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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
Form 10-Q
________________________________________________________________________________________
 Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For Quarter ended June 30, 2018
 
Commission File Number 1-35746
________________________________________________________________________________________

Bryn Mawr Bank Corporation
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________
Pennsylvania
23-2434506
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
identification No.)
 
 
801 Lancaster Avenue, Bryn Mawr, Pennsylvania
19010
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (610) 525-1700
 
Not Applicable
Former name, former address and fiscal year, if changed since last report.
 ________________________________________________________________________________________
Indicate by checkmark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act..
Large accelerated filer  ☒    Accelerated filer  ☐
Non-accelerated filer  ☐    Smaller reporting company  ☐ Emerging growth company  ☐ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ☐    No   ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Classes
 
Outstanding at August 1, 2018
Common Stock, par value $1
 
20,245,481
 

Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
 
FORM 10-Q
 
QUARTER ENDED JUNE 30, 2018

Index 
 
PART I -
 
 
 
 
ITEM 1.
 
 
 
 
 
Page 3
 
 
 
 
Page 8
 
 
 
ITEM 2.
Page 55
 
 
 
ITEM 3.
Page 77
 
 
 
ITEM 4.
Page 77
 
 
 
PART II -
Page 77
 
 
 
ITEM 1.
Page 77
 
 
 
ITEM 1A.
Page 77
 
 
 
ITEM 2.
Page 77
 
 
 
ITEM 3.
Page 79
 
 
 
ITEM 4.
Page 79
 
 
 
ITEM 5.
Page 79
 
 
 
ITEM 6.
Page 80


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
(dollars in thousands)
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
 
Cash and due from banks
 
$
7,318

 
$
11,657

Interest bearing deposits with banks
 
39,924

 
48,367

Cash and cash equivalents
 
47,242

 
60,024

Investment securities available for sale, at fair value (amortized cost of $543,314 and $692,824 as of June 30, 2018 and December 31, 2017, respectively)
 
531,075

 
689,202

Investment securities held to maturity, at amortized cost (fair value of $7,547 and $7,851 as of June 30, 2018 and December 31, 2017, respectively)
 
7,838

 
7,932

Investment securities, trading
 
8,175

 
4,610

Loans held for sale
 
4,204

 
3,794

Portfolio loans and leases, originated
 
2,700,815

 
2,487,296

Portfolio loans and leases, acquired
 
688,686

 
798,562

Total portfolio loans and leases
 
3,389,501

 
3,285,858

Less: Allowance for originated loan and lease losses
 
(19,181
)
 
(17,475
)
Less: Allowance for acquired loan and lease losses
 
(217
)
 
(50
)
Total allowance for loans and lease losses
 
(19,398
)

(17,525
)
Net portfolio loans and leases
 
3,370,103

 
3,268,333

Premises and equipment, net
 
54,185

 
54,458

Accrued interest receivable
 
13,115

 
14,246

Mortgage servicing rights
 
5,511

 
5,861

Bank owned life insurance
 
57,243

 
56,667

Federal Home Loan Bank stock
 
16,678

 
20,083

Goodwill
 
183,162

 
179,889

Intangible assets
 
24,977

 
25,966

Other investments
 
16,774

 
12,470

Other assets
 
53,921

 
46,185

Total assets
 
$
4,394,203

 
$
4,449,720

Liabilities
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
892,386

 
$
924,844

Interest-bearing
 
2,466,529

 
2,448,954

Total deposits
 
3,358,915

 
3,373,798

Short-term borrowings
 
227,059

 
237,865

Long-term FHLB advances
 
87,808

 
139,140

Subordinated notes
 
98,491

 
98,416

Junior subordinated debentures
 
21,497

 
21,416

Accrued interest payable
 
5,230

 
3,527

Other liabilities
 
52,700

 
47,439

Total liabilities
 
3,851,700

 
3,921,601

Shareholders' equity
 
 
 
 
Common stock, par value $1; authorized 100,000,000 shares; issued 24,453,417 and 24,360,049 shares as of June 30, 2018 and December 31, 2017, respectively and outstanding of 20,242,893 and 20,161,395 as of June 30, 2018 and December 31, 2017, respectively
 
24,453

 
24,360

Paid-in capital in excess of par value
 
372,227

 
371,486

Less: Common stock in treasury at cost - 4,210,524 and 4,198,654 shares as of June 30, 2018 and December 31, 2017, respectively
 
(68,943
)
 
(68,179
)
Accumulated other comprehensive loss, net of tax
 
(11,191
)
 
(4,414
)
Retained earnings
 
226,634

 
205,549

Total Bryn Mawr Bank Corporation shareholders' equity
 
543,180

 
528,802

Noncontrolling interest
 
(677
)
 
(683
)
Total shareholders' equity
 
542,503

 
528,119

Total liabilities and shareholders' equity
 
$
4,394,203

 
$
4,449,720

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

Page 3
Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income - Unaudited
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
(dollars in thousands, except share and per share data)
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
41,689

 
$
29,143

 
$
82,378

 
$
57,625

Interest on cash and cash equivalents
64

 
35

 
117

 
101

Interest on investment securities:
 
 
 
 
 
 
 
Taxable
2,922

 
1,906

 
5,628

 
3,529

Non-taxable
78

 
101

 
162

 
211

Dividends
1

 
52

 
3

 
97

Total interest income
44,754

 
31,237

 
88,288

 
61,563

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
4,499

 
1,983

 
7,971

 
3,811

Interest on short-term borrowings
985

 
237

 
1,615

 
264

Interest on FHLB advances and other borrowings
490

 
682

 
1,052

 
1,380

Interest on subordinated notes
1,143

 
370

 
2,286

 
740

Interest on junior subordinated debentures
321

 
—

 
609

 
—

Total interest expense
7,438

 
3,272

 
13,533

 
6,195

Net interest income
37,316

 
27,965

 
74,755

 
55,368

Provision for loan and lease losses
3,137

 
(83
)
 
4,167

 
208

Net interest income after provision for loan and lease losses
34,179

 
28,048

 
70,588

 
55,160

Noninterest income:
 
 
 
 
 
 
 
Fees for wealth management services
10,658

 
9,807

 
20,966

 
19,110

Insurance commissions
1,902

 
943

 
3,595

 
1,706

Capital markets revenue
2,105

 
953

 
2,771

 
953

Service charges on deposits
752

 
630

 
1,465

 
1,277

Loan servicing and other fees
475

 
519

 
1,161

 
1,022

Net gain on sale of loans
528

 
520

 
1,046

 
1,149

Net gain on sale of investment securities available for sale
—

 
—

 
7

 
1

Net gain (loss) on sale of other real estate owned ("OREO")
111

 
(12
)
 
287

 
(12
)
Dividends on FHLB and FRB stock
510

 
218

 
941

 
432

Other operating income
3,034

 
1,207

 
7,372

 
2,374

Total noninterest income
20,075

 
14,785

 
39,611

 
28,012

Noninterest expenses:
 
 
 
 
 
 
 
Salaries and wages
16,240

 
13,580

 
32,222

 
26,030

Employee benefits
2,877

 
2,404

 
6,585

 
4,893

Occupancy and bank premises
2,697

 
2,247

 
5,747

 
4,773

Furniture, fixtures, and equipment
2,069

 
1,869

 
3,967

 
3,843

Advertising
369

 
405

 
830

 
791

Amortization of intangible assets
889

 
687

 
1,768

 
1,380

Due diligence, merger-related and merger integration expenses
3,053

 
1,236

 
7,372

 
1,747

Professional fees
932

 
1,049

 
1,680

 
1,760

Pennsylvania bank shares tax
473

 
297

 
946

 
961

Information technology
1,252

 
821

 
2,447

 
1,695

Other operating expenses
4,985

 
3,900

 
8,302

 
7,282

Total noninterest expenses
35,836

 
28,495

 
71,866

 
55,155

Income before income taxes
18,418

 
14,338

 
38,333

 
28,017

Income tax expense
3,723

 
4,905

 
8,353

 
9,540

Net income
$
14,695

 
$
9,433

 
$
29,980

 
$
18,477

Net income attributable to noncontrolling interest
7

 
—

 
6

 
—

Net income attributable to Bryn Mawr Bank Corporation
$
14,688

 
$
9,433

 
$
29,974

 
$
18,477

Basic earnings per common share
$
0.73

 
$
0.56

 
$
1.48

 
$
1.09

Diluted earnings per common share
$
0.72

 
$
0.55

 
$
1.47

 
$
1.07

Dividends paid or accrued per share
$
0.22

 
$
0.21

 
$
0.44

 
$
0.42

Weighted-average basic shares outstanding
20,238,852

 
16,984,563

 
20,221,010

 
16,969,431

Dilutive shares
174,726

 
248,204

 
206,782

 
238,381

Adjusted weighted-average diluted shares
20,413,578

 
17,232,767

 
20,427,792

 
17,207,812

 
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.


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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income - Unaudited
 
(dollars in thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income attributable to Bryn Mawr Bank Corporation
$
14,688

 
$
9,433

 
$
29,974

 
$
18,477

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net change in unrealized (losses) gains on investment securities available for sale:
 
 
 
 
 
 
 
Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of $(402), $221, $(1,721), and $430, respectively
(1,512
)
 
411

 
(6,473
)
 
799

Reclassification adjustment for net gain on sale realized in net income, net of tax expense of $0, $0, $1 and $0, respectively
—

 
—

 
(6
)
 
(1
)
Reclassification adjustment for net gain realized on transfer of investment securities available for sale to trading, net of tax expense of $0, $0, $88, and $0, respectively
—

 
—

 
(329
)
 
—

Unrealized investment (losses) gains, net of tax (benefit) expense of $(402), $221, $(1,810), and $430, respectively
(1,512
)
 
411

 
(6,808
)
 
798

Net change in unfunded pension liability:
 
 
 
 
 
 
 
Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax (benefit) expense of $(4), $9, $9, and $25, respectively
(15
)
 
15

 
31

 
47

 
 
 
 
 
 
 
 
Total other comprehensive (loss) income
(1,527
)
 
426

 
(6,777
)
 
845

 
 
 
 
 
 
 
 
Total comprehensive income
$
13,161

 
$
9,859

 
$
23,197

 
$
19,322

 
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.


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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - Unaudited

(dollars in thousands)
Six Months Ended June 30,
 
2018
 
2017
Operating activities:
 
 
 
Net income attributable to Bryn Mawr Bank Corporation
$
29,974

 
$
18,477

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
4,167

 
208

Depreciation of fixed assets
3,033

 
2,792

Net amortization of investment premiums and discounts
1,509

 
1,352

Net gain on sale of investment securities available for sale
(7
)
 
(1
)
Net gain on sale of loans
(1,046
)
 
(1,149
)
Stock based compensation
1,235

 
915

Amortization and net impairment of mortgage servicing rights
366

 
387

Net accretion of fair value adjustments
(5,316
)
 
(1,264
)
Amortization of intangible assets
1,768

 
1,380

Impairment of OREO and other repossessed assets
—

 
200

Net (gain) loss on sale of OREO
(287
)
 
12

Net increase in cash surrender value of bank owned life insurance ("BOLI")
(576
)
 
(401
)
Other, net
(7,131
)
 
(1,809
)
Loans originated for resale
(44,108
)
 
(57,248
)
Proceeds from loans sold
44,663

 
58,940

Provision for deferred income taxes
640

 
614

Change in income taxes payable/receivable, net
6,277

 
(3,580
)
Change in accrued interest receivable
1,131

 
(184
)
Change in accrued interest payable
1,703

 
96

Net cash provided by operating activities
37,995

 
19,737

 
 
 
 
Investing activities:
 
 
 
Purchases of investment securities available for sale
(94,824
)
 
(115,841
)
Purchases of investment securities held to maturity
—

 
(2,335
)
Proceeds from maturity and paydowns of investment securities available for sale
239,318

 
234,043

Proceeds from maturity and paydowns of investment securities held to maturity
77

 
42

Proceeds from sale of investment securities available for sale
7

 
130

Net change in FHLB stock
3,405

 
2,137

Proceeds from calls of investment securities
310

 
4,864

Net change in other investments
(4,304
)
 
(55
)
Purchase of domain name
—

 
(152
)
Net portfolio loan and lease originations
(104,700
)
 
(131,702
)
Purchases of premises and equipment
(2,843
)
 
(3,731
)
Acquisitions, net of cash acquired
(380
)
 
(4,792
)
Capitalize costs to OREO
(15
)
 
—

Proceeds from sale of OREO
420

 
68

Net cash provided by (used in) investing activities
36,471

 
(17,324
)
 
 
 
 
Financing activities:
 
 
 
Change in deposits
(14,164
)
 
102,125

Change in short-term borrowings
(10,806
)
 
(73,856
)
Dividends paid
(8,994
)
 
(7,127
)
Change in long-term FHLB advances and other borrowings
(51,372
)
 
(25,000
)
Payment of contingent consideration for business combinations
(631
)
 
—

Cash payments to taxing authorities on employees' behalf from shares withheld from stock-based compensation
(732
)
 
(98
)
Net proceeds from sale of (purchase of) treasury stock for deferred compensation plans
99

 
(69
)
Repurchase of warrants from U.S. Treasury
(1,755
)
 
—

Proceeds from exercise of stock options
1,107

 
1,005

Net cash used in financing activities
(87,248
)
 
(3,020
)
 
 
 
 
Change in cash and cash equivalents
(12,782
)
 
(607
)
Cash and cash equivalents at beginning of period
60,024

 
50,765

Cash and cash equivalents at end of period
$
47,242

 
$
50,158

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid during the year for:
 
 
 
Income taxes
$
1,606

 
$
12,481

Interest
$
11,830

 
$
6,099

 
 
 
 
Non-cash information:
 
 
 
Change in other comprehensive loss
$
(6,777
)
 
$
845

Change in deferred tax due to change in comprehensive income
$
(1,801
)
 
$
455

Transfer of loans to OREO and repossessed assets
$
345

 
$
309

Acquisition of noncash assets and liabilities:
 
 
 
Assets acquired
$
1,466

 
$
7,284

Liabilities assumed
$
687

 
$
2,492

 
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.


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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes In Shareholders’ Equity - Unaudited

(dollars in thousands, except share and per share data)
 
For the Six Months Ended June 30, 2018
 
Shares of Common Stock Issued
 
Common
Stock
 
Paid-in Capital
 
Treasury
Stock
 
Accumulated Other Comprehensive Loss
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total Shareholders' Equity
Balance December 31, 2017
24,360,049

 
$
24,360

 
$
371,486

 
$
(68,179
)
 
$
(4,414
)
 
$
205,549

 
$
(683
)
 
$
528,119

Net income attributable to Bryn Mawr Bank Corporation
—

 
—

 
—

 
—

 
—

 
29,974

 
—

 
29,974

Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
6

 
6

Dividends paid or accrued, $0.44 per share
—

 
—

 
—

 
—

 
—

 
(8,987
)
 
—

 
(8,987
)
Other comprehensive loss, net of tax benefit of $1,801
—

 
—

 
—

 
—

 
(6,777
)
 
—

 
—

 
(6,777
)
Stock based compensation
—

 
—

 
1,235

 
—

 
—

 
—

 
—

 
1,235

Retirement of treasury stock
(2,253
)
 
(2
)
 
(20
)
 
22

 
—

 
—

 
—

 
—

Net purchase of treasury stock from stock awards for statutory tax withholdings
—

 
—

 
—

 
(732
)
 
—

 
—

 
—

 
(732
)
Net treasury stock activity for deferred compensation trusts
—

 
—

 
153

 
(54
)
 
—

 
—

 
—

 
99

Repurchase of warrants from U.S. Treasury
—

 
—

 
(1,853
)
 
—

 
—

 
98

 
—

 
(1,755
)
Common stock issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Common stock issued through share-based awards and options exercises
93,059

 
92

 
1,116

 
—

 
—

 
—

 
—

 
1,208

Shares issued in acquisitions(1)
2,562

 
3

 
110

 
—

 
—

 
—

 
—

 
113

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance June 30, 2018
24,453,417

 
$
24,453

 
$
372,227

 
$
(68,943
)
 
$
(11,191
)
 
$
226,634

 
$
(677
)
 
$
542,503

 
(1) Restricted shares relating to the RBPI Merger (defined in Note 3 – Business Combinations below) recorded during the three months ended June 30, 2018.

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.


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 BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1 - Basis of Presentation
 
The Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of Bryn Mawr Bank Corporation’s (the “Corporation”) management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in the Corporation’s Annual Report on Form 10-K for the twelve months ended December 31, 2017 (the “2017 Annual Report”).
 
The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year.
 
Principles of Consolidation
 
The Unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiaries; the Corporation’s primary subsidiary is The Bryn Mawr Trust Company (the “Bank”). In connection with the RBPI Merger (defined in Note 3 – Business Combinations below), the Corporation acquired two Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II. These two entities are not consolidated per requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current-year presentation.
 
Note 2 - Recent Accounting Pronouncements
 
The following Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs") are divided into pronouncements which have been adopted by the Corporation since January 1, 2018, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of June 30, 2018.
 
Adopted Pronouncements:
 
FASB ASU 2014-9 (Topic 606), “Revenue from Contracts with Customers”
 
The Corporation adopted ASU 2014-9 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Corporation’s revenues come from interest income and other sources, including loans, leases, investment securities and derivatives, that are outside the scope of ASC 606. The Corporation’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Corporation satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposits, interchange income, wealth management fees, investment brokerage fees, and the net gain on sale of OREO. Refer to Note 17 Revenue from Contracts with Customers for further discussion on the Corporation’s accounting policies for revenue sources within the scope of ASC 606. The adoption of this ASU did not have an impact to our Consolidated Financial Statements.
 
FASB ASU 2017-1 (Topic 805), “Business Combinations”
 
The Corporation adopted ASU 2017-1, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.
 
FASB ASU 2016-15 (Topic 320), “Classification of Certain Cash Receipts and Cash Payments”
 
The Corporation adopted ASU 2016-15, which provides guidance on eight specific cash flow issues and their disclosure in the consolidated statements of cash flows. The issues addressed include debt prepayment, settlement of zero-coupon debt,

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contingent consideration in business combinations, proceeds from settlement of insurance claims, proceeds from settlement of BOLI, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.
 
FASB ASU 2016-1 (Subtopic 825-10), “Financial Instruments – Overall, Recognition and Measurement of Financial Assets and Financial Liabilities”
 
The Corporation adopted ASU 2016-1 which requires that equity investments be measured at fair value with changes in fair value recognized in net income. The Corporation’s equity investments with a readily determinable fair value are currently included within trading securities and are measured at fair value with changes in fair value recognized in net income. In connection with the adoption of this ASU, the Corporation elected the practicability exception to fair value measurement for investments in equity securities without a readily determinable fair value (other than our Federal Home Loan Bank (“FHLB”), Federal Reserve Bank ("FRB"), and Atlantic Central Bankers Bank stock, which are outside of the scope of this ASU). Under the practicability exception, the investments are measured at cost, less impairment, plus or minus observable price changes (in orderly transactions) of an identical or similar investment of the same issuer. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
 
FASB ASU 2017-7 – Compensation – Retirement Benefits (Topic 715): “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”
 
On January 1, 2018, the Corporation adopted ASU 2017-7 and all subsequent amendments to the ASU, which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset).
 
Upon adoption, the components of net periodic benefit cost other than the service cost component were reclassified retrospectively from “Employee benefits” to “Other operating expenses” in the Consolidated Statements of Income. Since both “Employee benefits” and “Other operating expenses” line items of these income statement line items are within “Noninterest expenses”, there was no impact to total “Noninterest expenses” or “Net income.” The components of net periodic benefit cost are currently disclosed in Note 17 – “Pension and Postretirement Benefit Plans” in the Notes to Consolidated Financial Statements found in our 2017 Annual Report. Additionally, the Corporation does not currently capitalize any components of its net periodic benefit costs. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.
 
Pronouncements Not Yet Effective:
 
FASB ASU 2018-07: Compensation - Stock Compensation (Topic 718), “Improvements to Nonemployee Share-Based Payment Accounting”

Issued in June 2018, the FASB issued ASU 2018-07: Compensation - Stock Compensation (Topic 718), “Improvements to Nonemployee Share-Based Payment Accounting.” The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Corporation has not historically granted share based payment awards to nonemployees other than to the Corporation’s Board of Directors, who are treated as employees for share-based payment accounting. As a result, Management does not expect the adoption of this ASU to have an impact on our Consolidated Financial Statements and related disclosures.

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FASB ASU 2017-4 (Topic 350), “Intangibles – Goodwill and Others”
 
Issued in January 2017, ASU 2017-4 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-4 is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.
 
FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”
 
Issued in June 2016, ASU 2016-13 significantly changes how companies measure and recognize credit impairment for many financial assets. The new current expected credit loss (“CECL”) model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The ASU also makes targeted amendments to the current impairment model for available-for-sale debt securities. ASU 2016-13 is effective for the annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of this new guidance can be applied only on a prospective basis as a cumulative-effect adjustment to retained earnings.
 
It is expected that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset, and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Corporation’s allowance for credit losses, which will depend upon the nature and characteristics of the Corporation 's portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at the adoption date. The Corporation has engaged the services of a third-party consultant as well as invested in software designed to assist management in the development and implementation of the new CECL model. Management is currently in the process of validating historical data uploaded within the third-party software. The adoption of this ASU will also require the addition of an allowance for held-to-maturity debt securities. The Corporation currently does not intend to early adopt this new guidance.
 
FASB ASU 2016-2 (Topic 842), “Leases”
 
Issued in February 2016, ASU 2016-2 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-2 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is in-process of refining and reviewing the key assumptions needed to finalize the calculation of the lease liability and a right-of-use asset for all existing leases of the Corporation. Management is aware that the adoption of this ASU will impact the Corporation’s balance sheet for the recording of assets and liabilities for operating leases. Any additional assets recorded as a result of implementation will have a negative impact on the Corporation and Bank capital ratios under current regulatory guidance.

