outstanding short-term and long-term borrowings with the FHLB totaled $5.0 million. The maximum borrowing capacity with the FHLB changes as a function of qualifying collateral assets as well as the FHLB’s internal credit rating of the Bank and the amount of funds received may be reduced by additional required purchases of FHLB stock.

The Corporation maintains federal fund lines with several correspondent banks totaling $82.0 million at June 30, 2011 and December 31, 2010. Future availability under these lines is subject to the prerogatives of the granting banks and may be withdrawn at will.

The Corporation, through the Bank, has an available line of credit at the Federal Reserve Bank of Philadelphia, the amount of which is dependent upon the balance of loans and securities pledged as collateral. At June 30, 2011 and December 31, 2010, the Corporation had no outstanding borrowings under this line.

Cash Requirements

The Corporation has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The most significant contractual obligation, in both the under and over one year time period, is for the Bank to repay its certificates of deposit. Short-term borrowings consisting of securities sold under agreement to repurchase constitute the next largest payment obligation. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its branch network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market.

Commitments to extend credit are the Bank’s most significant commitment in both the under and over one year time periods. These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.

Recent Accounting Pronouncements

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

No material changes in the Corporation’s market risk or market strategy occurred during the current period. A detailed discussion of market risk is provided in the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2010.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2011.

Changes in Internal Control over Financial Reporting

There were no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation. In addition, there are no material proceedings pending or known to be threatened or contemplated against the Corporation or the Bank by government authorities.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K, Part 1, Item 1A, for the Year Ended December 31, 2010 as filed with the Securities and Exchange Commission on March 4, 2011.

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

The following table provides information on repurchases by the Corporation of its common stock during the three months ended June 30, 2011.

ISSUER PURCHASES OF EQUITY SECURITIES
					Total Number of		Maximum Number of
					Shares Purchased		Shares that May Yet
	Total Number		Average		as Part of Publicly		Be Purchased Under
	of Shares		Price Paid		Announced Plans or		the Plans or
Period	Purchased		per Share		Programs		Programs
April 1 — 30, 2011		—		—		—		643,782
May 1 — 31, 2011		—		—		—		643,782
June 1 — 30, 2011		—		—		—		643,782
Total		—				—

1.	Transactions are reported as of settlement dates.
2.	The Corporation’s current stock repurchase program was approved by its Board of Directors and announced on August 22, 2007. The repurchased shares limit is net of normal Treasury activity such as purchases to fund the Dividend Reinvestment Program, Employee Stock Purchase Program and the equity compensation plan.
3.	The number of shares approved for repurchase under the Corporation’s stock repurchase program is 643,782.
4.	The Corporation’s current stock repurchase program does not have an expiration date.
5.	No stock repurchase plan or program of the Corporation expired during the period covered by the table.
6.	The Corporation has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases. The plans are restricted during certain blackout periods in conformance with the Corporation’s Insider Trading Policy.

Item 3. Defaults Upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

a. Exhibits

Exhibit 3.1	Amended and Restated Articles of Incorporation are incorporated by reference to Appendix A of Form DEF14A, filed with the Securities and Exchange Commission (the SEC) on March 9, 2006.
Exhibit 3.2	Amended By-Laws dated September 26, 2007 are incorporated by reference to Exhibit 3.2 of Form 8-K, filed with the SEC on September 27, 2007.
Exhibit 31.1	Certification of William S. Aichele, Chairman, 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 Jeffrey M. Schweitzer, Senior Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	Certification of William S. Aichele, 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.

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Exhibit 32.2	Certification of Jeffrey M. Schweitzer, 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 Definitions Linkbase Document

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SIGNATURES

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

	Univest Corporation of Pennsylvania (Registrant)
Date: August 8, 2011	/s/ William S. Aichele
	William S. Aichele, Chairman, President and
	Chief Executive Officer (Principal Executive Officer)
Date: August 8, 2011	/s/ Jeffrey M. Schweitzer
	Jeffrey M. Schweitzer, Senior Executive Vice President,
	and Chief Financial Officer (Principal Financial and Accounting Officer)

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