Acquisition

Fox Chase Bancorp

On July 1, 2016, the Corporation completed the merger of Fox Chase Bancorp into the Corporation and Fox Chase Bank into Univest Bank and Trust Co. Fox Chase Bank was a locally-managed institution with locations in Pennsylvania and New Jersey and headquartered in Hatboro, Pennsylvania. The Corporation's presence expanded in Bucks, Chester, Philadelphia and Montgomery counties in Pennsylvania and into Cape May county in New Jersey, complementing and expanding the Corporation's existing network of financial centers. The fair value of total assets acquired as a result of the merger totaled $1.1 billion, loans totaled $776.2 million and deposits totaled $738.3 million. In accordance with the terms of the Agreement and Plan of Merger, dated December 8, 2015, holders of shares of Fox Chase common stock received, in aggregate, $98.9 million in cash and 6,857,529 shares or approximately 26% of the post transaction outstanding shares of the Corporation's common stock. The transaction was valued at $242.2 million based on Corporation’s June 30, 2016 closing share price of $21.02 as quoted on NASDAQ. The results of the combined entity’s operations are included in the Corporation's Consolidated Financial Statements from the date of acquisition. Goodwill of $59.9 million, which is the excess of the merger consideration over the estimated fair value of net assets acquired, was recorded in the Fox Chase acquisition and represents the anticipated revenue growth and reduced expenses as a result of the acquisition.

The acquisition of Fox Chase is being accounted for as a business combination using the acquisition method of accounting, which includes estimating the fair value of assets acquired, liabilities assumed and consideration paid as of the acquisition date.

The following table summarized the consideration paid for Fox Chase and the fair value of assets acquired and liabilities assumed at the acquisition date:



(Dollars in thousands, except share data)

Purchase price consideration in common stock:
Fox Chase common shares outstanding	11,754,852
Fox Chase common shares settled for stock	7,047,096
Exchange ratio	0.9731
Univest shares issued	6,857,529
Univest closing stock price at June 30, 2016	$	21.02
Purchase price assigned to Fox Chase common shares exchanged for Univest stock			$	144,146
Fox Chase common shares settled for cash	4,707,756
Purchase price for shares exchanged for cash	$	21.00
Purchase price assigned to Fox Chase common shares exchanged for cash			98,863
Purchase price assigned to cash in lieu of fractional shares			11
Purchase price assigned to Fox Chase options settled for cash			4,255
Purchase price consideration - ESOP and Equity Incentive Plan			(5,041		)
Total purchase price			$	242,234

Fair value of assets acquired:
Cash and due from banks	$	3,253
Interest-earning deposits with other banks	15,629
Investment securities available-for-sale	230,682
Loans held for investment	776,214
Premises and equipment, net	13,146
Other real estate owned	2,510
Core deposit intangible *	5,268
Bank owned life insurance	26,119
Accrued interest receivable and other assets	20,827
Total identifiable assets			$	1,093,648
Fair value of liabilities assumed:
Deposits - noninterest bearing	$	35,285
Deposits - interest bearing	702,978
Short-term borrowings	48,500
Long-term debt	123,448
Accrued interest payable and other liabilities	1,105
Total liabilities			$	911,316
Identifiable net assets			182,332
Goodwill resulting from merger *			$	59,902

* Goodwill is not deductible for federal income tax purposes. The goodwill and core deposit intangible are allocated to the Banking business segment.

The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. In many cases, determining the fair value of the acquired assets and assumed liabilities required the Corporation to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest, which required the utilization of significant estimates and judgment in accounting for the acquisition.

Cash and due from banks: The fair value of cash and due from banks is their stated value.

Investment securities available-for-sale: The estimated fair values of the investment securities available for sale, primarily comprised of U.S. government agency mortgage-backed securities and corporate bonds, were determined using Level 2 inputs in the fair value hierarchy. The fair values were determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilized evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. Management reviewed the data and assumptions used in pricing the securities. A fair value premium of $3.4 million was recorded and is being amortized over the estimated useful life of the investments (estimated average remaining life of 3.7 years) using the interest rate method.

Loans held for investment: The most significant fair value determination related to the valuation of acquired loans. The acquisition resulted in loans acquired with and without evidence of credit quality deterioration. There was no carryover related allowance for loan and lease losses.

The acquired loan portfolio was valued based on current guidance which defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the portfolio and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Corporation used assumptions in an effort to determine reasonable fair value. Specifically, management utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: 1) interest rate fair value analysis; 2) general credit fair value analysis; and 3) specific credit fair value analysis.

For loans acquired without evidence of credit quality deterioration, the Corporation prepared the interest rate fair value analysis. Loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value adjustment. Additionally a general credit fair value adjustment was calculated using a two part general credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for qualitative factors, liquidity and an additional discount for loans considered to have heightened risk but not considered impaired.

The expected lifetime losses were calculated using an average of historical losses of the Bank, Fox Chase Bank and peer banks. The Corporation also estimated an environmental factor to apply to each loan type. The environment factor represents potential discount which may arise due to general economic conditions. Fox Chase's loan portfolio without evidence of credit quality deterioration was recorded at a current fair value of $762.5 million. A fair value premium of $4.7 million was recognized to reflect the fair values of loans. A fair value discount of $8.5 million was recognized to reflect the general credit risk of the loan portfolio. The adjustment is being substantially recognized as interest income over approximately 10 years on a level yield amortization method based upon the expected life of the loans.