Note 3 - Business Combinations

Domenick & Associates (“Domenick”)

The Bank’s subsidiary, BMT Insurance Advisors, Inc., completed the acquisition of Domenick, a full-service insurance agency established in 1993 and headquartered in the Old City section of Philadelphia, on May 1, 2018. The consideration paid was $1.5 million, of which $750 thousand was paid at closing, with three contingent cash payments, not to exceed $250 thousand each, to be payable on each of May 1, 2019, May 1, 2020, and May 1, 2021, subject to the attainment of certain targets during the related periods.

The following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition and the resulting goodwill recorded:


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(dollars in thousands)
 
Consideration paid:
 
Cash paid at closing
$
750

Contingent payment liability (present value)
706

Value of consideration
$
1,456

 
 
Assets acquired:
 
Cash and due from banks
370

Intangible assets - customer relationships
779

Premises and equipment
1

Other assets
316

Total assets
1,466

 
 
Liabilities assumed:
 
Accounts payable
657

Other liabilities
30

Total liabilities
$
687

 
 
Net assets acquired
$
779

 
 
Goodwill resulting from acquisition of Domenick
$
677


As of June 30, 2018, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the Domenick acquisition were final.

Royal Bancshares of Pennsylvania, Inc.
 
On December 15, 2017, the previously announced merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into the Corporation (the “RBPI Merger”), and the merger of Royal Bank America with and into the Bank, as contemplated by the Agreement and Plan of Merger, by and between RBPI and the Corporation, dated as of January 30, 2017 (the “Agreement”) were completed. In accordance with the Agreement, the aggregate share consideration paid to RBPI shareholders consisted of 3,101,316 shares of the Corporation’s common stock. Shareholders of RBPI received 0.1025 shares of Corporation common stock for each share of RBPI Class A common stock and 0.1179 shares of Corporation common stock for each share of RBPI Class B common stock owned as of the effective date of the RBPI Merger, with cash-in-lieu of fractional shares totaling $7 thousand. Holders of in-the-money options to purchase RBPI Class A common stock received cash totaling $112 thousand. In addition, 1,368,040 warrants to purchase Class A common stock of RBPI, valued at $1.9 million were converted to 140,224 warrants to purchase Corporation common stock. In accordance with the acquisition method of accounting, assets acquired and liabilities assumed were preliminarily adjusted to their fair values as of the date of the RBPI Merger. The excess of consideration paid above the fair value of net assets acquired was recorded as goodwill. This goodwill is not amortizable nor is it deductible for income tax purposes.
 
In connection with the RBPI Merger, the consideration paid and the estimated fair value of identifiable assets acquired and liabilities assumed as of the date of the RBPI Merger, which include the effects of any measurement period adjustments in accordance with ASC 805-10, are summarized in the following table:
 

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(dollars in thousands)
 
Consideration paid:
 
Common shares issued (3,101,316)
$
136,768

Cash in lieu of fractional shares
7

Cash-out of certain options
112

Fair value of warrants assumed
1,853

Value of consideration
$
138,740

 
 
Assets acquired:
 
Cash and due from banks
17,092

Investment securities available for sale
121,587

Loans
567,308

Premises and equipment
8,264

Deferred income taxes
34,208

Bank-owned life insurance
16,550

Core deposit intangible
4,670

Favorable lease asset
566

Other assets
13,996

Total assets
$
784,241

 
 
Liabilities assumed:
 
Deposits
593,172

FHLB and other long-term borrowings
59,568

Short-term borrowings
15,000

Junior subordinated debentures
21,416

Unfavorable lease liability
322

Other liabilities
31,381

Total liabilities
$
720,859

 
 
Net assets acquired
$
63,382

 
 
Goodwill resulting from acquisition of RBPI
$
75,358

 
Provisional Estimates of Fair Value of Certain Assets Acquired in the RBPI Merger
As of June 30, 2018, the accounting for the estimates of fair value for certain loans acquired in the RBPI Merger is incomplete. The Corporation is in the process of obtaining new information that will allow management to better estimate fair values that existed as of December 15, 2017. When this information is obtained, management anticipates an adjustment to the provisional fair value assigned to certain acquired loans. These adjustments will result in corresponding adjustments to goodwill and net deferred tax asset. In accordance with ASC 805-10, the adjustments will be recorded in the period in which the new information about facts and circumstances that existed as of the acquisition date is obtained and reviewed.

During the six months ended June 30, 2018, the Corporation adjusted certain provisional fair value estimates related to the RBPI Merger. The following table details the changes in fair value of the net assets acquired and liabilities assumed as of December 15, 2017 from the amounts originally reported in the Corporation’s 2017 Annual Report for the year ended December 31, 2017:
 

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(dollars in thousands)
 
Goodwill resulting from the acquisition of RBPI reported as of December 31, 2017
$
72,762

 
 
Value of Consideration Adjustment:
 
Common shares issued (2,562)
113

 
 
Fair Value Adjustments:
 
Loans
3,065

Other assets
491

Deferred income taxes
(1,073
)
Total Fair Value Adjustments
2,483

 
 
Goodwill from the acquisition of RBPI as of June 30, 2018
$
75,358

 
Methods Used to Fair Value Assets and Liabilities
 
For information regarding the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed, refer to Note 2 in the Notes to Consolidated Financial Statements in our 2017 Annual Report.
 
Loans held for investment
 
During the first quarter of 2018, new information became available related to certain loans acquired from RBPI, which resulted in an adjustment to the fair value mark applied to acquired loans with evidence of credit quality deterioration. There were no adjustments to the fair value mark applied to the acquired loan portfolio during the second quarter of 2018. 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 yield amount will be recognized over the life of the loans or over the recovery period of the underlying collateral on a level yield basis as an adjustment to yield. As a result of the adjustments, the Corporation recorded a $3.0 million increase in nonaccretable difference in the first quarter of 2018. The adjustment to the aggregate expected cash flows less the acquisition date fair value resulted in an increase in accretable yield of $207 thousand.
 
The following table provides an updated summary of the acquired impaired loans and leases as of December 15, 2017, which include the effects of any measurement period adjustments in accordance with ASC 805-10, resulting from the RBPI Merger:
 
(dollars in thousands)
 
Contractually required principal and interest payments
$
38,404

Contractual cash flows not expected to be collected (nonaccretable difference)
(16,025
)
Cash flows expected to be collected
22,379

Interest component of expected cash flows (accretable yield)
(2,526
)
Fair value of loans acquired with deterioration of credit quality
$
19,853

 
Harry R. Hirshorn & Company, Inc., d/b/a Hirshorn Boothby (“Hirshorn”)
 
The acquisition of Hirshorn, an insurance agency headquartered in the Chestnut Hill section of Philadelphia, was completed on May 24, 2017. Immediately after the acquisition, Hirshorn was merged into the Bank’s existing insurance subsidiary, BMT Insurance Advisors, Inc., formerly known as Powers Craft Parker and Beard, Inc (“PCPB”). The consideration paid by the Bank was $7.5 million, of which $5.8 million was paid at closing, with three contingent cash payments, not to exceed $575 thousand each, to be payable on each of May 24, 2018, May 24, 2019, and May 24, 2020, subject to the attainment of certain targets during the related periods. The acquisition enhanced the Bank’s ability to offer comprehensive insurance solutions to both individual and business clients and continues the strategy of selectively establishing specialty offices in targeted areas.

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In connection with the Hirshorn acquisition, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition and the resulting goodwill recorded:
(dollars in thousands)
 
Consideration paid:
 
Cash paid at closing
$
5,770

Contingent payment liability (present value)
1,690

Value of consideration
7,460

 
 
Assets acquired:
 
Cash operating accounts
978

Intangible assets – trade name
195

Intangible assets – customer relationships
2,672

Intangible assets – non-competition agreements
41

Premises and equipment
1,795

Accounts receivable
192

Other assets
27

Total assets
5,900

 
 
Liabilities assumed:
 
Accounts payable
800

Other liabilities
2

Total liabilities
802

 
 
Net assets acquired
5,098

 
 
Goodwill resulting from acquisition of Hirshorn
$
2,362

 
As of December 31, 2017, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the Hirshorn acquisition were final.
 
Pro Forma Income Statements (unaudited)
 
The following table presents the pro forma income statement of the combined institution (RBPI and the Corporation) for the three and six months ended June 30, 2017 as if the RBPI Merger had occurred on January 1, 2017. The pro forma income statement adjustments are limited to the effects of purchase accounting fair value mark amortization and accretion and intangible asset amortization. No cost savings or additional merger expenses have been included in the pro forma income statement. Due to the immaterial contribution to net income of the Hirshorn acquisition, which occurred during the year shown in the table, the pro forma effects of the Hirshorn acquisition have been excluded.

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(dollars in thousands)
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
Total interest income
$
42,337

 
$
83,564

Total interest expense
4,971

 
9,533

Net interest income
37,366

 
74,031

Provision for loan and lease losses
(26
)
 
562

Net interest income after provision for loan and lease losses
37,392

 
73,469

Total noninterest income
15,728

 
29,466

Total noninterest expenses*
34,040

 
66,335

Income before income taxes
19,080

 
36,600

Income tax expense
6,526

 
12,463

Net income
$
12,554

 
$
24,137

Per share data**:
 
 
 
Weighted-average basic shares outstanding
20,083,317

 
20,068,185

Dilutive shares
278,199

 
267,210

Adjusted weighted-average diluted shares
20,361,516

 
20,335,395

Basic earnings per common share
$
0.63

 
$
1.20

Diluted earnings per common share
$
0.62

 
$
1.19

 
* Total noninterest expense includes RBPI Net Income Attributable to Noncontrolling Interest and Preferred Stock Series A Accumulated Dividend and Accretion for pro forma presentation.
 
** Assumes that the shares of RBPI common stock outstanding as of December 31, 2017 were outstanding for the full three and six month periods ended June 30, 2017.
 
Due Diligence, Merger-Related and Merger Integration Expenses
 
Due diligence, merger-related and merger integration expenses include consultant costs, investment banker fees, contract breakage fees, retention bonuses for severed employees, salary and wages for redundant staffing involved in the integration of the institutions and bonus accruals for members of the merger integration team. The following table details the costs identified and classified as due diligence, merger-related and merger integration costs for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2018
 
2017
 
2018
 
2017
Advertising
$
2

 
$
19

 
$
61

 
$
19

Employee Benefits
68

 
5

 
271

 
5

Occupancy and bank premises
289

 
—

 
2,145

 
—

Furniture, fixtures, and equipment
186

 
6

 
365

 
6

Information technology
142

 
259

 
254

 
259

Professional fees
510

 
542

 
1,257

 
938

Salaries and wages
477

 
320

 
823

 
400

Other
1,378

 
85

 
2,195

 
120

Total due diligence, merger-related and merger integration expenses
$
3,052

 
$
1,236

 
$
7,371

 
$
1,747

 









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Note 4 - Investment Securities
 
The amortized cost and fair value of investment securities available for sale as of June 30, 2018 and December 31, 2017 are as follows:
 
As of June 30, 2018
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Fair Value
U.S. Treasury securities
$
100

 
$
—

 
$
—

 
$
100

Obligations of the U.S. government and agencies
187,850

 
21

 
(4,615
)
 
183,256

Obligations of state and political subdivisions
17,483

 
11

 
(69
)
 
17,425

Mortgage-backed securities
298,704

 
416

 
(6,557
)
 
292,563

Collateralized mortgage obligations
38,077

 
16

 
(1,459
)
 
36,634

Other investment securities
1,100

 
—

 
(3
)
 
1,097

Total
$
543,314

 
$
464

 
$
(12,703
)
 
$
531,075

 
As of December 31, 2017
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Fair Value
U.S. Treasury securities
$
200,077

 
$
11

 
$
—

 
$
200,088

Obligations of the U.S. government and agencies
153,028

 
75

 
(2,059
)
 
151,044

Obligations of state and political subdivisions
21,352

 
11

 
(53
)
 
21,310

Mortgage-backed securities
275,958

 
887

 
(1,855
)
 
274,990

Collateralized mortgage obligations
37,596

 
14

 
(948
)
 
36,662

Other investment securities
4,813

 
318

 
(23
)
 
5,108

Total
$
692,824

 
$
1,316

 
$
(4,938
)
 
$
689,202

 
The following tables present the aggregate amount of gross unrealized losses as of June 30, 2018 and December 31, 2017 on available for sale investment securities classified according to the amount of time those securities have been in a continuous unrealized loss position:
 
As of June 30, 2018
 
Less than 12
Months
 
12 Months
or Longer
 
Total
(dollars in thousands)
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Obligations of the U.S. government and agencies
$
154,255

 
$
(3,361
)
 
$
28,237

 
$
(1,254
)
 
$
182,492

 
$
(4,615
)
Obligations of state and political subdivisions
5,907

 
(16
)
 
1,563

 
(53
)
 
7,470

 
(69
)
Mortgage-backed securities
228,831

 
(5,183
)
 
37,068

 
(1,374
)
 
265,899

 
(6,557
)
Collateralized mortgage obligations
6,800

 
(130
)
 
23,815

 
(1,329
)
 
30,615

 
(1,459
)
Other investment securities
797

 
(3
)
 
—

 
—

 
797

 
(3
)
Total
$
396,590

 
$
(8,693
)
 
$
90,683

 
$
(4,010
)
 
$
487,273

 
$
(12,703
)
 

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As of December 31, 2017
 
Less than 12
Months
 
12 Months
or Longer
 
Total
(dollars in thousands)
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Obligations of the U.S. government and agencies
$
114,120

 
$
(1,294
)
 
$
26,726

 
$
(765
)
 
$
140,846

 
$
(2,059
)
Obligations of state and political subdivisions
11,144

 
(29
)
 
2,709

 
(24
)
 
13,853

 
(53
)
Mortgage-backed securities
177,919

 
(1,293
)
 
31,787

 
(562
)
 
209,706

 
(1,855
)
Collateralized mortgage obligations
5,166

 
(47
)
 
26,686

 
(901
)
 
31,852

 
(948
)
Other investment securities
1,805

 
(23
)
 
—

 
—

 
1,805

 
(23
)
Total
$
310,154

 
$
(2,686
)
 
$
87,908

 
$
(2,252
)
 
$
398,062

 
$
(4,938
)
 
Management evaluates the Corporation’s investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. The investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state and local municipalities and other issuers. All fixed income investment securities in the Corporation’s investment portfolio are rated as investment-grade or higher. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, interest rates and the bond rating of each security. The unrealized losses presented in the tables above are temporary in nature and are primarily related to market interest rates rather than the underlying credit quality of the issuers or collateral. Management does not believe that these unrealized losses are other-than-temporary. Management does not have the intent to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely than not that it will not have to sell these securities prior to their maturity or the recovery of their cost bases.
 
As of June 30, 2018 and December 31, 2017, securities having a fair value of $127.2 million and $126.2 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the FRB discount window program, FHLB borrowings and other purposes. Advances by the FHLB are collateralized by a blanket lien on non-pledged, mortgage-related loans as part of the Corporation’s borrowing agreement with the FHLB as well as certain securities individually pledged by the Corporation.
 
The amortized cost and fair value of available for sale investment and mortgage-related securities available for sale as of June 30, 2018 and December 31, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
June 30, 2018
 
December 31, 2017
(dollars in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Investment securities:
 
 
 
 
 
 
 
Due in one year or less
$
10,137

 
$
10,132

 
$
211,019

 
$
211,019

Due after one year through five years
165,647

 
161,611

 
126,452

 
124,797

Due after five years through ten years
16,539

 
16,099

 
23,147

 
22,804

Due after ten years
14,210

 
14,036

 
15,439

 
15,421

Subtotal
206,533

 
201,878

 
376,057

 
374,041

Mortgage-related securities(1)
336,781

 
329,197

 
313,554

 
311,652

Mutual funds with no stated maturity
—

 
—

 
3,213

 
3,509

Total
$
543,314

 
$
531,075

 
$
692,824

 
$
689,202

 
(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 



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The amortized cost and fair value of investment securities held to maturity as of June 30, 2018 and December 31, 2017 are as follows:
 
As of June 30, 2018
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Fair Value
Mortgage-backed securities
$
7,838

 
$
—

 
$
(291
)
 
$
7,547

 
As of December 31, 2017
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Fair Value
Mortgage-backed securities
$
7,932

 
$
5

 
$
(86
)
 
$
7,851

 
The following tables present the aggregate amount of gross unrealized losses as of June 30, 2018 and December 31, 2017 on held to maturity securities classified according to the amount of time those securities have been in a continuous unrealized loss position:
 
As of June 30, 2018
 
Less than 12
Months
 
12 Months
or Longer
 
Total
(dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
$
4,900

 
$
(167
)
 
$
2,647

 
$
(124
)
 
$
7,547

 
$
(291
)
 
As of December 31, 2017
 
Less than 12
Months
 
12 Months
or Longer
 
Total
(dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities
$
2,756

 
$
(25
)
 
$
3,866

 
$
(61
)
 
$
6,622

 
$
(86
)
 
The amortized cost and fair value of held to maturity investment securities as of June 30, 2018 and December 31, 2017, by contractual maturity, are shown below:
 
June 30, 2018
 
December 31, 2017
(dollars in thousands)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Mortgage-backed securities(1)
$
7,838

 
$
7,547

 
$
7,932

 
$
7,851

 
(1) Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
As of June 30, 2018 and December 31, 2017, the Corporation’s investment securities held in trading accounts totaled $8.2 million and $4.6 million, respectively, and consisted of deferred compensation trust accounts which are invested in listed mutual funds whose diversification is at the discretion of the deferred compensation plan participants and, as of the first quarter of 2018, a rabbi trust account established to fund certain unqualified pension obligations. During the first quarter of 2018, $3.2 million of investment securities included within the rabbi trust account were reclassified from available for sale to trading. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income.






Page 18
Table of Contents


Note 5 - Loans and Leases
 
The loan and lease portfolio consists of loans and leases originated by the Corporation, as well as loans acquired in mergers and acquisitions. These mergers and acquisitions include the December 2017 RBPI Merger, the January 2015 Continental Bank Holdings, Inc. Merger, the November 2012 transaction with First Bank of Delaware, and the July 2010 acquisition of First Keystone Financial, Inc. Certain tables in this footnote are presented with a breakdown between originated and acquired loans and leases.
 
A. The table below details portfolio loans and leases as of the dates indicated:
 
 
June 30, 2018
 
December 31, 2017
(dollars in thousands)
Originated
 
Acquired
 
Total Loans and Leases
 
Originated
 
Acquired
 
Total Loans and Leases
Loans held for sale
$
4,204

 
$
—

 
$
4,204

 
$
3,794

 
$
—

 
$
3,794

Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
$
1,237,885

 
$
375,836

 
$
1,613,721

 
$
1,122,327

 
$
401,050

 
$
1,523,377

Home equity lines and loans
176,771

 
29,658

 
206,429

 
183,283

 
34,992

 
218,275

Residential mortgage
358,271

 
90,789

 
449,060

 
360,935

 
97,951

 
458,886

Construction
147,636

 
43,238

 
190,874

 
128,266

 
84,188

 
212,454

Total real estate loans
$
1,920,563

 
$
539,521

 
$
2,460,084

 
$
1,794,811

 
$
618,181

 
$
2,412,992

Commercial and industrial
632,917

 
112,389

 
745,306

 
589,304

 
130,008

 
719,312

Consumer
49,828

 
1,634

 
51,462

 
35,146

 
3,007

 
38,153

Leases
97,506

 
35,143

 
132,649

 
68,035

 
47,366

 
115,401

Total portfolio loans and leases
$
2,700,814

 
$
688,687

 
$
3,389,501

 
$
2,487,296

 
$
798,562

 
$
3,285,858

Total loans and leases
$
2,705,018

 
$
688,687

 
$
3,393,705

 
$
2,491,090

 
$
798,562

 
$
3,289,652

Loans with fixed rates
$
1,127,713

 
$
412,461

 
$
1,540,174

 
$
1,034,542

 
$
538,510

 
$
1,573,052

Loans with adjustable or floating rates
1,577,305

 
276,226

 
1,853,531

 
1,456,548

 
260,052

 
1,716,600

Total loans and leases
$
2,705,018

 
$
688,687

 
$
3,393,705

 
$
2,491,090

 
$
798,562

 
$
3,289,652

Net deferred loan origination fees included in the above loan table
$
1,200

 
$
—

 
$
1,200

 
$
887

 
$
—

 
$
887

 
B. Components of the net investment in leases are detailed as follows:
 
 
June 30, 2018
 
December 31, 2017
(dollars in thousands)
Originated
 
Acquired
 
Total Leases
 
Originated
 
Acquired
 
Total Leases
Minimum lease payments receivable
$
108,718

 
$
39,656

 
$
148,374

 
$
75,592

 
$
55,219

 
$
130,811

Unearned lease income
(15,735
)
 
(5,534
)
 
(21,269
)
 
(10,338
)
 
(9,523
)
 
(19,861
)
Initial direct costs and deferred fees
4,523

 
1,021

 
5,544

 
2,781

 
1,670

 
4,451

Total Leases
$
97,506

 
$
35,143

 
$
132,649

 
$
68,035

 
$
47,366

 
$
115,401

 














Page 19
Table of Contents

C. Non-Performing Loans and Leases(1)  
 
 
June 30, 2018
 
December 31, 2017
(dollars in thousands)
Originated
 
Acquired
 
Total Loans and Leases
 
Originated
 
Acquired
 
Total Loans and Leases
Commercial mortgage
$
—

 
$
1,011

 
$
1,011

 
$
90

 
$
782

 
$
872

Home equity lines and loans
1,833

 
490

 
2,323

 
1,221

 
260

 
1,481

Residential mortgage
1,615

 
1,032

 
2,647

 
1,505

 
2,912

 
4,417

Commercial and industrial
1,011

 
574

 
1,585

 
826

 
880

 
1,706

Leases
575

 
1,307

 
1,882

 
103

 
—

 
103

Total non-performing loans and leases
$
5,034

 
$
4,414

 
$
9,448

 
$
3,745

 
$
4,834

 
$
8,579

 
(1) Purchased credit-impaired loans, which have been recorded at their fair values at acquisition, and which are performing, are excluded from this table, with the exception of $87 thousand and $167 thousand of purchased credit-impaired loans as of June 30, 2018 and December 31, 2017, respectively, which became non-performing subsequent to acquisition.

D. Purchased Credit-Impaired Loans
 
The outstanding principal balance and related carrying amount of purchased credit-impaired loans, for which the Corporation applies ASC 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, to account for the interest earned, as of the dates indicated, are as follows:
(dollars in thousands)
June 30,
2018
 
December 31,
2017
Outstanding principal balance
$
38,791

 
$
46,543

Carrying amount(1)
$
27,601

 
$
30,849

 
(1) Includes $88 thousand and $173 thousand of purchased credit-impaired loans as of June 30, 2018 and December 31, 2017, respectively, for which the Corporation could not estimate the timing or amount of expected cash flows to be collected at acquisition, and for which no accretable yield is recognized. Additionally, the table above includes $87 thousand and $167 thousand of purchased credit-impaired loans as of June 30, 2018 and December 31, 2017, respectively, which became non-performing subsequent to acquisition, which are disclosed in Note 5C, above, and which also have no accretable yield.
 
The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Corporation applies ASC 310-30, for the six months ended June 30, 2018: 
(dollars in thousands)
Accretable
Discount
Balance, December 31, 2017
$
4,083

Accretion
(1,361
)
Reclassifications from nonaccretable difference
110

Additions/adjustments
211

Disposals
—

Balance, June 30, 2018
$
3,043

 
 










Page 20
Table of Contents

E. Age Analysis of Past Due Loans and Leases
 
The following tables present an aging of all portfolio loans and leases as of the dates indicated:
 
Accruing Loans and Leases
 
 
 
 
As of June 30, 2018
30 – 59
Days
Past Due
 
60 – 89
Days
Past Due
 
Over 89
Days
Past Due
 
Total Past
Due
 
Current*
 
Total Accruing
Loans and Leases
 
Nonaccrual
Loans and Leases
 
Total
Loans and Leases
(dollars in thousands)
 
 
 
 
 
 
 
Commercial mortgage
$
2,645

 
$
150

 
$
—

 
$
2,795

 
$
1,609,915

 
$
1,612,710

 
$
1,011

 
$
1,613,721

Home equity lines and loans
—

 
—

 
—

 
—

 
204,106

 
204,106

 
2,323

 
206,429

Residential mortgage
891

 
127

 
—

 
1,018

 
445,395

 
446,413

 
2,647

 
449,060

Construction
2,854

 
1,083

 
—

 
3,937

 
186,937

 
190,874

 
—

 
190,874

Commercial and industrial
832

 
163

 
—

 
995

 
742,726

 
743,721

 
1,585

 
745,306

Consumer
19

 
—

 
—

 
19

 
51,443

 
51,462

 
—

 
51,462

Leases
786

 
829

 
—

 
1,615

 
129,152

 
130,767

 
1,882

 
132,649

Total portfolio loans and leases
$
8,027

 
$
2,352

 
$
—

 
$
10,379

 
$
3,369,674

 
$
3,380,053

 
$
9,448

 
$
3,389,501

 
 
 
Accruing Loans and Leases
 
 
 
 
As of December 31, 2017
30 – 59
Days
Past Due
 
60 – 89
Days
Past Due
 
Over 89
Days
Past Due
 
Total Past
Due
 
Current*
 
Total Accruing
Loans and Leases
 
Nonaccrual
Loans and Leases
 
Total
Loans and Leases
(dollars in thousands)
 
 
 
 
 
 
 
Commercial mortgage
$
1,366

 
$
2,428

 
$
—

 
$
3,794

 
$
1,518,711

 
$
1,522,505

 
$
872

 
$
1,523,377

Home equity lines and loans
338

 
10

 
—

 
348

 
216,446

 
216,794

 
1,481

 
218,275

Residential mortgage
1,386

 
79

 
—

 
1,465

 
453,004

 
454,469

 
4,417

 
458,886

Construction
—

 
—

 
—

 
—

 
212,454

 
212,454

 
—

 
212,454

Commercial and industrial
658

 
286

 
—

 
944

 
716,662

 
717,606

 
1,706

 
719,312

Consumer
1,106

 
—

 
—

 
1,106

 
37,047

 
38,153

 
—

 
38,153

Leases
125

 
177

 
—

 
302

 
114,996

 
115,298

 
103

 
115,401

Total portfolio loans and leases
$
4,979

 
$
2,980

 
$
—

 
$
7,959

 
$
3,269,320

 
$
3,277,279

 
$
8,579

 
$
3,285,858

 
*Included as “current” are $6.5 million and $4.1 million of loans and leases as of June 30, 2018 and December 31, 2017, respectively, which are classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.

The following tables present an aging of originated portfolio loans and leases as of the dates indicated:
 
Accruing Loans and Leases
 
 
 
 
As of June 30, 2018
30 – 59
Days
Past Due
 
60 – 89
Days
Past Due
 
Over 89
Days
Past Due
 
Total Past
Due
 
Current*
 
Total Accruing
Loans and Leases
 
Nonaccrual
Loans and Leases
 
Total
Loans and Leases
(dollars in thousands)
 
 
 
 
 
 
 
Commercial mortgage
$
2,107

 
$
77

 
$
—

 
$
2,184

 
$
1,235,701

 
$
1,237,885

 
$
—

 
$
1,237,885

Home equity lines and loans
—

 
—

 
—

 
—

 
174,938

 
174,938

 
1,833

 
176,771

Residential mortgage
626

 
64

 
—

 
690

 
355,966

 
356,656

 
1,615

 
358,271

Construction
2,854

 
1,083

 
—

 
3,937

 
143,699

 
147,636

 
—

 
147,636

Commercial and industrial
766

 
—

 
—

 
766

 
631,140

 
631,906

 
1,011

 
632,917

Consumer
19

 
—

 
—

 
19

 
49,809

 
49,828

 
—

 
49,828

Leases
311

 
508

 
—

 
819

 
96,112

 
96,931

 
575

 
97,506

Total originated portfolio loans and leases
$
6,683

 
$
1,732

 
$
—

 
$
8,415

 
$
2,687,365

 
$
2,695,780

 
$
5,034

 
$
2,700,814

 

Page 21
Table of Contents

 
Accruing Loans and Leases
 
 
 
 
As of December 31, 2017
30 – 59
Days
Past Due
 
60 – 89
Days
Past Due
 
Over 89
Days
Past Due
 
Total Past
Due
 
Current*
 
Total Accruing
Loans and Leases
 
Nonaccrual
Loans and Leases
 
Total
Loans and Leases
(dollars in thousands)
 
 
 
 
 
 
 
Commercial mortgage
$
1,255

 
$
81

 
$
—

 
$
1,336

 
$
1,120,901

 
$
1,122,237

 
$
90

 
$
1,122,327

Home equity lines and loans
26

 
—

 
—

 
26

 
182,036

 
182,062

 
1,221

 
183,283

Residential mortgage
721

 
—

 
—

 
721

 
358,709

 
359,430

 
1,505

 
360,935

Construction
—

 
—

 
—

 
—

 
128,266

 
128,266

 
—

 
128,266

Commercial and industrial
439

 
236

 
—

 
675

 
587,803

 
588,478

 
826

 
589,304

Consumer
21

 
—

 
—

 
21

 
35,125

 
35,146

 
—

 
35,146

Leases
125

 
177

 
—

 
302

 
67,630

 
67,932

 
103

 
68,035

Total originated portfolio loans and leases
$
2,587

 
$
494

 
$
—

 
$
3,081

 
$
2,480,470

 
$
2,483,551

 
$
3,745

 
$
2,487,296

 
*Included as “current” are $6.2 million and $4.0 million of loans and leases as of June 30, 2018 and December 31, 2017, respectively, which are classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.
 
The following tables present an aging of acquired portfolio loans and leases as of the dates indicated:
 
Accruing Loans and Leases
 
 
 
 
As of June 30, 2018
30 – 59
Days
Past Due
 
60 – 89
Days
Past Due
 
Over 89
Days
Past Due
 
Total Past
Due
 
Current*
 
Total Accruing
Loans and Leases
 
Nonaccrual
Loans and Leases
 
Total
Loans and Leases
(dollars in thousands)
 
 
 
 
 
 
 
Commercial mortgage
$
538

 
$
73

 
$
—

 
$
611

 
$
374,214

 
$
374,825

 
$
1,011

 
$
375,836

Home equity lines and loans
—

 
—

 
—

 
—

 
29,168

 
29,168

 
490

 
29,658

Residential mortgage
265

 
63

 
—

 
328

 
89,429

 
89,757

 
1,032

 
90,789

Construction
—

 
—

 
—

 
—

 
43,238

 
43,238

 
—

 
43,238

Commercial and industrial
66

 
163

 
—

 
229

 
111,586

 
111,815

 
574

 
112,389

Consumer
—

 
—

 
—

 
—

 
1,634

 
1,634

 
—

 
1,634

Leases
475

 
321

 
—

 
796

 
33,040

 
33,836

 
1,307

 
35,143

Total acquired portfolio loans and leases
$
1,344

 
$
620

 
$
—

 
$
1,964

 
$
682,309

 
$
684,273

 
$
4,414

 
$
688,687

 
 
Accruing Loans and Leases
 
 
 
 
As of December 31, 2017
30 – 59
Days
Past Due
 
60 – 89
Days
Past Due
 
Over 89
Days
Past Due
 
Total Past
Due
 
Current*
 
Total Accruing
Loans and Leases
 
Nonaccrual
Loans and Leases
 
Total
Loans and Leases
(dollars in thousands)
 
 
 
 
 
 
 
Commercial mortgage
$
111

 
$
2,347

 
$
—

 
$
2,458

 
$
397,810

 
$
400,268

 
$
782

 
$
401,050

Home equity lines and loans
312

 
10

 
—

 
322

 
34,410

 
34,732

 
260

 
34,992

Residential mortgage
665

 
79

 
—

 
744

 
94,295

 
95,039

 
2,912

 
97,951

Construction
—

 
—

 
—

 
—

 
84,188

 
84,188

 
—

 
84,188

Commercial and industrial
219

 
50

 
—

 
269

 
128,859

 
129,128

 
880

 
130,008

Consumer
1,085

 
—

 
—

 
1,085

 
1,922

 
3,007

 
—

 
3,007

Leases
—

 
—

 
—

 
—

 
47,366

 
47,366

 
—

 
47,366

Total acquired portfolio loans and leases
$
2,392

 
$
2,486

 
$
—

 
$
4,878

 
$
788,850

 
$
793,728

 
$
4,834

 
$
798,562

 
*Included as “current” are $297 thousand and $102 thousand of loans and leases as of June 30, 2018 and December 31, 2017, respectively, which are classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.

Page 22
Table of Contents

 
F. Allowance for Loan and Lease Losses (the “Allowance”)
 
The following tables detail the roll-forward of the Allowance for the three and six months ended June 30, 2018 and 2017:
(dollars in thousands)
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Unallocated
 
Total
Balance,
December 31,
2017
$
7,550

 
$
1,086

 
$
1,926

 
$
937

 
$
5,038

 
$
246

 
$
742

 
$
—

 
$
17,525

Charge-offs
(16
)
 
(225
)
 
—

 
—

 
(750
)
 
(92
)
 
(1,348
)
 
—

 
(2,431
)
Recoveries
6

 
1

 
1

 
2

 
1

 
3

 
123

 
—

 
137

Provision for loan and lease losses
493

 
71

 
6

 
219

 
1,383

 
132

 
1,863

 
—

 
4,167

Balance,
June 30, 2018
$
8,033

 
$
933

 
$
1,933

 
$
1,158

 
$
5,672

 
$
289

 
$
1,380

 
$
—

 
$
19,398


(dollars in thousands)
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Unallocated
 
Total
Balance,
March 31, 2018
$
7,174

 
$
1,045

 
$
1,898

 
$
844

 
$
5,361

 
$
291

 
$
1,049

 
$
—

 
$
17,662

Charge-offs
(16
)
 
(200
)
 
—

 
—

 
(467
)
 
(43
)
 
(751
)
 
—

 
(1,477
)
Recoveries
3

 
1

 
1

 
1

 
—

 
2

 
68

 
—

 
76

Provision for loan and lease losses
872

 
87

 
34

 
313

 
778

 
39

 
1,014

 
—

 
3,137

Balance,
June 30, 2018
$
8,033

 
$
933

 
$
1,933

 
$
1,158

 
$
5,672

 
$
289

 
$
1,380

 
$
—

 
$
19,398

 
 
(dollars in thousands)
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Unallocated
 
Total
Balance,
December 31,
2016
$
6,227

 
$
1,255

 
$
1,917

 
$
2,233

 
$
5,142

 
$
153

 
$
559

 
$
—

 
$
17,486

Charge-offs
—

 
(606
)
 
(70
)
 
—

 
(259
)
 
(59
)
 
(513
)
 
—

 
(1,507
)
Recoveries
6

 
—

 
—

 
2

 
15

 
4

 
185

 
—

 
212

Provision for loan and lease losses
375

 
565

 
(71
)
 
(1,124
)
 
(85
)
 
79

 
469

 
—

 
208

Balance,
June 30, 2017
$
6,608

 
$
1,214

 
$
1,776

 
$
1,111

 
$
4,813

 
$
177

 
$
700

 
$
—

 
$
16,399

 

Page 23
Table of Contents

(dollars in thousands)
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Unallocated
 
Total
Balance,
March 31, 2017
$
6,410

 
$
1,243

 
$
1,798

 
$
2,195

 
$
4,747

 
$
135

 
$
579

 
$
—

 
$
17,107

Charge-offs
—

 
(169
)
 
(43
)
 
—

 
(200
)
 
(18
)
 
(307
)
 
—

 
(737
)
Recoveries
3

 
—

 
—

 
1

 
15

 
2

 
91

 
—

 
112

Provision for loan and lease losses
195

 
140

 
21

 
(1,085
)
 
251

 
58

 
337

 
—

 
(83
)
Balance,
June 30, 2017
$
6,608

 
$
1,214

 
$
1,776

 
$
1,111

 
$
4,813

 
$
177

 
$
700

 
$
—

 
$
16,399



The following tables detail the allocation of the Allowance for all portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2018 and December 31, 2017:
As of June 30, 2018
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Unallocated
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
 
Allowance on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
19

 
$
299

 
$
—

 
$
104

 
$
4

 
$
—

 
$
—

 
$
426

Collectively evaluated for impairment
8,033

 
914

 
1,634

 
1,158

 
5,568

 
285

 
1,380

 
—

 
18,972

Purchased credit-impaired(1)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
8,033

 
$
933

 
$
1,933

 
$
1,158

 
$
5,672

 
$
289

 
$
1,380

 
$
—

 
$
19,398

 
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.

As of December 31, 2017
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Unallocated
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
 
Allowance on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
19

 
$
230

 
$
—

 
$
5

 
$
4

 
$
—

 
$
—

 
$
258

Collectively evaluated for impairment
7,550

 
1,067

 
1,696

 
937

 
5,033

 
242

 
742

 
—

 
17,267

Purchased credit-impaired(1)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
7,550

 
$
1,086

 
$
1,926

 
$
937

 
$
5,038

 
$
246

 
$
742

 
$
—

 
$
17,525


(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
 
 




Page 24
Table of Contents

The following tables detail the carrying value for all portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2018 and December 31, 2017:
As of June 30, 2018
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Carrying value of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,011

 
$
2,995

 
$
5,603

 
$
—

 
$
1,864

 
$
27

 
$
—

 
$
11,500

Collectively evaluated for impairment
1,603,381

 
202,923

 
443,457

 
188,474

 
728,081

 
51,435

 
132,649

 
3,350,400

Purchased credit-impaired(1)
9,329

 
511

 
—

 
2,400

 
15,361

 
—

 
—

 
27,601

Total
$
1,613,721

 
$
206,429

 
$
449,060

 
$
190,874

 
$
745,306

 
$
51,462

 
$
132,649

 
$
3,389,501


(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
 
As of December 31, 2017
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Carrying value of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,128

 
$
2,162

 
$
7,726

 
$
—

 
$
1,897

 
$
27

 
$
—

 
$
13,940

Collectively evaluated for impairment
1,503,825

 
215,604

 
451,160

 
204,088

 
712,865

 
38,126

 
115,401

 
3,241,069

Purchased credit-impaired(1)
17,424

 
509

 
—

 
8,366

 
4,550

 
—

 
—

 
30,849

Total
$
1,523,377

 
$
218,275

 
$
458,886

 
$
212,454

 
$
719,312

 
$
38,153

 
$
115,401

 
$
3,285,858

 

(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
 
 
The following tables detail the allocation of the Allowance for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2018 and December 31, 2017:
As of June 30, 2018
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Allowance on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
19

 
$
182

 
$
—

 
$
4

 
$
4

 
$
—

 
$
209

Collectively evaluated for impairment
8,033

 
914

 
1,634

 
1,158

 
5,568

 
285

 
1,380

 
18,972

Total
$
8,033

 
$
933

 
$
1,816

 
$
1,158

 
$
5,572

 
$
289

 
$
1,380

 
$
19,181

 

Page 25
Table of Contents

As of December 31, 2017
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Allowance on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
19

 
$
180

 
$
—

 
$
5

 
$
4

 
$
—

 
$
208

Collectively evaluated for impairment
7,550

 
1,067

 
1,696

 
937

 
5,033

 
242

 
742

 
17,267

Total
$
7,550

 
$
1,086

 
$
1,876

 
$
937

 
$
5,038

 
$
246

 
$
742

 
$
17,475

 

The following tables detail the carrying value for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2018 and December 31, 2017:
As of June 30, 2018
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Carrying value of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
2,505

 
$
3,974

 
$
—

 
$
1,377

 
$
27

 
$
—

 
$
7,883

Collectively evaluated for impairment
1,237,885

 
174,266

 
354,297

 
147,636

 
631,540

 
49,801

 
97,506

 
2,692,931

Total
$
1,237,885

 
$
176,771

 
$
358,271

 
$
147,636

 
$
632,917

 
$
49,828

 
$
97,506

 
$
2,700,814

 
As of December 31, 2017
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Carrying value of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,345

 
$
1,902

 
$
4,418

 
$
—

 
$
1,186

 
$
27

 
$
—

 
$
8,878

Collectively evaluated for impairment
1,120,982

 
181,381

 
356,517

 
128,266

 
588,118

 
35,119

 
68,035

 
2,478,418

Total
$
1,122,327

 
$
183,283

 
$
360,935

 
$
128,266

 
$
589,304

 
$
35,146

 
$
68,035

 
$
2,487,296

 

The following tables detail the allocation of the Allowance for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2018 and December 31, 2017:
As of June 30, 2018
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Allowance on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
117

 
$
—

 
$
100

 
$
—

 
$
—

 
$
217

Collectively evaluated for impairment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Purchased credit-impaired(1)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
—

 
$
—

 
$
117

 
$
—

 
$
100

 
$
—

 
$
—

 
$
217


(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
 

Page 26
Table of Contents

As of December 31, 2017
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Allowance on loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
50

 
$
—

 
$
—

 
$
—

 
$
—

 
$
50

Collectively evaluated for impairment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Purchased credit-impaired(1)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
—

 
$
—

 
$
50

 
$
—

 
$
—

 
$
—

 
$
—

 
$
50


(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
 
 
The following tables detail the carrying value for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2018 and December 31, 2017:
As of June 30, 2018
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
 
Carrying value of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,011

 
$
490

 
$
1,629

 
$
—

 
$
487

 
$
—

 
$
—

 
$
3,617

Collectively evaluated for impairment
365,496

 
28,657

 
89,160

 
40,838

 
96,541

 
1,634

 
35,143

 
657,469

Purchased credit-impaired(1)
9,329

 
511

 
—

 
2,400

 
15,361

 
—

 
—

 
27,601

Total
$
375,836

 
$
29,658

 
$
90,789

 
$
43,238

 
$
112,389

 
$
1,634

 
$
35,143

 
$
688,687


(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
 
As of December 31, 2017
Commercial
Mortgage
 
Home Equity
Lines and
Loans
 
Residential
Mortgage
 
Construction
 
Commercial
and
Industrial
 
Consumer
 
Leases
 
Total
(dollars in thousands)
 
 
 
 
 
 
Carrying value of loans and leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
783

 
$
260

 
$
3,308

 
$
—

 
$
711

 
$
—

 
$
—

 
$
5,062

Collectively evaluated for impairment
382,843

 
34,223

 
94,643

 
75,822

 
124,747

 
3,007

 
47,366

 
762,651

Purchased credit-impaired(1)
17,424

 
509

 
—

 
8,366

 
4,550

 
—

 
—

 
30,849

Total
$
401,050

 
$
34,992

 
$
97,951

 
$
84,188

 
$
130,008

 
$
3,007

 
$
47,366

 
$
798,562


(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
 
As part of the process of determining the Allowance for the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as external loan reviewers. The result of these reviews is reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
 
•
Pass – Loans considered satisfactory with no indications of deterioration.

Page 27
Table of Contents

•
Special mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
•
Substandard - Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
•
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

In addition, for the remaining segments of the loan and lease portfolio, which include residential mortgage, home equity lines and loans, consumer, and leases, the credit quality indicator used to determine this component of the Allowance is based on performance status.
 