For loans acquired with evidence of credit quality deterioration the Corporation prepared a specific credit fair value adjustment. Management reviewed the acquired loan portfolio for loans meeting the definition of an impaired loan with deteriorated credit quality. Loans meeting this definition were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value results in an accretable yield amount. The accretable discount amount is being recognized over the life of the loans on a level yield basis as an adjustment to yield. Any disposals of loans, including sales of loans, payments in full or foreclosures result in the derecognition of the loan at its carrying value with differences in actual results reflected in interest income.

At the acquisition date, the Corporation recorded $13.7 million of acquired impaired loans. The aggregate expected cash flows less the acquisition date fair value results in an accretable discount amount of $283 thousand, which is being recognized over the life of the loans on a level yield basis as an adjustment to yield. Contractual cashflows not expected to be collected of $11.1 million resulted in an unaccretable fair value discount of $5.7 million.

The following is a summary of the acquired impaired loans at July 1, 2016 resulting from the acquisition with Fox Chase:



(Dollars in thousands)

Contractually required principal and interest payments	$	25,141
Contractual cash flows not expected to be collected (nonaccretable difference)	(11,120		)
Cash flows expected to be collected	14,021
Interest component of expected cash flows (accretable discount)	(283		)
Fair value of loans acquired with a deterioration of credit quality	$	13,738

Bank premises: The Corporation assumed ten owned properties. The fair value was determined taking into consideration the highest and best use of the properties from a market participant perspective. For those properties that the Corporation have held-for-sale, the fair value is reduced by the costs to sell. The fair value of bank premises were determined using Level 2 inputs in the fair value hierarchy. The fair value of the buildings of $4.4 million is being amortized over an estimated life of 30 years.

Other real estate owned: The Corporation assumed five other real estate owned properties. The fair value was determined taking into consideration the highest and best use of the properties from a market participant perspective, including management assumptions when comparative data is not available, and is reduced by the costs to sell. The fair value of other real estate owned was determined using Level 3 inputs in the fair value hierarchy.

Bank owned life insurance: The fair value was determined at the cash surrender value of the policies.

Core deposit intangible: Core deposit intangible represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of the acquisition. The core deposit intangible fair value represents the future economic benefit, including the present value of future tax benefits, of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources and was valued utilizing Level 3 inputs. The core deposit intangible of $5.3 million is being amortized using the sum of the years digits method over an estimated life of 10 years.

Deposits: The fair values of demand and saving deposits, with no stated maturities, approximated the carrying value as these accounts are payable on demand. The fair values of time deposits with fixed maturities were estimated by discounting the final maturity using current market interest rate for similar instruments. A fair value premium of $831 thousand was recorded and is recognized as a reduction to interest expense using a level yield amortization method over the life of the time deposit. The fair value of time deposits were determined using Level 2 inputs in the fair value hierarchy.

Federal funds: Federal funds are overnight funds. The fair value of federal funds was determined to be the carrying balance due to the using Level 2 inputs in the fair value hierarchy.

Long-term debt: Fair values of long-term debt were estimated using discounted cash flow analysis based on rates currently available to the Bank for advances with similar terms and remaining maturities. The fair value of long-term borrowings was determined using Level 2 inputs in the fair value hierarchy. A fair value premium of $3.4 million was recognized and is recognized as a reduction to interest expense using a level yield amortization method over the life of the debt.

Deferred tax assets and liabilities: Deferred tax assets and liabilities were established for purchase accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income.

Direct costs related to the acquisition were expensed as incurred. For the year ended December 31, 2016, the Corporation incurred $15.9 million of Fox Chase integration and acquisition-related costs, which have been separately stated in the Corporation's consolidated statements of income.

Supplemental Pro Forma Financial Information (unaudited)

The following unaudited pro forma combined consolidated financial information for the years ended December 31, 2016 and 2015 combine the historical consolidated results of the Corporation and Fox Chase and give effect to the merger as if the merger occurred on January 1, 2016 and January 1, 2015, respectively. The pro forma information has been prepared to include the estimated adjustments necessary to record the assets and liabilities of Fox Chase at their respective fair values. Furthermore, the unaudited proforma information does not reflect management’s estimate of any revenue-enhancing opportunities or anticipated cost savings.

The pro forma data is not necessarily indicative of the operating results that the Corporation would have achieved had it completed the merger as of the beginning of the period presented and should not be considered as representative of future operations.



	Pro Forma
	For the Years Ended December 31,
(Dollars in thousands, except share data)	2016		2015
Net interest income	$	132,581	$	130,452
Noninterest income	58,189		55,158
Noninterest expense*	168,170		132,600
Net income*	11,933		38,767
Earnings per share:*
Basic	0.45		1.46
Diluted	0.45		1.46

* Includes acquisition, integration and restructuring costs as summarized below.



	Pro Forma
	For the Years Ended December 31,
(Dollars in thousands, except share data)	2016			2015
Acquisition and integration costs	$	(29,433	)	(3,028	)
Acquisition and integration costs, net of tax	(19,939		)	(2,156	)
Earnings per share:
Basic	(0.76		)	(0.08	)
Diluted	(0.76		)	(0.08	)

Restructuring charges	(1,731		)	(1,642	)
Restructuring charges, net of tax	(1,125		)	(1,067	)
Earnings per share:
Basic	(0.04		)	(0.04	)
Diluted	(0.04		)	(0.04	)