The following tables detail the carrying value of all portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of June 30, 2018 and December 31, 2017:
 
Credit Risk Profile by Internally Assigned Grade 
 
Commercial Mortgage
 
Construction
 
Commercial and Industrial
 
Total
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Pass
$
1,585,083

 
$
1,490,862

 
$
180,805

 
$
193,227

 
$
726,009

 
$
711,145

 
$
2,491,897

 
$
2,395,234

Special Mention
2,357

 
13,448

 
2,208

 
3,902

 
230

 
889

 
4,795

 
18,239

Substandard
25,717

 
18,194

 
7,861

 
15,325

 
18,797

 
6,013

 
52,375

 
39,532

Doubtful
564

 
873

 
—

 
—

 
270

 
1,265

 
834

 
2,138

Total
$
1,613,721

 
$
1,523,377

 
$
190,874

 
$
212,454

 
$
745,306

 
$
719,312

 
$
2,549,901

 
$
2,455,143

 
 
Credit Risk Profile by Payment Activity
 
Residential Mortgage
 
Home Equity Lines
and Loans
 
Consumer
 
Leases
 
Total
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Performing
$
446,413

 
$
454,469

 
$
204,106

 
$
216,794

 
$
51,462

 
$
38,153

 
$
130,767

 
$
115,298

 
$
832,748

 
$
824,714

Non-performing
2,647

 
4,417

 
2,323

 
1,481

 
—

 
—

 
1,882

 
103

 
6,852

 
6,001

Total
$
449,060

 
$
458,886

 
$
206,429

 
$
218,275

 
$
51,462

 
$
38,153

 
$
132,649

 
$
115,401

 
$
839,600

 
$
830,715

 
 
The following tables detail the carrying value of originated portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of June 30, 2018 and December 31, 2017:
 
Credit Risk Profile by Internally Assigned Grade
 
Commercial Mortgage
 
Construction
 
Commercial and Industrial
 
Total
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Pass
$
1,228,319

 
$
1,114,171

 
$
140,896

 
$
126,260

 
$
630,227

 
$
586,896

 
$
1,999,442

 
$
1,827,327

Special Mention
990

 
—

 
1,279

 
—

 
—

 
664

 
2,269

 
664

Substandard
8,576

 
8,156

 
5,461

 
2,006

 
2,420

 
1,389

 
16,457

 
11,551

Doubtful
—

 
—

 
—

 
—

 
270

 
355

 
270

 
355

Total
$
1,237,885

 
$
1,122,327

 
$
147,636

 
$
128,266

 
$
632,917

 
$
589,304

 
$
2,018,438

 
$
1,839,897


Page 28
Table of Contents

 

Credit Risk Profile by Payment Activity
 
Residential Mortgage
 
Home Equity Lines
and Loans
 
Consumer
 
Leases
 
Total
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Performing
$
356,656

 
$
359,430

 
$
174,938

 
$
182,062

 
$
49,828

 
$
35,146

 
$
96,931

 
$
67,932

 
$
678,353

 
$
644,570

Non-performing
1,615

 
1,505

 
1,833

 
1,221

 
—

 
—

 
575

 
103

 
4,023

 
2,829

Total
$
358,271

 
$
360,935

 
$
176,771

 
$
183,283

 
$
49,828

 
$
35,146

 
$
97,506

 
$
68,035

 
$
682,376

 
$
647,399

 
 
The following tables detail the carrying value of acquired portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of June 30, 2018 and December 31, 2017:
 
Credit Risk Profile by Internally Assigned Grade
 
Commercial Mortgage
 
Construction
 
Commercial and Industrial
 
Total
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Pass
$
356,764

 
$
376,691

 
$
39,909

 
$
66,967

 
$
95,782

 
$
124,249

 
$
492,455

 
$
567,907

Special Mention
1,367

 
13,448

 
929

 
3,902

 
230

 
225

 
2,526

 
17,575

Substandard
17,141

 
10,038

 
2,400

 
13,319

 
16,377

 
4,624

 
35,918

 
27,981

Doubtful
564

 
873

 
—

 
—

 
—

 
910

 
564

 
1,783

Total
$
375,836

 
$
401,050

 
$
43,238

 
$
84,188

 
$
112,389

 
$
130,008

 
$
531,463

 
$
615,246

 
 Credit Risk Profile by Payment Activity
 
Residential Mortgage
 
Home Equity Lines
and Loans
 
Consumer
 
Leases
 
Total
(dollars in thousands)
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Performing
$
89,757

 
$
95,039

 
$
29,168

 
$
34,732

 
$
1,634

 
$
3,007

 
$
33,836

 
$
47,366

 
$
154,395

 
$
180,144

Non-performing
1,032

 
2,912

 
490

 
260

 
—

 
—

 
1,307

 
—

 
2,829

 
3,172

Total
$
90,789

 
$
97,951

 
$
29,658

 
$
34,992

 
$
1,634

 
$
3,007

 
$
35,143

 
$
47,366

 
$
157,224

 
$
183,316

 
 
G. Troubled Debt Restructurings (“TDRs”)
 
The restructuring of a loan is considered a “troubled debt restructuring” if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.
 
The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.
 



Page 29
Table of Contents

The following table presents the balance of TDRs as of the indicated dates:
(dollars in thousands)
June 30, 2018
 
December 31, 2017
TDRs included in nonperforming loans and leases
$
1,044

 
$
3,289

TDRs in compliance with modified terms
4,117

 
5,800

Total TDRs
$
5,161

 
$
9,089

 

The following table presents information regarding loan and lease modifications categorized as TDRs for the three months ended June 30, 2018:
 
For the Three Months Ended June 30, 2018
(dollars in thousands)
Number of Contracts
 
Pre-Modification Outstanding
Recorded Investment
 
Post-Modification Outstanding
Recorded Investment
Home equity loans and lines
1
 
$
8

 
$
8

Residential mortgages
2
 
219

 
219

Leases
2
 
33

 
33

    Total
5
 
$
260

 
$
260

 
The following table presents information regarding the types of loan and lease modifications made for the three months ended June 30, 2018:
 
Number of Contracts
 
Loan Term Extension
 
Interest Rate Change and Term Extension
 
Interest Rate Change and/or Interest-Only Period
 
Contractual
Payment Reduction
(Leases only)
 
Temporary Payment Deferral
Home equity loans and lines
—
 
1
 
—
 
—
 
—
Residential mortgages
1
 
1
 
—
 
—
 
—
Leases
—
 
—
 
—
 
2
 
—
    Total
1
 
2
 
—
 
2
 
—

The following table presents information regarding loan and lease modifications categorized as TDRs for the six months ended June 30, 2018: 
 
For the Six Months Ended June 30, 2018
(dollars in thousands)
Number of Contracts
 
Pre-Modification Outstanding
Recorded Investment
 
Post-Modification Outstanding
Recorded Investment
Home equity loans and lines
1
 
$
8

 
$
8

Residential mortgages
2
 
219

 
219

Commercial and industrial
1
 
18

 
18

Leases
2
 
33

 
33

    Total
6
 
$
278

 
$
278














Page 30
Table of Contents

The following table presents information regarding the types of loan and lease modifications made for the six months ended June 30, 2018:

 
Number of Contracts
 
Loan Term Extension
 
Interest Rate Change and Term Extension
 
Interest Rate Change and/or Interest-Only Period
 
Contractual
Payment Reduction
(Leases only)
 
Temporary Payment Deferral
Home equity loans and lines
—
 
1
 
—
 
—
 
—
Residential mortgages
1
 
1
 
—
 
—
 
—
Commercial and industrial
—
 
1
 
—
 
—
 
—
Leases
—
 
—
 
—
 
2
 
—
    Total
1
 
3
 
—
 
2
 
—

During the six months ended June 30, 2018, one home equity line of credit with a principal balance of $25 thousand and one lease with a principal balance of $50 thousand, which had been previously modified to troubled debt restructurings defaulted and were charged off.

H. Impaired Loans
 
The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized for the three and six months ended June 30, 2018 and 2017 (purchased credit-impaired loans are not included in the tables):
As of and for the Three Months Ended
June 30, 2018
Recorded
Investment**
 
Principal
Balance
 
Related
Allowance
 
Average
Principal Balance
 
Interest Income
Recognized
 
Cash-Basis
Interest Income
Recognized
(dollars in thousands)
 
 
 
 
 
Impaired loans with related allowance:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines and loans
$
570

 
$
570

 
$
19

 
$
572

 
$
6

 
$
—

Residential mortgage
2,379

 
2,379

 
299

 
2,383

 
22

 
—

Commercial and industrial
267

 
362

 
104

 
314

 
—

 
—

Consumer
27

 
27

 
4

 
27

 
—

 
—

Total
$
3,243

 
$
3,338

 
$
426

 
$
3,296

 
$
28

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans without related allowance*:
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
$
1,011

 
$
1,010

 
$
—

 
$
1,022

 
$
—

 
$
—

Home equity lines and loans
2,425

 
2,487

 
—

 
2,450

 
2

 
—

Residential mortgage
3,223

 
3,265

 
—

 
3,236

 
19

 
—

Commercial and industrial
1,598

 
2,300

 
—

 
1,620

 
5

 
—

Total
$
8,257

 
$
9,062

 
$
—

 
$
8,328

 
$
26

 
$
—

Grand total
$
11,500

 
$
12,400

 
$
426

 
$
11,624

 
$
54

 
$
—

 
*The table above does not include the recorded investment of $2.0 million of impaired leases without a related Allowance.
 
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.


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Table of Contents

As of and for the Six Months Ended
June 30, 2018
Recorded
Investment**
 
Principal
Balance
 
Related
Allowance
 
Average
Principal Balance
 
Interest Income
Recognized
 
Cash-Basis
Interest Income
Recognized
(dollars in thousands)
 
 
 
 
 
Impaired loans with related allowance:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines and loans
$
570

 
$
570

 
$
19

 
$
574

 
$
11

 
$
—

Residential mortgage
2,379

 
2,379

 
299

 
2,387

 
45

 
—

Commercial and industrial
267

 
362

 
104

 
391

 
—

 
—

Consumer
27

 
27

 
4

 
27

 
1

 
—

Total
$
3,243

 
$
3,338

 
$
426

 
$
3,379

 
$
57

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans without related allowance*:
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
$
1,011

 
$
1,010

 
$
—

 
$
771

 
$
6

 
$
—

Home equity lines and loans
2,425

 
2,487

 
—

 
2,473

 
8

 
—

Residential mortgage
3,223

 
3,265

 
—

 
3,105

 
41

 
—

Commercial and industrial
1,598

 
2,300

 
—

 
1,569

 
12

 
—

Total
$
8,257

 
$
9,062

 
$
—

 
$
7,918

 
$
67

 
$
—

Grand total
$
11,500

 
$
12,400

 
$
426

 
$
11,297

 
$
124

 
$
—


*The table above does not include the recorded investment of $2.0 million of impaired leases without a related Allowance.
 
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.

 
As of and for the Three Months Ended
June 30, 2017
Recorded
Investment**
 
Principal
Balance
 
Related
Allowance
 
Average
Principal Balance
 
Interest Income
Recognized
 
Cash-Basis
Interest Income
Recognized
(dollars in thousands)
 
 
 
 
 
Impaired loans with related allowance:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines and loans
$
21

 
$
21

 
$
3

 
$
21

 
$
—

 
$
—

Residential mortgage
1,578

 
1,578

 
112

 
1,581

 
20

 
—

Consumer
38

 
38

 
14

 
38

 
—

 
—

Total
1,637

 
1,637

 
129

 
1,640

 
20

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans without related allowance*:
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
$
2,071

 
$
2,106

 
$
—

 
$
2,113

 
$
15

 
$
—

Home equity lines and loans
1,514

 
2,054

 
—

 
1,536

 
1

 
—

Residential mortgage
5,371

 
5,712

 
—

 
5,496

 
36

 
—

Commercial and industrial
2,140

 
2,796

 
—

 
2,338

 
3

 
—

Total
$
11,096

 
$
12,668

 
$
—

 
$
11,483

 
$
55

 
$
—

Grand total
$
12,733

 
$
14,305

 
$
129

 
$
13,123

 
$
75

 
$
—

 
*The table above does not include the recorded investment of $380 thousand of impaired leases without a related Allowance.
 
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.




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Table of Contents

As of and for the Six Months Ended
June 30, 2017
Recorded
Investment**
 
Principal
Balance
 
Related
Allowance
 
Average
Principal Balance
 
Interest Income
Recognized
 
Cash-Basis
Interest Income
Recognized
(dollars in thousands)
 
 
 
 
 
Impaired loans with related allowance:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines and loans
$
21

 
$
21

 
$
3

 
$
21

 
$
1

 
$
—

Residential mortgage
1,578

 
1,578

 
112

 
1,585

 
41

 
—

Consumer
38

 
38

 
14

 
39

 
1

 
—

Total
$
1,637

 
$
1,637

 
$
129

 
$
1,645

 
$
43

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans without related allowance*:
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage
$
2,071

 
$
2,106

 
$
—

 
$
2,117

 
$
39

 
$
—

Home equity lines and loans
1,514

 
2,054

 
—

 
1,579

 
3

 
—

Residential mortgage
5,371

 
5,712

 
—

 
5,521

 
76

 
—

Commercial and industrial
2,140

 
2,796

 
—

 
2,367

 
6

 
—

Total
$
11,096

 
$
12,668

 
$
—

 
$
11,584

 
$
124

 
$
—

Grand total
$
12,733

 
$
14,305

 
$
129

 
$
13,229

 
$
167

 
$
—

 
*The table above does not include the recorded investment of $380 thousand of impaired leases without a related Allowance.
 
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.


(dollars in thousands)
Recorded
Investment (2)
 
Principal
Balance
 
Related
Allowance
As of December 31, 2017
 
 
Impaired loans with related allowance:
 
 
 
 
 
Home equity lines and loans
$
577

 
$
577

 
$
19

Residential mortgage
2,436

 
2,435

 
230

Commercial and industrial
18

 
19

 
5

Consumer
27

 
27

 
4

Total
3,058

 
3,058

 
258

Impaired loans without related allowance(1):
 
 
 
 
 
Home equity lines and loans
$
1,585

 
$
1,645

 
$
—

Residential mortgage
5,290

 
5,529

 
—

Commercial and industrial
1,879

 
3,613

 
—

Commercial mortgage
2,128

 
2,218

 
—

Total
$
10,882

 
$
13,005

 
$
—

Grand total
$
13,940

 
$
16,063

 
$
258

 
(1) 
The table above does not include the recorded investment of $272 thousand of impaired leases without a related Allowance.
(2) 
Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.

I. Loan Mark
 
Loans acquired in mergers and acquisitions are recorded at fair value as of the date of the transaction. This adjustment to the acquired principal amount is referred to as the “Loan Mark”. With the exception of purchased credit impaired loans, for which the Loan Mark is accounted under ASC 310-30, the Loan Mark is amortized or accreted as an adjustment to yield over the lives of the loans.
 
The following tables detail, for acquired loans, the outstanding principal, remaining loan mark, and recorded investment, by portfolio segment, as of the dates indicated:

Page 33
Table of Contents

 
As of June 30, 2018
(dollars in thousands)
Outstanding
Principal
 
Remaining
Loan Mark
 
Recorded
Investment
Commercial mortgage
$
385,801

 
$
(9,965
)
 
$
375,836

Home equity lines and loans
32,271

 
(2,613
)
 
29,658

Residential mortgage
93,916

 
(3,127
)
 
90,789

Construction
43,676

 
(438
)
 
43,238

Commercial and industrial
121,265

 
(8,876
)
 
112,389

Consumer
1,669

 
(35
)
 
1,634

Leases
36,792

 
(1,649
)
 
35,143

Total
$
715,390

 
$
(26,703
)
 
$
688,687

 
 
 
As of December 31, 2017
(dollars in thousands)
Outstanding
Principal
 
Remaining
Loan Mark
 
Recorded
Investment
Commercial mortgage
$
412,263

 
$
(11,213
)
 
$
401,050

Home equity lines and loans
37,944

 
(2,952
)
 
34,992

Residential mortgage
101,523

 
(3,572
)
 
97,951

Construction
86,081

 
(1,893
)
 
84,188

Commercial and industrial
141,960

 
(11,952
)
 
130,008

Consumer
3,051

 
(44
)
 
3,007

Leases
50,530

 
(3,164
)
 
47,366

Total
$
833,352

 
$
(34,790
)
 
$
798,562

 
Note 6 - Mortgage Servicing Rights
 
The following table summarizes the Corporation’s activity related to mortgage servicing rights (“MSRs”) for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
(dollars in thousands)
2018
 
2017
Balance, beginning of period
$
5,706

 
$
5,686

Additions
—

 
213

Amortization
(196
)
 
(173
)
Recovery / (Impairment)
1

 
(43
)
Balance, end of period
$
5,511

 
$
5,683

Fair value
$
6,695

 
$
6,057

 
Six Months Ended June 30,
(dollars in thousands)
2018
 
2017
Balance, beginning of period
$
5,861

 
$
5,582

Additions
16

 
489

Amortization
(417
)
 
(342
)
Recovery / (Impairment)
51

 
(46
)
Balance, end of period
$
5,511

 
$
5,683

Fair value
$
6,695

 
$
6,057

Residential mortgage loans serviced for others
$
614,259

 
$
631,888

 
As of June 30, 2018, and December 31, 2017, key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10% and 20% percent adverse changes in those assumptions are as follows:

Page 34
Table of Contents

(dollars in thousands)
June 30,
2018
 
December 31,
2017
Fair value amount of MSRs
$
6,695

 
$
6,397

Weighted average life (in years)
6.6

 
6.1

Prepayment speeds (constant prepayment rate)*
9.0
%
 
10.3
%
Impact on fair value:
 
 
 
10% adverse change
$
(112
)
 
$
(194
)
20% adverse change
$
(242
)
 
$
(394
)
Discount rate
9.55
%
 
9.55
%
Impact on fair value:
 
 
 
10% adverse change
$
(247
)
 
$
(225
)
20% adverse change
$
(477
)
 
$
(434
)
 
  * Represents the weighted average prepayment rate for the life of the MSR asset.

At June 30, 2018 and December 31, 2017 the fair value of the MSRs was $6.7 million and $6.4 million, respectively. The fair value of the MSRs for these dates was determined using values obtained from a third party which utilizes a valuation model which calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate is used to determine the present value of future net servicing income. Another key assumption in the model is the required rate of return the market would expect for an asset with similar risk. These assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change. Management reviews, annually, the process utilized by its independent third-party valuation experts.
 
These assumptions and sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which could magnify or counteract the sensitivities.

Note 7 - Goodwill and Other Intangibles
 
The following table presents activity in the Corporation's goodwill by its reporting units and finite-lived and indefinite-lived intangible assets, other than MSRs, for the three months ended June 30, 2018:
(dollars in thousands)
Balance
December 31, 2017
 
Additions
 
Adjustments
 
Amortization
 
Balance
June 30, 2018
 
Amortization
Period
Goodwill – Wealth
$
20,412

 
$
—

 
$
—

 
$
—

 
$
20,412

 
Indefinite
Goodwill – Banking
153,545

 
—

 
2,596

 
—

 
156,141

 
Indefinite
Goodwill – Insurance
5,932

 
677

 
—

 
—

 
6,609

 
Indefinite
Total Goodwill
$
179,889

 
$
677

 
$
2,596

 
$
—

 
$
183,162

 
 
Core deposit intangible
$
7,380

 
$
—

 
$
—

 
$
(742
)
 
$
6,638

 
10 years
Customer relationships
14,173

 
779

 
—

 
(833
)
 
14,119

 
10 to 20 years
Non-compete agreements
1,319

 
—

 
—

 
(121
)
 
1,198

 
5 to 10 years
Trade name
2,322

 
—

 
—

 
(32
)
 
2,290

 
3 years to Indefinite
Domain name
151

 
—

 
—

 
—

 
151

 
Indefinite
Favorable lease assets
621

 
—

 
—

 
(40
)
 
581

 
1 to 16 years
Total Intangible Assets
$
25,966

 
$
779

 
$
—

 
$
(1,768
)
 
$
24,977

 
 
Total Goodwill and Intangible Assets
$
205,855

 
$
1,456

 
$
2,596

 
$
(1,768
)
 
$
208,139

 
 
 


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Table of Contents

Management conducted its annual impairment tests for goodwill and indefinite-lived intangible assets as of October 31, 2017 using generally accepted valuation methods. Management determined that no impairment of goodwill or indefinite-lived intangible assets was identified as a result of the annual impairment analyses. Future impairment testing will be conducted each October 31, unless a triggering event occurs in the interim that would suggest possible impairment, in which case it would be tested as of the date of the triggering event. For the eight months ended June 30, 2018, management determined there were no events that would necessitate impairment testing of goodwill or indefinite-lived intangible assets.


Note 8 - Deposits
 
The following table details the components of deposits:
 
June 30,
2018
 
December 31,
2017
(dollars in thousands)
 
 
 
Interest-bearing demand
$
617,258

 
$
481,336

Money market
814,530

 
862,639

Savings
291,858

 
338,572

Retail time deposits
536,287

 
532,202

Wholesale non-maturity deposits
36,826

 
62,276

Wholesale time deposits
169,770

 
171,929

Total interest-bearing deposits
2,466,529

 
2,448,954

Noninterest-bearing deposits
892,386

 
924,844

Total deposits
$
3,358,915

 
$
3,373,798


Note 9 - Short-Term Borrowings and Long-Term FHLB Advances
 
A. Short-term borrowings 
 
The Corporation’s short-term borrowings (original maturity of one year or less), which consist of funds obtained from overnight repurchase agreements with commercial customers, FHLB advances with original maturities of one year or less and overnight fed funds, are detailed below.
 
A summary of short-term borrowings is as follows:
(dollars in thousands)
June 30,
2018
 
December 31,
2017
Repurchase agreements* – commercial customers
$
17,159

 
$
25,865

Short-term FHLB advances
209,900

 
212,000

Total short-term borrowings
$
227,059

 
$
237,865

* Overnight repurchase agreements with no expiration date
 
The following table sets forth information concerning short-term borrowings:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2018
 
2017
 
2018
 
2017
Balance at period-end
$
227,059

 
$
130,295

 
$
227,059

 
$
130,295

Maximum amount outstanding at any month end
$
279,525

 
$
130,295

 
$
279,525

 
$
130,295

Average balance outstanding during the period
$
218,566

 
$
98,869

 
$
198,079

 
$
73,378

 
 
 
 
 
 
 
 
Weighted-average interest rate:
 
 
 
 
 
 
 
As of the period-end
1.89
%
 
1.11
%
 
1.89
%
 
1.11
%
Paid during the period
1.92
%
 
0.96
%
 
1.72
%
 
0.72
%

Page 36
Table of Contents

Average balances outstanding during the year represent daily average balances and average interest rates represent interest expense divided by the related average balance.
 
B. Long-term FHLB Advances
 
As of June 30, 2018 and December 31, 2017, the Corporation had $87.8 million and $139.1 million, respectively, of long-term FHLB advances (original maturities exceeding one year).
 
The following table presents the remaining periods until maturity of long-term FHLB advances:
(dollars in thousands)
June 30,
2018
 
December 31,
2017
Within one year
$
39,867

 
$
83,766

Over one year through five years
47,941

 
55,374

Total
$
87,808

 
$
139,140

 
The following table presents rate and maturity information on FHLB advances and other borrowings: 
 
Maturity Range(1)
 
Weighted Average Rate(1)
 
Coupon Rate(1)
 
Balance at
Description
From
 
  To
 
 
From
 
To
 
June 30,
2018
 
December 31,
2017
Bullet maturity – fixed rate
7/30/2018
 
8/24/2021
 
1.70
%
 
1.31
%
 
2.13
%
 
$
77,808

 
$
118,131

Convertible-fixed(2)
8/20/2018
 
8/20/2018
 
2.58
%
 
2.58
%
 
2.58
%
 
10,000

 
21,009

Total
 
 
 
 
 

 
 

 
 

 
$
87,808

 
$
139,140

 
(1)Maturity range, weighted average rate and coupon rate range refers to June 30, 2018 balances.
(2) FHLB advances whereby the FHLB has the option, at predetermined times, to convert the fixed interest rate to an adjustable interest rate indexed to the London Interbank Offered Rate (“LIBOR”). The Corporation has the option to prepay these advances, without penalty, if the FHLB elects to convert the interest rate to an adjustable rate. As of June 30, 2018, substantially all FHLB advances with this convertible feature are subject to conversion in fiscal 2018. These advances are included in the maturity ranges in which they mature, rather than the period in which they are subject to conversion.

C. Other Borrowings Information
 
In connection with its FHLB borrowings, the Corporation is required to hold the capital stock of the FHLB. The amount of capital stock held was $16.7 million at June 30, 2018, and $20.1 million at December 31, 2017. The carrying amount of the FHLB stock approximates its redemption value.
 
The level of required investment in FHLB stock is based on the balance of outstanding borrowings the Corporation has from the FHLB.  Although FHLB stock is a financial instrument that represents an equity interest in the FHLB, it does not have a readily determinable fair value. FHLB stock is generally viewed as a long-term investment. Accordingly, when evaluating FHLB stock for impairment, its value should be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
 
The Corporation had a maximum borrowing capacity with the FHLB of $1.49 billion as of June 30, 2018 of which the unused capacity was $1.19 billion. In addition, there were $79.0 million in the overnight federal funds line available and $145.5 million of Federal Reserve Discount Window capacity.
 
Note 10 – Subordinated Notes
 
On December 13, 2017, the Corporation completed the issuance of $70.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2027 (the "2027 Notes") in an underwritten public offering. On August 6, 2015, the Corporation completed the issuance of $30.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2025 (the "2025 Notes") in a private placement transaction to institutional accredited investors. The net proceeds of both offerings increased Tier II regulatory capital at the Corporation level.
 



Page 37
Table of Contents

The following tables detail the subordinated notes, including debt issuance costs, as of June 30, 2018, and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
(dollars in thousands)
Balance
 
Rate(1)(2)
 
Balance
 
Rate(1)(2)
Subordinated notes – due 2027
$
68,877

 
4.25
%
 
$
68,829

 
4.25
%
Subordinated notes – due 2025
29,614

 
4.75
%
 
29,587

 
4.75
%
Total subordinated notes
$
98,491

 
 
 
$
98,416

 
 
 
(1)The 2027 Notes bear interest at an annual fixed rate of 4.25% from the date of issuance until December 14, 2022, and will thereafter bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 2.050% until December 15, 2027, or any early redemption date.
 
(2)The 2025 Notes bear interest at an annual fixed rate of 4.75% from the date of issuance until August 14, 2020, and will thereafter bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 3.068% until August 15, 2025, or any early redemption date.

Note 11 – Junior Subordinated Debentures
 
In connection with the RBPI Merger, the Corporation acquired Royal Bancshares Capital Trust I (“Trust I”) and Royal Bancshares Capital Trust II (“Trust II”) (collectively, the “Trusts”), which were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although the Corporation owns $774 thousand of the common securities of Trust I and Trust II, the Trusts are not consolidated into the Corporation’s Consolidated Financial Statements as the Corporation is not deemed to be the primary beneficiary of these entities. In connection with the issuance and sale of the capital securities, RBPI issued, and the Corporation assumed as a result of the RBPI Merger, junior subordinated debentures to the Trusts of $10.7 million each, totaling $21.4 million representing the Corporation’s maximum exposure to loss. The junior subordinated debentures incur interest at a coupon rate of 4.49% as of June 30, 2018. The rate resets quarterly based on 3-month LIBOR plus 2.15%.
 
Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital securities initially bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to an unaffiliated investment vehicle and an aggregate principal amount of $387 thousand of common securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to the Corporation. As a result of the RBPI Merger, the Corporation has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.
 
The rights of holders of common securities of the Trusts are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities. The capital and common securities of the Trusts are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each. Unless earlier dissolved, the Trusts will dissolve on December 15, 2034. The junior subordinated debentures are the sole assets of Trusts, mature on December 15, 2034, and may be called at par by the Corporation any time after December 15, 2009. The Corporation records its investments in the Trusts’ common securities of $387 thousand each as investments in unconsolidated entities and records dividend income upon declaration by Trust I and Trust II.


Note 12 – Derivative Instruments and Hedging Activities
 
Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. Management manages these risks as part of its asset and liability management process and through credit policies and procedures. Management seeks to minimize counterparty credit risk by establishing credit limits and collateral agreements and utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative transactions entered into by the Corporation are an economic hedge of a derivative offerings to Bank customers. The Corporation does not use derivative financial instruments for trading purposes.
 
Customer Derivatives – Interest Rate Swaps. The Corporation enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’ variable-rate loans into fixed-rate loans. The Corporation then enters into

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corresponding swap agreements with swap dealer counterparties to economically hedge its exposure on the variable and fixed components of the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of June 30, 2018, there were no fair value adjustments related to credit quality.
 
Risk Participation Agreements. The Corporation may enter into a risk participation agreement (“RPA”) with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA sold”. In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation may purchase an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA purchased”.
 
The following tables detail the derivative instruments as of June 30, 2018 and December 31, 2017:
 
Asset Derivatives
 
Liability Derivatives
(dollars in thousands)
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
As of June 30, 2018:
 
 
 
 
 
 
 
Customer derivatives – interest rate swaps
$
274,541

 
$
6,318

 
$
274,541

 
$
6,269

RPAs sold
—

 
—

 
553

 
1

RPAs purchased
35,636

 
65

 
—

 
—

Total derivatives
$
310,177

 
$
6,383

 
$
275,094

 
$
6,270

As of December 31, 2017:
 
 
 
 
 
 
 
Customer derivatives – interest rate swaps
$
124,627

 
$
1,895

 
$
124,627

 
$
1,895

RPAs sold
—

 
—

 
899

 
3

RPAs purchased
14,710

 
21

 
—

 
—

Total derivatives
$
139,337

 
$
1,916

 
$
125,526

 
$
1,898

 
The Corporation has International Swaps and Derivatives Association agreements with third parties that requires a minimum dollar transfer amount upon a margin call. This requirement is dependent on certain specified credit measures. The amount of collateral posted with third parties at June 30, 2018 and December 31, 2017 was $1.8 million and $1.3 million, respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $3.4 million and $1.6 million as of June 30, 2018 and December 31, 2017, respectively.
 

Note 13 - Accounting for Uncertainty in Income Taxes

The Corporation recognizes the financial statement benefit of a tax position only after determining that the Corporation would be more likely than not to sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the relevant tax authority.

The Corporation is subject to income taxes in the United States federal jurisdiction and multiple state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examination by taxing authorities for years before 2014.

The Corporation’s policy is to record interest and penalties on uncertain tax positions as income tax expense. No interest or penalties were accrued for the three or six months ended June 30, 2018 or 2017.




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Note 14 - Shareholders’ Equity
 
Dividend
 
On July 19, 2018, the Corporation’s Board of Directors declared a regular quarterly dividend of $0.25 per share payable September 1, 2018 to shareholders of record as of August 1, 2018. During the second quarter of 2018, the Corporation paid or accrued, as applicable, a regular quarterly dividend of $0.22 per share. This dividend totaled $4.5 million, based on outstanding shares and restricted stock units as of May 1, 2018 of 20,446,221 shares.
 
S-3 Shelf Registration Statement and Offerings Thereunder

In May 2018, the Corporation filed a shelf registration statement on Form S-3, SEC File No. 333-224849 (the “Shelf Registration Statement”). The Shelf Registration Statement allows the Corporation to raise additional capital from time to time through offers and sales of registered securities consisting of common stock, debt securities, warrants, purchase contracts, rights and units or units consisting of any combination of the foregoing securities. The Corporation may sell these securities using the prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, from time to time, in one or more offerings.

In addition, the Corporation has in place a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), which allows it to issue up to 1,500,000 shares of registered common stock. The Plan allows for the grant of a request for waiver (“RFW”) above the Plan’s maximum investment of $120 thousand per account per year. An RFW is granted based on a variety of factors, including the Corporation’s current and projected capital needs, prevailing market prices of the Corporation’s common stock and general economic and market conditions.

For the three and six months ended June 30, 2018, the Corporation did not issue any shares under the Plan. No RFWs were approved during the three and six months ended June 30, 2018. No other sales of equity securities were executed under the Shelf Registration Statement during the three and six months ended June 30, 2018.
 
Option Exercises and Restricted Stock Awards

In addition to shares that may be issued through the Plan, the Corporation also issues shares through the exercise of stock options and the vesting of RSUs and PSUs. During the three and six months ended June 30, 2018, 4,750 shares and 48,675 shares, respectively, were issued pursuant to the exercise of stock options, increasing shareholders’ equity by $115 thousand and $1.1 million, respectively. The increase in shareholders’ equity related to the vesting of restricted stock units and performance stock units, which is recognized over the vesting period through stock based compensation expense, was $615 thousand and $1.2 million for the three and six months ended June 30, 2018, respectively.
 
Stock Repurchases
 
On August 6, 2015, the Corporation announced a stock repurchase program (the “2015 Program”) under which the Corporation may repurchase up to 1,200,000 shares of the Corporation’s common stock, at an aggregate purchase price not to exceed $40 million. During the three months ended June 30, 2018, no shares were repurchased under the 2015 Program. As of June 30, 2018, the maximum number of shares remaining authorized for repurchase under the 2015 Program was 189,300. In addition to the 2015 Program, it is the Corporation’s practice to retire shares to its treasury account upon the vesting of stock awards to certain officers in order to cover the statutory income tax withholdings related to such vestings.

Note 15 – Accumulated Other Comprehensive (Loss) Income

The following table details the components of accumulated other comprehensive (loss) income for the three and six month periods ended June 30, 2018 and 2017:

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(dollars in thousands)
Net Change in
Unrealized Gains
on Available-for-
Sale Investment
Securities
 
Net Change in
Unfunded
Pension Liability
 
Accumulated
Other
Comprehensive
Loss
Balance, March 31, 2018
$
(8,157
)
 
$
(1,507
)
 
$
(9,664
)
Other comprehensive (loss)
(1,512
)
 
(15
)
 
(1,527
)
Balance, June 30, 2018
$
(9,669
)
 
$
(1,522
)
 
$
(11,191
)
 
 
 
 
 
 
Balance, March 31, 2017
$
(844
)
 
$
(1,146
)
 
$
(1,990
)
Other comprehensive income
411

 
15

 
426

Balance, June 30, 2017
$
(433
)
 
$
(1,131
)
 
$
(1,564
)
(dollars in thousands)
Net Change in
Unrealized Gains
on Available-for-
Sale Investment
Securities
 
Net Change in
Unfunded
Pension Liability
 
Accumulated
Other
Comprehensive
Loss
Balance, December 31, 2017
$
(2,861
)
 
$
(1,553
)
 
$
(4,414
)
Other comprehensive (loss) income
(6,808
)
 
31

 
(6,777
)
Balance, June 30, 2018
$
(9,669
)
 
$
(1,522
)
 
$
(11,191
)
 
 
 
 
 
 
Balance, December 31, 2016
$
(1,231
)
 
$
(1,178
)
 
$
(2,409
)
Other comprehensive income
798

 
47

 
845

Balance, June 30, 2017
$
(433
)
 
$
(1,131
)
 
$
(1,564
)


The following table details the amounts reclassified from each component of accumulated other comprehensive loss to each component’s applicable income statement line, for the three and six month periods ended June 30, 2018 and 2017:
Description of Accumulated Other
 
Amount Reclassified from Accumulated
Other Comprehensive Loss
 
 
Comprehensive Loss Component
 
Three Months Ended June 30,
 
Affected Income Statement Category
 
 
2018
 
2017
 
 
Unfunded pension liability:
 
 
 
 
 
 
Amortization of net loss included in net periodic pension costs*
 
$
25

 
$
24

 
Other operating expenses
Income tax effect
 
5

 
8

 
Income tax expense
Net of income tax
 
$
20

 
$
16

 
Net income

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Description of Accumulated Other
 
Amount Reclassified from Accumulated
Other Comprehensive Loss
 
 
Comprehensive Loss Component
 
Six Months Ended June 30,
 
Affected Income Statement Category
 
 
2018
 
2017
 
 
Net unrealized gain on investment securities available for sale:
 
 
 
 
 
 
Realization of gain on sale of investment securities available for sale
 
$
7

 
$
1

 
Net gain on sale of available for sale investment securities
Realization of gain on transfer of investment securities available for sale to trading
 
417

 
—

 
Other operating income
Total
 
$
424

 
$
1

 
 
Income tax effect
 
89

 
—

 
Income tax expense
Net of income tax
 
$
335

 
$
1

 
Net income
 
 
 
 
 
 
 
Unfunded pension liability:
 
 
 
 
 
 
Amortization of net loss included in net periodic pension costs*
 
$
50

 
$
47

 
Other operating expenses
Income tax effect
 
10

 
16

 
Income tax expense
Net of income tax
 
$
40

 
$
31

 
Net income

 *Accumulated other comprehensive loss components are included in the computation of net periodic pension cost.

Note 16 - Earnings per Common Share
 
Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution that would occur if in-the-money stock options were exercised and converted into common shares and restricted stock awards and performance-based stock awards were vested. Proceeds assumed to have been received on option exercises are assumed to be used to purchase shares of the Corporation’s common stock at the average market price during the period, as required by the treasury stock method of accounting. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands except share and per share data)
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 

 

Net income available to common shareholders
$
14,688

 
$
9,433

 
$
29,974

 
$
18,477

Denominator for basic earnings per share – weighted average shares outstanding
20,238,852

 
16,984,563

 
20,221,010

 
16,969,431

Effect of dilutive common shares
174,726

 
248,204

 
206,782

 
238,381

Denominator for diluted earnings per share – adjusted weighted average shares outstanding
20,413,578

 
17,232,767

 
20,427,792

 
17,207,812

Basic earnings per share
$
0.73

 
$
0.56

 
$
1.48

 
$
1.09

Diluted earnings per share
$
0.72

 
$
0.55

 
$
1.47

 
$
1.07

Antidilutive shares excluded from computation of average dilutive earnings per share
1,422

 
—

 
2,495

 
—

 
Note 17 - Revenue from Contracts with Customers
 
All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income.  The following table presents the Corporation’s noninterest income by revenue stream and reportable segment for the three and six months ended June 30, 2018 and 2017.  Items outside the scope of ASC 606 are noted as such.
 

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Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
(dollars in thousands)
Banking
 
Wealth
Management
 
Consolidated
 
Banking
 
Wealth
Management
 
Consolidated
Fees for wealth management services
$
—

 
$
10,658

 
$
10,658

 
$
—

 
$
9,807

 
$
9,807

Insurance commissions(1)
—

 
1,902

 
1,902

 
—

 
943

 
943

Capital markets revenue(1)
2,105

 
—

 
2,105

 
953

 
—

 
953

Service charges on deposit accounts
752

 
—

 
752

 
630

 
—

 
630

Loan servicing and other fees(1)
475

 
—

 
475

 
519

 
—

 
519

Net gain on sale of loans(1)
528

 
—

 
528

 
520

 
—

 
520

Net gain on sale of investment securities available for sale(1)
—

 
—

 
—

 
—

 
—

 
—

Net gain on sale of other real estate owned
111

 
—

 
111

 
(12
)
 
—

 
(12
)
Dividends on FHLB and FRB stock(1)
510

 
—

 
510

 
218

 
—

 
218

Other operating income(2)
2,976

 
58

 
3,034

 
1,158

 
49

 
1,207

Total noninterest income
$
7,457

 
$
12,618

 
$
20,075

 
$
3,986

 
$
10,799

 
$
14,785

 
(1) Not within the scope of ASC 606.
 
(2) Other operating income includes merchant interchange fees, safe deposit box rentals, and rent income totaling $610 thousand and $501 thousand for the three months ended June 30, 2018 and 2017, respectively, which are within the scope of ASC 606.
 
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
(dollars in thousands)
Banking
 
Wealth
Management
 
Consolidated
 
Banking
 
Wealth
Management
 
Consolidated
Fees for wealth management services
$
—

 
$
20,966

 
$
20,966

 
$
—

 
$
19,110

 
$
19,110

Insurance commissions(1)
—

 
3,595

 
3,595

 
—

 
1,706

 
1,706

Capital markets revenue(1)
2,771

 
—

 
2,771

 
953

 
—

 
953

Service charges on deposit accounts
1,465

 
—

 
1,465

 
1,277

 
—

 
1,277

Loan servicing and other fees(1)
1,161

 
—

 
1,161

 
1,022

 
—

 
1,022

Net gain on sale of loans(1)
1,046

 
—

 
1,046

 
1,149

 
—

 
1,149

Net gain on sale of investment securities available for sale(1)
7

 
—

 
7

 
1

 
—

 
1

Net gain on sale of other real estate owned
287

 
—

 
287

 
(12
)
 
—

 
(12
)
Dividends on FHLB and FRB stock(1)
941

 
—

 
941

 
432

 
—

 
432

Other operating income(2)
7,270

 
102

 
7,372

 
2,277

 
97

 
2,374

Total noninterest income
$
14,948

 
$
24,663

 
$
39,611

 
$
7,099

 
$
20,913

 
$
28,012


(1) Not within the scope of ASC 606.
 
(2) Other operating income includes merchant interchange fees, safe deposit box rentals, and rent income totaling $1.1 million and $980 thousand for the six months ended June 30, 2018 and 2017, respectively, which are within the scope of ASC 606.






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A description of the Corporation’s revenue streams accounted for under ASC 606 follows:
 
Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Wealth Management Fees: The Corporation earns wealth management fee revenue from a variety of sources including fees from trust administration and other related fiduciary services, custody, investment management and advisory services, employee benefit account and IRA administration, estate settlement, tax service fees, shareholder service fees and brokerage.
 
Fees that are determined based on the market value of the assets held in their accounts are generally billed monthly, in arrears, based on the market value of assets at the end of the previous billing period. Other related services that are based on a fixed fee schedule are recognized when the services are rendered. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date.
 
Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected.
 
Interchange Income: The Corporation earns interchange income fees from debit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
 
Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.
 
Note 18 – Stock-Based Compensation
 
A. General Information 
 
The Corporation permits the issuance of stock options, dividend equivalents, performance stock awards, stock appreciation rights and restricted stock units or awards to employees and directors of the Corporation under several plans. The performance awards and restricted awards may be in the form of stock awards or stock units. Stock awards and stock units differ in that for a stock award, shares of restricted stock are issued in the name of the grantee, whereas a stock unit constitutes a promise to issue shares of stock upon vesting. The accounting for awards and units is identical. The terms and conditions of awards under the plans are determined by the Corporation’s Management Development and Compensation Committee.
 
Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved the Corporation’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of the Corporation’s common stock were made available for award grants. On April 28, 2010, the shareholders approved the Corporation’s “2010 Long Term Incentive Plan” under which a total of 445,002 shares of the Corporation’s common stock were made available for award grants and on April 30, 2015, the shareholders approved an amendment and restatement of such plan (as amended and restated, the “2010 LTIP”) to, among other things, increase the number of shares available for award grants by 500,000 to 945,002.
 
In addition to the shareholder-approved plans mentioned in the preceding paragraph, the Corporation periodically authorizes grants of stock-based compensation as inducement awards to new employees. This type of award does not require shareholder approval in accordance with Rule 5635(c)(4) of the NASDAQ listing rules.
 
The equity awards are authorized to be in the form of, among others, options to purchase the Corporation’s common stock, restricted stock units (“RSUs”) and performance stock units (“PSUs”).
 
RSUs have a restriction based on the passage of time. The grant date fair value of the RSUs is based on the closing price on the date of the grant.
 

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PSUs have restrictions based on performance criteria and the passage of time. The performance criteria may be a market-based criteria measured by the Corporation’s total shareholder return (“TSR”) relative to the performance of the community bank index for the respective period. The fair value of the PSUs based on the Corporation’s TSR relative to the performance of a designated peer group or the NASDAQ Community Bank Index is calculated using the Monte Carlo Simulation method. The performance criteria may also be based on a non-market-based criteria such as return on average equity relative to that designated peer group. The grant date fair value of these PSUs is based on the closing price of the Corporation’s stock on the date of the grant. PSU grants may have a vesting percent ranging from 0% to 150%.
 
B. Other Stock Option Information
 
The following table provides information about options outstanding for the three months ended June 30, 2018:
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Grant Date
Fair Value
Options outstanding, March 31, 2018
71,321

 
$
19.59

 
$
4.75

Forfeited
—

 
—

 
—

Expired
—

 
—

 
—

Exercised
(4,750
)
 
$
24.26

 
$
5.27

Options outstanding, June 30, 2018
66,571

 
$
19.26

 
$
4.71

 
The following table provides information about options outstanding for the six months ended June 30, 2018:
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Grant Date
Fair Value
Options outstanding, December 31, 2017
115,246

 
$
20.73

 
$
4.86

Forfeited
—

 
—

 
—

Expired
—

 
—

 
—

Exercised
(48,675
)
 
$
22.74

 
$
5.05

Options outstanding, June 30, 2018
66,571

 
$
19.26

 
$
4.71


As of June 30, 2018 there were no unvested options.
 
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2018
 
2017
 
2018
 
2017
Proceeds from exercise of stock options
$
115

 
$
355

 
$
1,107

 
$
1,005

Related tax benefit recognized
21

 
86

 
231

 
227

Net proceeds of options exercised
$
136

 
$
441

 
$
1,338

 
$
1,232

 
 
 
 
 
 
 
 
Intrinsic value of options exercised
$
99

 
$
326

 
$
1,098

 
$
874

 
The following table provides information about options outstanding and exercisable at June 30, 2018:
(dollars in thousands, except share data and exercise price)
Outstanding
 
Exercisable
Number of shares
66,571

 
66,571

Weighted average exercise price
$
19.26

 
$
19.26

Aggregate intrinsic value
$
1,800

 
$
1,800

Weighted average remaining contractual term in years
1.0

 
1.0

 



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C. Restricted Stock and Performance Stock and Units
 
The Corporation has granted RSUs and PSUs under the 2007 LTIP and 2010 LTIP and in accordance with Rule 5635(c)(4) of the NASDAQ listing standards.
 
RSUs
 
The compensation expense for the RSUs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight-line basis over the vesting period.
 
For the three and six months ended June 30, 2018, the Corporation recognized $267 thousand and $555 thousand, respectively, of expense related to the Corporation’s RSUs. As of June 30, 2018, there was $1.5 million of unrecognized compensation cost related to RSUs. This cost will be recognized over a weighted average period of 2.0 years.
 
The following table details the RSUs for the three and six months ended June 30, 2018:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
Number of Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of Shares
 
Weighted
Average
Grant Date
Fair Value
Beginning balance
77,107

 
$
36.13

 
75,707

 
$
35.80

Granted
—

 
$
—

 
2,400

 
$
43.95

Vested
(7,347
)
 
$
29.17

 
(8,347
)
 
$
29.28

Forfeited
(1,165
)
 
$
35.36

 
(1,165
)
 
$
35.36

Ending balance
68,595

 
$
36.89

 
68,595

 
$
36.89

 
PSUs
 
For the three and six months ended June 30, 2018, the Corporation recognized $348 thousand and $680 thousand, respectively, of expense related to the PSUs. As of June 30, 2018, there was $1.8 million of unrecognized compensation cost related to PSUs. This cost will be recognized over a weighted average period of 1.2 years.
 
The following table details the PSUs for the three and six months ended June 30, 2018:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
Number of Shares
 
Weighted
Average
Grant Date
Fair Value
 
Number of Shares
 
Weighted
Average
Grant Date
Fair Value
Beginning balance
168,453

 
$
24.76

 
168,453

 
$
24.76

Granted
—

 
$
—

 
—

 
$
—

Vested
(33,784
)
 
$
16.91

 
(33,784
)
 
$
16.91

Forfeited
(4,409
)
 
$
26.57

 
(4,409
)
 
$
26.57

Ending balance
130,260

 
$
26.73

 
130,260

 
$
26.73

 
Note 19 - Fair Value Measurement
 
FASB ASC 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).





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The three levels of the fair value hierarchy under FASB ASC Topic 820 are:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
 
A. Assets and liabilities measured on a recurring basis

A description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. 

Investment Securities

The value of the Corporation’s available for sale investment securities, which include obligations of the U.S. government and its agencies, mortgage-backed securities issued by U.S. government- and U.S. government sponsored agencies, obligations of state and political subdivisions, corporate bonds and other debt securities are determined by the Corporation, taking into account the input of an independent third party valuation service provider. The third party’s evaluations are based on market data, utilizing pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their pricing models apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities, additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions. Management reviews, annually, the process utilized by its independent third-party valuation service provider. On a quarterly basis, management tests the validity of the prices provided by the third party by selecting a representative sample of the portfolio and obtaining actual trade results, or if actual trade results are not available, competitive broker pricing. On an annual basis, management evaluates, for appropriateness, the methodology utilized by the independent third-party valuation service provider.
 
U.S. Government agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage-backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other available-for-sale investments are evaluated using a broker-quote based application, including quotes from issuers.
 
Interest Rate Swaps and Risk Participation Agreements 
 
The Corporation’s interest rate swaps and RPAs are reported at fair value utilizing Level 2 inputs. Prices of these instruments are obtained through an independent pricing source utilizing pricing information which may include market observed quotations for swaps, LIBOR rates, forward rates and rate volatility. When entering into a derivative contract, the Corporation is exposed to fair value changes due to interest rate movements, and the potential non-performance of our contract counterparty. The Corporation has developed a methodology to value the non-performance risk based on internal credit risk metrics and the unique characteristics of derivative instruments, which include notional exposure rather than principle at risk and interest payment netting. The results of this methodology are used to adjust the base fair value of the instrument for the potential counterparty credit risk.
 
The following tables present the Corporation’s assets measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:

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As of June 30, 2018
 
 
 
 
 
 
 
(dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
0.1

 
$
0.1

 
$
—

 
$
—

Obligations of U.S. government & agencies
183.3

 
—

 
183.3

 
—

Obligations of state & political subdivisions
17.4

 
—

 
17.4

 
—

Mortgage-backed securities
292.6

 
—

 
292.6

 
—

Collateralized mortgage obligations
36.6

 
—

 
36.6

 
—

Other debt securities
1.1

 
—

 
1.1

 
—

Total investment securities available for sale
$
531.1

 
$
0.1

 
$
531.0

 
$
—

 
 
 
 
 
 
 
 
Investment securities trading:
 
 
 
 
 
 
 
Mutual funds
$
8.2

 
$
8.2

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps
$
6.3

 
$
—

 
$
6.3

 
$
—

     Total recurring fair value measurements
$
545.6

 
$
8.3

 
$
537.3

 
$
—

 
As of December 31, 2017
 
 
 
 
 
 
 
(dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
200.1

 
$
200.1

 
$
—

 
$
—

Obligations of U.S. government & agencies
151.0

 
—

 
151.0

 
—

Obligations of state & political subdivisions
21.3

 
—

 
21.3

 
—

Mortgage-backed securities
275.0

 
—

 
275.0

 
—

Collateralized mortgage obligations
36.7

 
—

 
36.7

 
—

Mutual funds
3.5

 
3.5

 
—

 
—

Other debt securities
1.6

 
—

 
1.6

 
—

Total investment securities available for sale
$
689.2

 
$
203.6

 
$
485.6

 
$
—

 
 
 
 
 
 
 
 
Investment securities trading:
 
 
 
 
 
 
 
Mutual funds
$
4.6

 
$
4.6

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate swaps
$
1.9

 
$
—

 
$
1.9

 
$
—

     Total recurring fair value measurements
$
695.7

 
$
208.2

 
$
487.5

 
$
—

 
There have been no transfers between levels during the three and six months ended June 30, 2018.
  
B. Assets and liabilities measured on a non-recurring basis
 
Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances.  Similarly, fair value is used on a nonrecurring basis for nonfinancial assets and nonfinancial liabilities such as foreclosed assets, OREO, intangible assets, nonfinancial assets and liabilities evaluated in a goodwill impairment analysis and other nonfinancial assets measured at fair value for purposes of assessing impairment.  A description of the valuation methodologies used for financial and nonfinancial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.
 





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Impaired Loans
 
Management evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by the Corporation. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.
 
The Corporation has an appraisal policy in which an appraisal is obtained for a commercial loan at the point at which the loan either becomes nonperforming or is downgraded to a substandard or worse classification. For consumer loans, management obtains updated appraisals when a loan becomes 90 days past due or when it receives other information that may indicate possible impairment. Based on the appraisals obtained by the Corporation, a partial or full charge-off may be necessary. 
 
Other Real Estate Owned
 
OREO consists of properties acquired as a result of foreclosures and deeds in-lieu-of foreclosure. Properties classified as OREO are reported at the lower of cost or fair value less cost to sell, and are classified as Level 3 in the fair value hierarchy.
 
Mortgage Servicing Rights
 
MSRs do not trade in an active, open market with readily observable prices. Accordingly, management obtains the fair value of the MSRs using a third-party pricing provider. The provider determines the fair value by discounting projected net servicing cash flows of the remaining servicing portfolio. The valuation model used by the provider considers market loan prepayment predictions and other economic factors which management considers to be significant unobservable inputs. The fair value of MSRs is mostly affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease. All assumptions are market driven. Management has a sufficient understanding of the third party service’s valuation models, assumptions, and inputs used in determining the fair value of MSRs, enabling management to maintain an appropriate system of internal control. MSRs are classified within Level 3 of the fair value hierarchy as the valuation is model driven and primarily based on unobservable inputs.
 
The following tables present the Corporation’s assets measured at fair value on a non-recurring basis as of June 30, 2018 and December 31, 2017:
As of June 30, 2018
 
 
 
 
 
 
 
(dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
MSRs
$
6.7

 
$
—

 
$
—

 
$
6.7

Impaired loans and leases
13.1

 
—

 
—

 
13.1

OREO
0.5

 
—

 
—

 
0.5

   Total non-recurring fair value measurements
$
20.3

 
$
—

 
$
—

 
$
20.3

 
As of December 31, 2017
 
 
 
 
 
 
 
(dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
MSRs
$
6.4

 
$
—

 
$
—

 
$
6.4

Impaired loans and leases
14.0

 
—

 
—

 
14.0

OREO
0.3

 
—

 
—

 
0.3

   Total non-recurring fair value measurements
$
20.7

 
$
—

 
$
—

 
$
20.7

 
During the three and six months ended June 30, 2018, increases of $138 thousand and $167 thousand, respectively, were recorded in the Allowance as a result of adjusting the carrying value and estimated fair value of the impaired loans in the above tables.



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Note 20 - Fair Value of Financial Instruments
 
FASB ASC 825, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies, are based on the exit price notion set forth by ASU 2016-1 effective January 1, 2018, and are applied to this disclosure on a prospective basis. Estimated fair value of assets and liabilities carried at cost as of December 31, 2017 were based on an entry price notion. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Corporation.

The carrying amount and fair value of the Corporation’s financial instruments are as follows:
 
 
 
As of June 30, 2018
 
As of December 31, 2017
(dollars in thousands)
Fair Value
Hierarchy
Level*
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
Level 1
 
$
47,242

 
$
47,242

 
$
60,024

 
$
60,024

Investment securities - available for sale
See Note 19
 
531,075

 
531,075

 
689,202

 
689,202

Investment securities - trading
See Note 19
 
8,175

 
8,175

 
4,610

 
4,610

Investment securities – held to maturity
Level 2
 
7,838

 
7,547

 
7,932

 
7,851

Loans held for sale
Level 2
 
4,204

 
4,204

 
3,794

 
3,794

Net portfolio loans and leases
Level 3
 
3,370,103

 
3,304,479

 
3,268,333

 
3,293,802

MSRs
Level 3
 
5,511

 
6,695

 
5,861

 
6,397

Interest rate swaps
Level 2
 
6,318

 
6,318

 
1,895

 
1,895

RPAs purchased
Level 2
 
65

 
65

 
21

 
21

Other assets
Level 3
 
46,567

 
46,567

 
46,799

 
46,799

Total financial assets
 
 
$
4,027,098

 
$
3,962,367

 
$
4,088,471

 
$
4,114,395

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
Level 2
 
$
3,358,915

 
$
3,340,565

 
$
3,373,798

 
$
3,368,276

Short-term borrowings
Level 2
 
227,059

 
227,059

 
237,865

 
237,865

Long-term FHLB advances
Level 2
 
87,808

 
86,963

 
139,140

 
138,685

Subordinated notes
Level 2
 
98,491

 
97,629

 
98,416

 
95,044

Junior subordinated debentures
Level 2
 
21,497

 
23,675

 
21,416

 
19,366

Interest rate swaps
Level 2
 
6,269

 
6,269

 
1,895

 
1,895

RPAs sold
Level 2
 
1

 
1

 
3

 
3

Other liabilities
Level 3
 
57,928

 
57,928

 
49,071

 
49,071

Total financial liabilities
 
 
$
3,857,968

 
$
3,840,089

 
$
3,921,604

 
$
3,910,205

 
* See Note 19 in the Notes to Unaudited Consolidated Financial Statements for a description of hierarchy levels.
 







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Note 21 - Financial Instruments with Off-Balance Sheet Risk, Contingencies and Concentration of Credit Risk

Off-Balance Sheet Arrangements

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument of commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.

Commitments to extend credit, which include unused lines of credit and unfunded commitments to originate loans, are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and  may require payment of a fee. Some of the commitments are expected to expire without being drawn upon, and the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at  June 30, 2018 and December 31, 2017 were $829.1 million and $748.3 million, respectively. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on a credit evaluation of the counterparty. Collateral varies but  may include accounts receivable, marketable securities, inventory, property, plant and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in extending loan facilities to customers. The collateral varies, but  may include accounts receivable, marketable securities, inventory, property, plant and equipment, and residential real estate for those commitments for which collateral is deemed necessary. The Corporation’s obligations under standby letters of credit as of  June 30, 2018 and December 31, 2017 were $21.8 million and $17.7 million, respectively.

Contingencies

Legal Matters

In the ordinary course of its operations, the Corporation and its subsidiaries are parties to various claims, litigation, investigations, and legal and administrative cases and proceedings.  Such pending or threatened claims, litigation, investigations, legal and administrative cases and proceedings typically entail matters that are considered incidental to the normal conduct of business. Claims for significant monetary damages may be asserted in many of these types of legal actions.  Based on the information currently available, management believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of the Corporation and its shareholders.

On a regular basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that the Corporation will incur a loss and the amount of the loss can be reasonably estimated, a liability may be recorded in the Consolidated Financial Statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount or range of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation.




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Indemnifications

In general, the Corporation does not sell loans with recourse, except to the extent that it arises from standard loan-sale contract provisions. These provisions cover violations of representations and warranties and, under certain circumstances, first payment default by borrowers. These indemnifications  may include the repurchase of loans by the Corporation, and are considered customary provisions in the secondary market for conforming mortgage loan sales. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There were no such repurchases for the three or six months ended June 30, 2018.

Concentrations of Credit Risk

The Corporation has a material portion of its loans in real estate-related loans. A predominant percentage of the Corporation’s real estate exposure, both commercial and residential, is in the Corporation’s primary trade area which includes portions of Delaware, Chester, Montgomery and Philadelphia counties in Southeastern Pennsylvania. Management is aware of this concentration and attempts to mitigate this risk to the extent possible in many ways, including the underwriting and assessment of borrower’s capacity to repay. See Note 5 – “Loans and Leases” for additional information.

Note 22 - Segment Information
 
FASB Codification 280 – “Segment Reporting” identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s chief operating decision maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.
 
The Corporation’s Banking segment consists of commercial and retail banking. The Banking segment is evaluated as a single strategic unit which generates revenues from a variety of products and services. The Banking segment generates interest income from its lending (including leases) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale in available for sale investment securities, gains on the sale of residential mortgage loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income and interchange revenue associated with its Visa Check Card offering. Also included in the Banking segment are two subsidiaries of the Bank, KCMI Capital, Inc. and Bryn Mawr Equipment Financing, Inc., both of which provide specialized lending solutions to our customers.
 
The Wealth Management segment has responsibility for a number of activities within the Corporation, including trust administration, other related fiduciary services, custody, investment management and advisory services, employee benefits and IRA administration, estate settlement, tax services and brokerage. Bryn Mawr Trust of Delaware and Lau Associates are included in the Wealth Management segment of the Corporation since they have similar economic characteristics, products and services to those of the Wealth Management Division of the Corporation. BMT Investment Advisers, formed in May 2017, which serves as investment adviser to BMT Investment Funds, a Delaware statutory trust, is also reported under the Wealth Management segment. In addition, the Wealth Management Division oversees all insurance services of the Corporation, which are conducted through the Bank’s insurance subsidiary, BMT Insurance Advisors, Inc., and are reported in the Wealth Management segment.
 
The accounting policies of the Corporation are applied by segment in the following tables. The segments are presented on a pre-tax basis.
 
The following table details the Corporation’s segments for the three and six months ended June 30, 2018 or 2017:



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Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
(dollars in thousands)
Banking
 
Wealth
Management
 
Consolidated
 
Banking
 
Wealth
Management
 
Consolidated
Net interest income
$
37,315

 
$
1

 
$
37,316

 
$
27,964

 
$
1

 
$
27,965

Provision for loan and lease losses
3,137

 
—

 
3,137

 
(83
)
 
—

 
(83
)
Net interest income after loan loss provision
34,178

 
1

 
34,179

 
28,047

 
1

 
28,048

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Fees for wealth management services
—

 
10,658

 
10,658

 
—

 
9,807

 
9,807

Insurance commissions
—

 
1,902

 
1,902

 
—

 
943

 
943

Capital markets revenue
2,105

 
—

 
2,105

 
953

 
—

 
953

Service charges on deposit accounts
752

 
—

 
752

 
630

 
—

 
630

Loan servicing and other fees
475

 
—

 
475

 
519

 
—

 
519

Net gain on sale of loans
528

 
—

 
528

 
520

 
—

 
520

Net gain (loss) on sale of OREO
111

 
—

 
111

 
(12
)
 
—

 
(12
)
Other operating income
3,486

 
58

 
3,544

 
1,376

 
49

 
1,425

Total noninterest income
7,457

 
12,618

 
20,075

 
3,986

 
10,799

 
14,785

 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries & wages
11,184

 
5,056

 
16,240

 
9,284

 
4,296

 
13,580

Employee benefits
1,922

 
955

 
2,877

 
1,421

 
983

 
2,404

Occupancy and bank premise
2,235

 
462

 
2,697

 
1,849

 
398

 
2,247

Amortization of intangible assets
385

 
504

 
889

 
196

 
491

 
687

Professional fees
879

 
53

 
932

 
1,031

 
18

 
1,049

Other operating expenses
10,875

 
1,326

 
12,201

 
7,489

 
1,039

 
8,528

Total noninterest expenses
27,480

 
8,356

 
35,836

 
21,270

 
7,225

 
28,495

Segment profit
14,155

 
4,263

 
18,418

 
10,763

 
3,575

 
14,338

Intersegment (revenues) expenses*
(150
)
 
150

 
—

 
(112
)
 
112

 
—

Pre-tax segment profit after eliminations
$
14,005

 
$
4,413

 
$
18,418

 
$
10,651

 
$
3,687

 
$
14,338

% of segment pre-tax profit after eliminations
76.0
%
 
24.0
%
 
100.0
%
 
74.3
%
 
25.7
%
 
100.0
%
Segment assets (dollars in millions)
$
4,339.3

 
$
54.9

 
$
4,394.2

 
$
3,387.0

 
$
51.0

 
$
3,438.0

 

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Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
(dollars in thousands)
Banking
 
Wealth
Management
 
Consolidated
 
Banking
 
Wealth
Management
 
Consolidated
Net interest income
$
74,753

 
$
2

 
$
74,755

 
$
55,366

 
$
2

 
$
55,368

Provision for loan and lease losses
4,167

 
—

 
4,167

 
208

 
—

 
208

Net interest income after loan loss provision
70,586

 
2

 
70,588

 
55,158

 
2

 
55,160

Noninterest income:
 
 
 
 
 
 
 
 
 
 
—

Fees for wealth management services
—

 
20,966

 
20,966

 
—

 
19,110

 
19,110

Insurance commissions
—

 
3,595

 
3,595

 
—

 
1,706

 
1,706

Capital markets revenue
2,771

 
—

 
2,771

 
953

 
—

 
953

Service charges on deposit accounts
1,465

 
—

 
1,465

 
1,277

 
—

 
1,277

Loan servicing and other fees
1,161

 
—

 
1,161

 
1,022

 
—

 
1,022

Net gain on sale of loans
1,046

 
—

 
1,046

 
1,149

 
—

 
1,149

Net gain on sale of investment securities available for sale
7

 
—

 
7

 
1

 
—

 
1

Net gain (loss) gain on sale of OREO
287

 
—

 
287

 
(12
)
 
—

 
(12
)
Other operating income
8,211

 
102

 
8,313

 
2,709

 
97

 
2,806

Total noninterest income
14,948

 
24,663

 
39,611

 
7,099

 
20,913

 
28,012

 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries & wages
22,340

 
9,882

 
32,222

 
17,915

 
8,115

 
26,030

Employee benefits
4,598

 
1,987

 
6,585

 
2,978

 
1,915

 
4,893

Occupancy and bank premise
4,811

 
936

 
5,747

 
3,976

 
797

 
4,773

Amortization of intangible assets
783

 
985

 
1,768

 
392

 
988

 
1,380

Professional fees
1,608

 
72

 
1,680

 
1,712

 
48

 
1,760

Other operating expenses
21,306

 
2,558

 
23,864

 
14,254

 
2,065

 
16,319

Total noninterest expenses
55,446

 
16,420

 
71,866

 
41,227

 
13,928

 
55,155

Segment profit
30,088

 
8,245

 
38,333

 
21,030

 
6,987

 
28,017

Intersegment (revenues) expenses*
(299
)
 
299

 
—

 
(224
)
 
224

 
—

Pre-tax segment profit after eliminations
$
29,789

 
$
8,544

 
$
38,333

 
$
20,806

 
$
7,211

 
$
28,017

% of segment pre-tax profit after eliminations
77.7
%
 
22.3
%
 
100.0
%
 
74.3
%
 
25.7
%
 
100.0
%
Segment assets (dollars in millions)
$
4,339.3

 
$
54.9

 
$
4,394.2

 
$
3,387.0

 
$
51.0

 
$
3,438.0


* Inter-segment revenues consist of rental payments, interest on deposits and management fees.
 
Wealth Management Segment Information
 
(dollars in millions)
June 30,
2018
 
December 31,
2017
Assets under management, administration, supervision and brokerage
$
13,404.7

 
$
12,968.7



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ITEM 2. Management’s Discussion and Analysis of Results of Operation and Financial Condition
 
The following is the Corporation’s discussion and analysis of the significant changes in the financial condition, results of operations, capital resources and liquidity presented in the accompanying Consolidated Financial Statements. Current performance does not guarantee, and may not be indicative of, similar performance in the future.
 
Brief History of the Corporation
 
The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the “Corporation”) was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation and its subsidiaries offer a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 36 branches, eight limited-hour retirement community offices, six wealth management offices and a full-service insurance agency located throughout Montgomery, Delaware, Chester, Philadelphia, Berks, and Dauphin counties in Pennsylvania, Mercer and Camden counties of New Jersey, and New Castle county in Delaware. The common stock of the Corporation trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.
 
The Corporation operates in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. The Corporation and its subsidiaries are regulated by many agencies including the Securities and Exchange Commission (“SEC”), NASDAQ, Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania Department of Banking and Securities. The goal of the Corporation is to become the preeminent community bank and wealth management organization in the Philadelphia area.

Critical Accounting Policies, Judgments and Estimates
 
The accounting and reporting policies of the Corporation and its subsidiaries conform with U.S. generally accepted accounting principles (“GAAP”). All inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous year’s financial statements to the current year’s presentation. In preparing the Consolidated Financial Statements, the Corporation is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. However, there are uncertainties inherent in making these estimates and actual results could differ from these estimates. The Corporation has identified certain areas that require estimates and assumptions, which include the allowance for loan and lease losses (the “Allowance”), the valuation of goodwill and intangible assets, the fair value of investment securities, the fair value of derivative financial instruments, and the valuation of mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation. The Corporation’s derivative financial instruments are not exchange-traded and therefore are valued utilizing models that use as their basis readily observable market parameters, specifically the London Interbank Offered Rate (“LIBOR”) swap curve, and are classified within Level 2 of the valuation hierarchy. In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
 
These critical accounting policies, along with other significant accounting policies, are presented in Footnote 1 – Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in the Corporation’s 2017 Annual Report.
 
Recent Acquisitions and Expansions
 
On May 1, 2018, BMT Insurance Advisors, Inc. acquired Domenick & Associates, a full-service insurance agency established in 1993 and headquartered in the Old City section of Philadelphia. Domenick & Associates has a specialty niche with nonprofit and social service organizations which aligns well with our banking and wealth management solutions in these specialty service areas. This acquisition furthers our objective of pursuing strategic growth opportunities to enhance, broaden, and diversify our revenue streams.

On December 15, 2017, the merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into the Corporation (the “RBPI Merger”), and the merger of Royal Bank America with and into the Bank, were completed. Consideration totaled $138.7 million, comprised of 3,101,316 shares of the Corporation’s common stock, the assumption of 140,224 warrants to purchase Corporation common stock, valued at $1.9 million, $112 thousand for the cash-out of certain options and $7 thousand cash in

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lieu of fractional shares. The RBPI Merger initially added $567.3 million of loans, $121.6 million of investments, $593.2 million of deposits, twelve new branches and a loan production office. The acquisition of RBPI expanded the Corporation’s footprint within Montgomery, Chester, Berks and Philadelphia Counties in Pennsylvania as well as Camden and Mercer Counties in New Jersey.
 
In addition to the RBPI Merger, the Bank has continued to execute on its strategies of diversification and acquiring and/or establishing specialty offices in strategically targeted areas where management believes there to be a high demand for the Bank’s products and services. On May 24, 2017, the Bank completed its acquisition of Hirshorn Boothby, a full-service insurance agency established in 1931 and headquartered in the Chestnut Hill section of Philadelphia. Hirshorn Boothby was immediately merged into the Bank’s existing insurance subsidiary, BMT Insurance Advisors, Inc., formerly known as Powers Craft Parker and Beard, Inc., expanding the footprint of this growing segment.
 
On May 12, 2017, the Corporation established a wealth management-focused office in Princeton, New Jersey which complements the already-established presence in central New Jersey that was acquired in the RBPI Merger.
 
Beginning in the second quarter of 2017, the Bank’s newly established Capital Markets department commenced operations focusing on providing risk management services to address the needs of its commercial customer base. These capital markets capabilities enable the Bank to offer hedging tools for qualified commercial customers through the use of interest rate swaps and options designed to mitigate the interest rate risk on variable rate loans. This interest rate hedging offering allows the Bank to participate and lead in larger and longer-dated credits without incurring additional interest rate risk. Additional services will focus on assisting qualified customers in hedging their foreign exchange risk and meeting their trade finance needs through enhanced international services capabilities.

Executive Overview 
 
The following items highlight the Corporation’s results of operations for the three and six months ended June 30, 2018, as compared to the same period in 2017, and the changes in its financial condition as of June 30, 2018 as compared to December 31, 2017. More detailed information related to these highlights can be found in the sections that follow.

Three Month Results of Operations

•
Net income attributable to Bryn Mawr Bank Corporation for the three months ended June 30, 2018 was $14.7 million, an increase of $5.3 million as compared to net income of $9.4 million for the same period in 2017. Diluted earnings per share was $0.72 for the three months ended June 30, 2018 as compared to $0.55 for the same period in 2017.

•
Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended June 30, 2018 were 11.03% and 1.36%, respectively, as compared to ROE and ROA of 9.71% and 1.14% respectively, for the same period in 2017.

•
Tax-equivalent net interest income increased $9.2 million, or 32.8%, to $37.4 million for the three months ended June 30, 2018, as compared to $28.2 million for the same period in 2017.

•
Provision for loan and lease losses (the “Provision”) of $3.1 million for the three months ended June 30, 2018 was an increase of $3.2 million from the $(83) thousand recovery of Provision recorded for the same period in 2017.

•
Noninterest income of $20.1 million for the three months ended June 30, 2018 increased $5.3 million as compared to $14.8 million for the same period in 2017.

•
Fees for wealth management services, capital markets revenue, and insurance commissions of $10.7 million, $2.1 million and $1.9 million for the three months ended June 30, 2018 increased $851 thousand, $1.2 million, and $959 thousand, respectively, as compared to the same period in 2017.

•
Noninterest expense of $35.8 million for the three months ended June 30, 2018 increased $7.3 million, from $28.5 million for the same period in 2017.





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Six Month Results of Operations

•
Net income attributable to Bryn Mawr Bank Corporation for the six months ended June 30, 2018 was $30.0 million, an increase of $11.5 million as compared to net income of $18.5 million for the same period in 2017. Diluted earnings per share was $1.47 for the six months ended June 30, 2018 as compared to $1.07 for the same period in 2017.

•
Return on average equity (“ROE”) and return on average assets (“ROA”) for the six months ended June 30, 2018 were 11.49% and 1.41%, respectively, as compared to ROE and ROA of 9.65% and 1.13% respectively, for the same period in 2017.

•
Tax-equivalent net interest income increased $19.2 million, or 34.4%, to $74.9 million for the six months ended June 30, 2018, as compared to $55.8 million for the same period in 2017.

•
The Provision of $4.2 million for the six months ended June 30, 2018 was an increase of $4.0 million from the $208 thousand Provision recorded for the same period in 2017.

•
Noninterest income of $39.6 million for the six months ended June 30, 2018 increased $11.6 million as compared to $28.0 million for the same period in 2017.

•
Fees for wealth management services, insurance commissions, and capital markets revenue of $21.0 million, $3.6 million, and $2.8 million for the six months ended June 30, 2018 increased of $1.9 million, $1.9 million, and $1.8 million, respectively, as compared to the same period in 2017.

•
Noninterest expense of $71.9 million for the six months ended June 30, 2018 increased $16.7 million, from $55.2 million for the same period in 2017.

Changes in Financial Condition

•
Total assets of $4.39 billion as of June 30, 2018 decreased $55.5 million from $4.45 billion as of December 31, 2017.

•
Total shareholders’ equity of $542.5 million as of June 30, 2018 increased $14.4 million from $528.1 million as of December 31, 2017.

•
Total portfolio loans and leases as of June 30, 2018 were $3.39 billion, an increase of $103.6 million from $3.29 billion as of December 31, 2017.

•
Total non-performing loans and leases of $9.4 million represented 0.28% of portfolio loans and leases as of June 30, 2018 as compared to $8.6 million, or 0.26% of portfolio loans and leases as of December 31, 2017.

•
The $19.4 million Allowance, as of June 30, 2018, represented 0.57% of portfolio loans and leases, as compared to $17.5 million or 0.53% of portfolio loans and leases as of December 31, 2017.

•
Total deposits of $3.36 billion as of June 30, 2018 decreased $14.9 million from $3.37 billion as of December 31, 2017.

•
Wealth assets under management, administration, supervision and brokerage as of June 30, 2018 were $13.40 billion, an increase of $436.0 million from $12.97 billion December 31, 2017.











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Key Performance Ratios
 
Key financial performance ratios for the three and six months ended June 30, 2018 and 2017 are shown in the table below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Return on average equity
11.03
%
 
9.71
%
 
11.49
%
 
9.65
%
Return on average assets
1.36
%
 
1.14
%
 
1.41
%
 
1.13
%
Tax-equivalent net interest margin
3.81
%
 
3.68
%
 
3.87
%
 
3.71
%
Basic earnings per share
$
0.73

 
$
0.56

 
$
1.48

 
$
1.09

Diluted earnings per share
$
0.72

 
$
0.55

 
$
1.47

 
$
1.07

Dividends paid or accrued per share
$
0.22

 
$
0.21

 
$
0.44

 
$
0.42

Dividends paid or accrued per share to net income per basic common share
30.1
%
 
37.5
%
 
29.7
%
 
38.5
%
 
The following table presents certain key period-end balances and ratios as of June 30, 2018 and December 31, 2017:
(dollars in millions, except per share amounts)
June 30,
2018
 
December 31,
2017
Book value per share
$
26.80

 
$
26.19

Tangible book value per share
$
16.55

 
$
16.02

Allowance as a percentage of portfolio loans and leases
0.57
%
 
0.53
%
Tier I capital to risk weighted assets
10.46
%
 
10.42
%
Tangible common equity ratio
8.00
%
 
7.61
%
Loan to deposit ratio
100.9
%
 
97.4
%
Wealth assets under management, administration, supervision and brokerage
$
13,404.7

 
$
12,968.7

Portfolio loans and leases
$
3,389.5

 
$
3,285.9

Total assets
$
4,394.2

 
$
4,449.7

Total shareholders’ equity
$
542.5

 
$
528.1

 
The following sections discuss, in greater detail, the Corporation’s results of operations for the three and six months ended June 30, 2018, as compared to the same periods in 2017, and the changes in its financial condition as of June 30, 2018 as compared to December 31, 2017.

Components of Net Income
 
Net income is comprised of five major elements:

•
Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;
•
Provision for Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;
•
Noninterest Income, which is made up primarily of wealth management revenue, capital markets revenue, gains and losses from the sale of residential mortgage loans, gains and losses from the sale of available for sale investment securities and other fees from loan and deposit services;
•
Noninterest Expense, which consists primarily of salaries and employee benefits, occupancy, intangible asset amortization, professional fees, due diligence, merger-related and merger integration expenses, and other operating expenses; and
•
Income Tax Expense, which include state and federal jurisdictions.

TAX-EQUIVALENT NET INTEREST INCOME
 
Net interest income is the primary source of the Corporation’s revenue. The below tables present a summary, for the three and six months ended June 30, 2018 and 2017, of the Corporation’s average balances and tax-equivalent yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The tax-equivalent net interest margin is the tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread is the

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difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of noninterest-bearing liabilities represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.
 
Three Months Ended June 30, 2018 Compared to the Same Period in 2017

For the three months ended June 30, 2018, tax-equivalent net interest income increased $9.2 million, or 32.8%, to $37.4 million, as compared to $28.2 million for the same period in 2017. Tax-equivalent interest income and fees on loans and leases increased $12.5 million for the three months ended June 30, 2018 as compared to the same period in 2017. The increase in tax-equivalent interest and fees on loans and leases was primarily related to the $737.7 million increase in average loans to $3.35 billion for the three months ended June 30, 2018 from $2.62 billion for the three months ended June 30, 2017 coupled with a 51 basis point increase on the yield on loans and leases over the same period. The increase in average loans was largely related to the loans and leases acquired in the RBPI Merger which initially increased loans and leases by $567.3 million, as well as organic loan growth. Tax-equivalent interest income on available for sale investment securities increased by $891 thousand for the three months ended June 30, 2018 as compared to the same period in 2017. Average available for sale investment securities increased by $113.1 million for the second quarter of 2018 as compared to the second quarter of 2017 coupled with a 24 basis point increase in the yield on available for sale investment securities over the same period.

Interest expense on interest-bearing deposits, subordinated notes, short-term borrowings, and junior subordinated debentures increased $2.5 million, $773 thousand, $748 thousand, and $321 thousand, respectively, for the three months ended June 30, 2018 as compared to the same period in 2017. The increases in interest expense were primarily related to increases in the average balances of interest-bearing deposits and junior subordinated debentures as a result of the RBPI Merger, and the December 13, 2017 issuance of $70 million, ten-year, 4.25% fixed-to-floating subordinated notes. The rate on interest-bearing deposits increased 29 basis points over the same period.

Six Months Ended June 30, 2018 Compared to the Same Period in 2017

For the six months ended June 30, 2018, tax-equivalent net interest income increased $19.2 million, or 34.4%, to $74.9 million, as compared to $55.8 million for the same period in 2017. Tax-equivalent interest and fees on loans and leases increased $24.6 million for the six months ended June 30, 2018 as compared to the same period in 2017. The increase in tax-equivalent interest and fees on loans and leases was primarily related to the $736.6 million increase in average loans to $3.32 billion for the six months ended June 30, 2018 from $2.59 billion as of June 30, 2017 coupled with a 49 basis point increase in the yield on loans and leases over the same period. The increase in average loans was largely related to the loans and leases acquired in the RBPI Merger which initially increased loans and leases by $567.3 million, as well as organic loan growth. Tax-equivalent interest income on available for sale investment securities increased by $1.8 million for the six months ended June 30, 2018 as compared to the same period in 2017. Average available for sale investment securities increased by $123.5 million for the six months ended June 30, 2018 as compared to the same period in 2017 coupled with a 24 basis point increase in the yield on available for sale investment securities over the same period.

Interest expense on interest-bearing deposits, subordinated notes, short-term borrowings, and junior subordinated debentures increased $4.2 million, $1.5 million, $1.4 million, and $609 thousand, respectively, for the six months ended June 30, 2018 as compared to the same period in 2017. The increases in interest expense were primarily related to increases in the average balances of interest-bearing deposits and junior subordinated debentures as a result of the RBPI Merger, and the December 13, 2017 issuance of $70 million, ten-year, 4.25% fixed-to-floating subordinated notes. The rate on interest-bearing deposits increased 24 basis points over the same period.

Analyses of Interest Rates and Interest Differential
 
The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields.
 

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For the Three Months Ended June 30,
 
2018
 
 
2017
(dollars in thousands)
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
 
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
$
37,215

 
$
64

 
0.69
%
 
 
$
26,266

 
$
35

 
0.53
%
Investment securities - available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
514,966

 
2,888

 
2.25
%
 
 
391,112

 
1,940

 
1.99
%
Tax-exempt(4)
18,215

 
93

 
2.05
%
 
 
28,970

 
150

 
2.08
%
Total investment securities – available for sale
533,181

 
2,981

 
2.24
%
 
 
420,082

 
2,090

 
2.00
%
Investment securities – held to maturity
7,866

 
13

 
0.66
%
 
 
5,181

 
5

 
0.39
%
Investment securities – trading
8,202

 
22

 
1.08
%
 
 
4,137

 
13

 
1.26
%
Loans and leases(1)(2)(3)(4)
3,353,339

 
41,782

 
5.00
%
 
 
2,615,610

 
29,309

 
4.49
%
Total interest-earning assets
3,939,803

 
44,862

 
4.57
%
 
 
3,071,276

 
31,452

 
4.11
%
Cash and due from banks
7,153

 
 
 
 
 
 
15,727

 
 
 
 
Allowance for loan and lease losses
(18,043
)
 
 
 
 
 
 
(17,549
)
 
 
 
 
Other assets
415,628

 
 
 
 
 
 
263,853

 
 
 
 
Total assets
$
4,344,541

 
 
 
 
 
 
$
3,333,307

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW, and market rate accounts
$
1,722,328

 
$
2,073

 
0.48
%
 
 
$
1,375,949

 
$
813

 
0.24
%
Wholesale deposits
233,714

 
973

 
1.67
%
 
 
154,424

 
378

 
0.98
%
Retail time deposits
533,254

 
1,453

 
1.09
%
 
 
323,287

 
792

 
0.98
%
Total interest-bearing deposits
2,489,296

 
4,499

 
0.72
%
 
 
1,853,660

 
1,983

 
0.43
%
Short-term borrowings
205,323

 
985

 
1.92
%
 
 
98,869

 
237

 
0.96
%
Long-term FHLB advances
102,023

 
490

 
1.93
%
 
 
171,567

 
682

 
1.59
%
Subordinated notes
98,463

 
1,143

 
4.66
%
 
 
29,550

 
370

 
5.02
%
Junior subordinated debt
21,470

 
321

 
6.00
%
 
 
—

 
—

 
—

Total interest-bearing liabilities
2,916,575

 
7,438

 
1.02
%
 
 
2,153,646

 
3,272

 
0.61
%
Noninterest-bearing deposits
841,676

 
 
 
 
 
 
755,597

 
 
 
 
Other liabilities
52,389

 
 
 
 
 
 
34,348

 
 
 
 
Total noninterest-bearing liabilities
894,065

 
 
 
 
 
 
789,945

 
 
 
 
Total liabilities
3,810,640

 
 
 
 
 
 
2,943,591

 
 
 
 
Shareholders’ equity
533,901

 
 
 
 
 
 
389,716

 
 
 
 
Total liabilities and shareholders’ equity
$
4,344,541

 
 
 
 
 
 
$
3,333,307

 
 
 
 
Net interest spread
 
 
 
 
3.55
%
 
 
 
 
 
 
3.50
%
Effect of noninterest-bearing sources
 
 
 
 
0.26
%
 
 
 
 
 
 
0.18
%
Net interest income/margin on earning assets(4)
 
 
$
37,424

 
3.81
%
 
 
 
 
$
28,180

 
3.68
%
Tax-equivalent adjustment(4)
 
 
$
108

 
0.01
%
 
 
 
 
$
215

 
0.03
%
 
(1)
Non-accrual loans have been included in average loan balances, but interest on non-accrual loans has not been included for purposes of determining interest income.
(2)
Includes portfolio loans and leases and loans held for sale.
(3)
Interest on loans and leases includes deferred fees of $421 thousand and $112 thousand for the three months ended June 30, 2018 and 2017, respectively.
(4)
Tax rate used for tax-equivalent calculations is 21% for 2018 and 35% for 2017

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For the Six Months Ended June 30,
 
2018
 
 
2017
(dollars in thousands)
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
 
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Rates
Earned/
Paid
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
$
37,627

 
$
117

 
0.63
%
 
 
$
32,931

 
$
101

 
0.62
%
Investment securities - available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
506,887

 
5,563

 
2.21
%
 
 
372,772

 
3,620

 
1.96
%
Tax-exempt(4)
19,352

 
193

 
2.01
%
 
 
30,221

 
314

 
2.10
%
Total investment securities – available for sale
526,239

 
5,756

 
2.21
%
 
 
402,993

 
3,934

 
1.97
%
Investment securities – held to maturity
7,889

 
25

 
0.64
%
 
 
4,446

 
4

 
0.18
%
Investment securities – trading
8,270

 
43

 
1.05
%
 
 
4,014

 
2

 
0.10
%
Loans and leases(1)(2)(3)(4)
3,322,447

 
82,536

 
5.01
%
 
 
2,585,809

 
57,931

 
4.52
%
Total interest-earning assets
3,902,472

 
88,477

 
4.57
%
 
 
3,030,193

 
61,972

 
4.12
%
Cash and due from banks
8,916

 
 
 
 
 
 
15,336

 
 
 
 
Allowance for loan and lease losses
(17,837
)
 
 
 
 
 
 
(17,564
)
 
 
 
 
Other assets
402,086

 
 
 
 
 
 
260,963

 
 
 
 
Total assets
$
4,295,637

 
 
 
 
 
 
$
3,288,928

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings, NOW, and market rate accounts
$
1,701,732

 
$
3,552

 
0.42
%
 
 
$
1,382,220

 
$
1,569

 
0.23
%
Wholesale deposits
232,508

 
1,706

 
1.48
%
 
 
148,973

 
695

 
0.94
%
Retail time deposits
530,378

 
2,713

 
1.03
%
 
 
321,738

 
1,547

 
0.97
%
Total interest-bearing deposits
2,464,618

 
7,971

 
0.65
%
 
 
1,852,931

 
3,811

 
0.41
%
Short-term borrowings
189,019

 
1,615

 
1.72
%
 
 
73,378

 
264

 
0.73
%
Long-term FHLB advances
112,911

 
1,052

 
1.88
%
 
 
177,006

 
1,380

 
1.57
%
Subordinated notes
98,447

 
2,286

 
4.68
%
 
 
29,544

 
740

 
5.05
%
Junior subordinated debt
21,450

 
609

 
5.73
%
 
 
—

 
—

 
—

Total interest-bearing liabilities
2,886,445

 
13,533

 
0.95
%
 
 
2,132,859

 
6,195

 
0.59
%
Noninterest-bearing deposits
840,571

 
 
 
 
 
 
733,817

 
 
 
 
Other liabilities
42,482

 
 
 
 
 
 
36,266

 
 
 
 
Total noninterest-bearing liabilities
883,053

 
 
 
 
 
 
770,083

 
 
 
 
Total liabilities
3,769,498

 
 
 
 
 
 
2,902,942

 
 
 
 
Shareholders’ equity
526,139

 
 
 
 
 
 
385,986

 
 
 
 
Total liabilities and shareholders’ equity
$
4,295,637

 
 
 
 
 
 
$
3,288,928

 
 
 
 
Net interest spread
 
 
 
 
3.62
%
 
 
 
 
 
 
3.53
%
Effect of noninterest-bearing sources
 
 
 
 
0.25
%
 
 
 
 
 
 
0.18
%
Net interest income/margin on earning assets(4)
 
 
$
74,944

 
3.87
%
 
 
 
 
$
55,777

 
3.71
%
Tax-equivalent adjustment(4)
 
 
$
189

 
0.01
%
 
 
 
 
$
409

 
0.03
%

(1)
Non-accrual loans have been included in average loan balances, but interest on non-accrual loans has not been included for purposes of determining interest income.
(2)
Includes portfolio loans and leases and loans held for sale.
(3)
Interest on loans and leases includes deferred fees of $699 thousand and $350 thousand for the six months ended June 30, 2018 and 2017, respectively.
(4)
Tax rate used for tax-equivalent calculations is 21% for 2018 and 35% for 2017

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Rate/Volume Analysis (tax-equivalent basis)*
 
The rate/volume analysis in the table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and six months ended June 30, 2018 as compared to the same period in 2017, allocated by rate and volume. The change in interest income and/or expense due to both volume and rate has been allocated to changes in volume.
 
2018 Compared to 2017
(dollars in thousands)
Three Months Ended June 30,
 
Six Months Ended June 30,
increase/(decrease)
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest Income:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
$
14

 
$
15

 
$
29

 
$
14

 
$
2

 
$
16

Investment securities - taxable
647

 
318

 
965

 
1,316

 
689

 
2,005

Investment securities -nontaxable
(56
)
 
(1
)
 
(57
)
 
(112
)
 
(9
)
 
(121
)
Loans and leases
8,226

 
4,247

 
12,473

 
16,525

 
8,080

 
24,605

Total interest income
8,831

 
4,579

 
13,410

 
17,743

 
8,762

 
26,505

Interest expense:

 

 

 

 

 

Savings, NOW and market rate accounts
211

 
1,049

 
1,260

 
367

 
1,616

 
1,983

Wholesale deposits
193

 
402

 
595

 
389

 
622

 
1,011

Retail time deposits
514

 
147

 
661

 
1,008

 
158

 
1,166

Short-term borrowings
255

 
493

 
748

 
420

 
931

 
1,351

Long-term FHLB advances
(674
)
 
482

 
(192
)
 
(763
)
 
435

 
(328
)
Subordinated notes
1,344

 
(571
)
 
773

 
2,059

 
(513
)
 
1,546

Junior subordinated debt
321

 
—

 
321

 
609

 
—

 
609

Total interest expense
2,164

 
2,002

 
4,166

 
4,089

 
3,249

 
7,338

Interest differential
$
6,667

 
$
2,577

 
$
9,244

 
$
13,654

 
$
5,513

 
$
19,167

* The tax rate used in the calculation of the tax-equivalent income is 21% for 2018 and 35% for 2017
 

Tax-Equivalent Net Interest Margin
 
The tax-equivalent net interest margin of 3.81% for the three months ended June 30, 2018 was a 13 basis point increase from 3.68% for the same period in 2017. Adjusting for the impact of the accretion of purchase accounting fair value marks, the adjusted tax-equivalent net interest margin decreased four basis point to 3.58% from 3.62% for three months ended June 30, 2018 and 2017, respectively. The contribution to the tax-equivalent net interest margin from the accretion of purchase accounting adjustments was 23 basis points for three months ended June 30, 2018 as compared to six basis points for three months ended June 30, 2017.

The tax-equivalent net interest margin and related components for the past five consecutive quarters are shown in the table below:
 
Quarter
 
Interest-
Earning
Asset Yield
 
Interest-
Bearing
Liability Cost
 
Net Interest
Spread
 
Effect of Noninterest Bearing Sources
 
Net Interest
Margin
2nd Quarter 2018
 
4.57%
 
1.02%
 
3.55%
 
0.26%
 
3.81%
1st Quarter 2018
 
4.58%
 
0.87%
 
3.71%
 
0.23%
 
3.94%
4th Quarter 2017
 
4.15%
 
0.74%
 
3.41%
 
0.21%
 
3.62%
3rd Quarter 2017
 
4.18%
 
0.67%
 
3.51%
 
0.20%
 
3.71%
2nd Quarter 2017
 
4.11%
 
0.61%
 
3.50%
 
0.18%
 
3.68%





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Interest Rate Sensitivity 
 
Management actively manages the Corporation’s interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The Corporation’s Asset Liability Committee (“ALCO”), using policies and procedures approved by the Corporation’s Board of Directors, is responsible for the management of the Corporation’s interest rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities. This is accomplished through the management of the investment portfolio, the pricings of loans and deposit offerings and through wholesale funding. Wholesale funding is available from multiple sources including borrowings from the FHLB, the Federal Reserve Bank of Philadelphia’s discount window, federal funds from correspondent banks, certificates of deposit from institutional brokers, Certificate of Deposit Account Registry Service (“CDARS”), Insured Network Deposit (“IND”) Program, Charity Deposits Corporation (“CDC”) (formerly known as Institutional Deposit Corporation (“IDC”)), Insured Cash Sweep (“ICS”) and Pennsylvania Local Government Investment Trust (“PLGIT”).
 
Management utilizes several tools to measure the effect of interest rate risk on net interest income. These methods include gap analysis, market value of portfolio equity analysis, and net interest income simulations under various scenarios. The results of these analyses are compared to limits established by the Corporation’s ALCO policies and make adjustments as appropriate if the results are outside the established limits.
 
The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock”, in the yield curve and subjective adjustments in deposit pricing, might have on management’s projected net interest income over the next 12 months.
 
This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next twelve months. By definition, the simulation assumes static interest rates and does not incorporate forecasted changes in the yield curve. The changes to net interest income shown below are in compliance with the Corporation’s policy guidelines.

Summary of Interest Rate Simulation
 
Change in Net Interest Income Over the Twelve Months Beginning After June 30, 2018
 
Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2017
 
Amount
 
Percentage
 
Amount
 
Percentage
+300 basis points
$
7,360

 
4.82
 %
 
$
15,953

 
10.66
%
+200 basis points
$
4,987

 
3.26
 %
 
$
10,644

 
7.11
%
+100 basis points
$
2,551

 
1.67
 %
 
$
5,316

 
3.55
%
-100 basis points
$
(4,716
)
 
(3.09
)%
 
$
(6,913
)
 
(4.62
)
 
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of June 30, 2018 in the +100 basis point scenario, demonstrating that a 100 basis point increase in interest rates would have a positive impact on net interest income over the next 12 months. The balance sheet is less asset sensitive in a rising-rate environment as of June 30, 2018 than it was as of December 31, 2017. The decrease in sensitivity is related to a decline in interest-bearing cash and an increase in interest-bearing deposits and borrowings at higher rates. The magnitude of the change in the 100 basis point decrease in rate is related to the Bank's ability to decrease rates on deposits.

The interest rate simulation is an estimate based on assumptions, which are derived from past behavior of customers, along with expectations of future behavior relative to interest rate changes. In today’s economic environment and the current extended period of very low interest rates, the reliability of management’s assumptions in the interest rate simulation model is more uncertain than in prior periods. Actual customer behavior, as it relates to deposit activity, may be significantly different than expected behavior, which could cause an unexpected outcome and may result in lower net interest income than that derived from the analysis referenced above.






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Gap Analysis
 
The interest sensitivity, or gap analysis, identifies interest rate risk by showing repricing gaps in the Corporation’s balance sheet. All assets and liabilities are reflected based on behavioral sensitivity, which is usually the earliest of: repricing, maturity, contractual amortization, prepayments or likely call dates. Non-maturity deposits, such as NOW, savings and money market accounts are spread over various time periods based on the expected sensitivity of these rates considering liquidity and the investment preferences of management. Non-rate-sensitive assets and liabilities are spread over time periods to reflect management’s view of the maturity of these funds.
 
Non-maturity deposits (demand deposits in particular) are recognized by the Bank’s regulatory agencies to have different sensitivities to interest rate environments. Consequently, it is an accepted practice to spread non-maturity deposits over defined time periods to capture that sensitivity. Commercial demand deposits are often in the form of compensating balances, and fluctuate inversely to the level of interest rates; the maturity of these deposits is reported as having a shorter life than typical retail demand deposits. Additionally, the Bank’s regulatory agencies have suggested distribution limits for non-maturity deposits. However, management has taken a more conservative approach than these limits would suggest by forecasting these deposit types with a shorter maturity. The following table presents the Corporation’s gap analysis as of June 30, 2018:

(dollars in millions)
0 to 90
Days
 
91 to 365
Days
 
1 - 5
Years
 
Over
5 Years
 
Non-Rate
Sensitive
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits with banks
39.9

 
—

 
—

 
—

 
—

 
39.9

Investment securities(1)
24.7

 
54.8

 
332.3

 
135.3

 
—

 
547.1

Loans and leases(2)
1,360.3

 
379.0

 
1,269.1

 
385.3

 
—

 
3,393.7

Allowance
—

 
—

 
—

 
—

 
(19.4
)
 
(19.4
)
Cash and due from banks
—

 
—

 
—

 
—

 
7.3

 
7.3

Other assets
—

 
—

 
—

 
—

 
425.6

 
425.6

Total assets
1,424.9

 
433.8

 
1,601.4

 
520.6

 
413.5

 
4,394.2

Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Demand, noninterest-bearing
64.2

 
162.2

 
226.6

 
439.4

 
—

 
892.4

Savings, NOW and market rate
114.7

 
344.1

 
808.0

 
456.8

 
—

 
1,723.6

Time deposits
93.6

 
310.8

 
131.1

 
2.8

 
—

 
538.3

Wholesale non-maturity deposits
36.9

 
—

 
—

 
—

 
—

 
36.9

Wholesale time deposits
53.2

 
114.6

 
—

 
—

 
—

 
167.8

Short-term borrowings
227.1

 
—

 
—

 
—

 
—

 
227.1

Long-term FHLB advances
15.0

 
25.0

 
47.8

 
—

 
—

 
87.8

Subordinated notes
—

 
—

 
98.5

 
—

 
—

 
98.5

Junior subordinated debentures
21.5

 
—

 
—

 
—

 
—

 
21.5

Other liabilities
—

 
—

 
—

 
—

 
57.8

 
57.8

Shareholders’ equity
19.4

 
58.1

 
310.0

 
155.0

 
—

 
542.5

Total liabilities and shareholders’ equity
645.6

 
1,014.8

 
1,622.0

 
1,054.0

 
57.8

 
4,394.2

Interest-earning assets
1,424.9

 
433.8

 
1,601.4

 
520.6

 
—

 
3,980.7

Interest-bearing liabilities
562.0

 
794.5

 
1,085.4

 
459.6

 
—

 
2,901.5

Difference between interest-earning assets and interest-bearing liabilities
862.9

 
(360.7
)
 
516.0

 
61.0

 
—

 
1,079.2

Cumulative difference between interest earning assets and interest-bearing liabilities
$
862.9

 
$
502.2

 
$
1,018.2

 
$
1,079.2

 
$
—

 
$
1,079.2

Cumulative earning assets as a % of cumulative interest-bearing liabilities
254
%
 
137
%
 
142
%
 
137
%
 
 
 
 
 
(1) Investment securities include available for sale, held to maturity and trading.
(2) Loans include portfolio loans and leases and loans held for sale.
 

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The table above indicates that the Corporation is asset-sensitive in the immediate 90-day time frame and may experience an increase in net interest income during that time period if rates rise. Conversely, if rates decline, net interest income may decline. It should be noted that the gap analysis is only one tool used to measure interest rate sensitivity and should be used in conjunction with other measures such as the interest rate simulation discussed above. The gap analysis measures the timing of changes in rate, but not the true weighting of any specific component of the Corporation’s balance sheet. The asset-sensitive position reflected in this gap analysis is similar to the Corporation’s position at December 31, 2017.

PROVISION FOR LOAN AND LEASE LOSSES
 
For the three months ended June 30, 2018, the Corporation recorded a Provision of $3.1 million which was a $3.2 million increase as compared to the same period in 2017, when the Corporation experienced an $(83) thousand recovery of Provision. Net originated loan growth of $136.0 million and changes in certain qualitative factors used to determine the required level of Allowance were key drivers in the increase in the Provision. Net charge-offs for the second quarter of 2018 were $1.4 million as compared to $625 thousand for the same period in 2017.

For the six months ended June 30, 2018, the Corporation recorded a Provision of $4.2 million which was a $4.0 million increase as compared to the same period in 2017. During the six months ended June 30, 2018, net originated loan growth of $213.5 million and changes in certain qualitative factors utilized in determining the required level of Allowance were key drivers in the increase in the Provision. Net charge-offs for the six months ended June 30, 2018 were $2.3 million as compared to $1.3 million for the same period in 2017.

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Asset Quality and Analysis of Credit Risk
 
As of June 30, 2018, total nonperforming loans and leases increased by $0.9 million to $9.4 million , representing 0.28% of portfolio loans and leases, as compared to $8.6 million, or 0.26% of portfolio loans and leases as of December 31, 2017. The increase in nonperforming loans and leases was related to the addition of $5.1 million of new nonperforming loans and leases as of June 30, 2018, partially offset by pay-offs and pay-downs of $2.7 million, charge-offs of $328 thousand, upgrades to performing status of $968 thousand of loans and leases classified as nonperforming as of December 31, 2017, and the recording in OREO of $234 thousand of loans foreclosed during the period.

As of June 30, 2018, the Allowance of $19.4 million represented 0.57% of portfolio loans and leases, an increase of 4 basis points from December 31, 2017. The Allowance on originated (non-acquired) portfolio loans, as a percentage of originated (non-acquired) portfolio loans, was 0.71% as of June 30, 2018 as compared to 0.70% as of December 31, 2017. Loans acquired in mergers are recorded at fair value as of the date of acquisition. This fair value estimate takes into account an estimate of the expected lifetime losses of the acquired loans. As such, an acquired loan will not generally become subject to additional Allowance unless it becomes impaired.

As of June 30, 2018, the Corporation had $5.2 million of troubled debt restructurings (“TDRs”), of which $4.1 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2017, the Corporation had $9.1 million of TDRs, of which $5.8 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. The decrease in TDRs during the six months ended June 30, 2018 was primarily the result of the payoffs of two residential mortgage loans totaling $2.5 million and one $1.3 million commercial mortgage loan, all of which had been previously modified to TDRs.
 
As of June 30, 2018, the Corporation had a recorded investment of $13.5 million of impaired loans and leases which included $5.2 million of TDRs. Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases. Impaired loans and leases as of December 31, 2017 totaled $14.2 million which included $9.1 million of TDRs. Refer to Note 5H in the Notes to Unaudited Consolidated Financial Statements for more information regarding the Corporation’s impaired loans and leases.
 
Management continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. Management believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.


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Nonperforming Assets and Related Ratios
(dollars in thousands)
June 30,
2018
 
December 31,
2017
Nonperforming Assets:
 
 
 
Nonperforming loans and leases
$
9,448

 
$
8,579

Other real estate owned
531

 
304

Total nonperforming assets
$
9,979

 
$
8,883

 
 
 
 
Troubled Debt Restructurings:
 
 
 
TDRs included in non-performing loans
$
1,044

 
$
3,289

TDRs in compliance with modified terms
4,117

 
5,800

Total TDRs
$
5,161

 
$
9,089

 
 
 
 
Loan and Lease quality indicators:
 
 
 
Allowance for loan and lease losses to nonperforming loans and leases
205.3
%
 
204.3
%
Nonperforming loans and leases to total portfolio loans and leases
0.28
%
 
0.26
%
Allowance for loan and lease losses to total portfolio loans and leases
0.57
%
 
0.53
%
Nonperforming assets to total loans and leases and OREO
0.29
%
 
0.27
%
Nonperforming assets to total assets
0.23
%
 
0.20
%
Total portfolio loans and leases
$
3,389,501

 
$
3,285,858

Allowance for loan and lease losses
$
19,398

 
$
17,525


NONINTEREST INCOME
 
Three Months Ended June 30, 2018 Compared to the Same Period in 2017
 
Noninterest income of $20.1 million for the three months ended June 30, 2018 increased $5.3 million as compared to $14.8 million for the same period in 2017, primarily due to increases in other operating income, capital markets revenue, insurance commissions, and fees for wealth management services, respectively. Other operating income increased $1.8 million for the three months ended June 30, 2018 as compared to the same period in 2017, primarily due to a $710 thousand recovery of a purchase accounting fair value mark resulting from the pay off, in full, of a purchased credit impaired loan acquired in the RBPI merger and a $310 thousand recovery during the second quarter of 2018 of loans and leases charged-off by Royal Bank pre-merger. Capital markets revenues increased $1.2 million, primarily due to the formation of our Capital Markets group, which began operations in the second quarter of 2017. Insurance commissions increased $959 thousand, primarily due to to the May 2017 acquisition of Hirshorn Boothby which expanded our insurance division into the city of Philadelphia and, to a lesser extent, the May 2018 acquisition of Domenick. Fees for wealth management services increased $851 thousand primarily due to the $1.35 billion increase in wealth assets under management, administration, supervision and brokerage between June 30, 2017 and June 30, 2018.

Six Months Ended June 30, 2018 Compared to the Same Period in 2017

Noninterest income of $39.6 million for the six months ended June 30, 2018 increased $11.6 million as compared to $28.0 million for the same period in 2017, primarily due to increases in other operating income, insurance commissions, fees for wealth management services, and capital markets revenue. Other operating income increased $5.0 million primarily due to $3.0 million of recoveries of purchase accounting fair value marks resulting from the pay offs, in full, of purchased credit impaired loans acquired in the RBPI merger and $704 thousand of recoveries of loans and leases charged-off by RBPI pre-merger. Insurance commissions increased $1.9 million, primarily due to the May 2017 acquisition of Hirshorn Boothby which expanded our insurance division into the city of Philadelphia and, to a lesser extent, the May 2018 acquisition of Domenick. Fees for wealth management services increased $1.9 million, primarily due to the $1.35 billion increase in wealth assets under management, administration, supervision and brokerage between June 30, 2017 and June 30, 2018. Capital markets revenues increased $1.8 million primarily due to the formation of our Capital Markets group, which began operations in the second quarter of 2017.



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The following table provides supplemental information regarding mortgage loan originations and sales:
 
As of and for the
Three Months Ended June 30,
 
As of and for the
Six Months Ended June 30,
(dollars in thousands)
2018
 
2017
 
2018
 
2017
Mortgage originations
$
35,763

 
$
46,848

 
$
61,818

 
$
95,398

Mortgage loans sold:
 
 
 
 

 

Servicing retained
$
—

 
$
21,793

 
$
1,850

 
$
49,479

Servicing released
25,892

 
3,816

 
41,848

 
8,800

Total mortgage loans sold
$
25,892

 
$
25,609

 
$
43,698

 
$
58,279

Percentage of originated mortgage loans sold
72.4
%
 
54.7
%
 
70.7
%
 
61.1
%
Servicing retained %
—
%
 
85.1
%
 
4.2
%
 
84.9
%
Servicing released %
100.0
%
 
14.9
%
 
95.8
%
 
15.1
%
Residential mortgage loans serviced for others
$
614,259

 
$
631,888

 
$
614,259

 
$
631,888

Mortgage servicing rights
$
5,511

 
$
5,683

 
$
5,511

 
$
5,683

Gain on sale of mortgage loans
$
419

 
$
519

 
$
764

 
$
1,097

Loan servicing and other fees
$
475

 
$
519

 
$
1,161

 
$
1,022

Amortization of MSRs
$
196

 
$
173

 
$
417

 
$
342

(Recovery) / Impairment of MSRs
$
(1
)
 
$
43

 
$
(51
)
 
$
46

 
The following table provides details of other operating income for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in thousands)
2018
 
2017
 
2018
 
2017
Merchant interchange fees
$
469

 
$
361

 
$
856

 
$
701

Bank-owned life insurance (“BOLI”) income
298

 
201

 
576

 
401

Commissions and fees
470

 
142

 
725

 
273

Safe deposit box rentals
96

 
94

 
187

 
184

Other investment income
125

 
9

 
147

 
9

Rental income
45

 
46

 
88

 
95

Gain on trading investments
84

 
108

 
419

 
318

Recovery of purchase accounting fair value loan mark
710

 
—

 
3,004

 
18

Miscellaneous other income
737

 
246

 
1,370

 
375

Other operating income
$
3,034

 
$
1,207

 
$
7,372

 
$
2,374

 

Wealth Assets Under Management, Administration, Supervision and Brokerage (“Wealth Assets”)
 
Wealth Asset accounts are categorized into two groups; the first account group consists predominantly of clients whose fees are determined based on the market value of the assets held in their accounts (“Market Value” fee basis). The second account group consists predominantly of clients whose fees are set at fixed amounts (“Fixed Fee” basis), and, as such, are not affected by market value changes.
 
The following tables detail the composition of Wealth Assets as it relates to the calculation of fees for wealth management services:
(dollars in thousands)
Wealth Assets as of:
Fee Basis
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
Market value
$
5,779,774

 
$
5,693,146

 
$
5,884,692

 
$
5,759,375

 
$
5,593,936

Fixed fee
7,624,949

 
7,453,780

 
7,084,046

 
6,671,995

 
6,456,619

Total
$
13,404,723

 
$
13,146,926

 
$
12,968,738

 
$
12,431,370

 
$
12,050,555

 

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Table of Contents

 
Percentage of Wealth Assets as of:
Fee Basis
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
Market value
43.1
%
 
43.3
%
 
45.4
%
 
46.3
%
 
46.4
%
Fixed fee
56.9
%
 
56.7
%
 
54.6
%
 
53.7
%
 
53.6
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
The following tables detail the composition of fees for wealth management services for the periods indicated:
(dollars in thousands)
For the Three Months Ended:
Fee Basis
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
Market value
$
7,620

 
$
7,880

 
$
7,618

 
$
7,522

 
$
7,382

Fixed fee
3,038

 
2,428

 
2,356

 
2,129

 
2,425

Total
$
10,658

 
$
10,308

 
$
9,974

 
$
9,651

 
$
9,807

 
 
Percentage of Fees for Wealth Management for the Three Months Ended:
Fee Basis
June 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
 
June 30,
2017
Market value
71.5
%
 
76.4
%
 
76.4
%
 
77.9
%
 
75.3
%
Fixed fee
28.5
%
 
23.6
%
 
23.6
%
 
22.1
%
 
24.7
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Customer Derivatives
 
To accommodate the risk management needs of qualified commercial customers, the Bank enters into financial derivative transactions consisting of interest rate swaps, options, risk participation agreements and foreign exchange contracts. Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. Market risk exposure from customer derivative positions is managed by simultaneously entering into matching transactions with institutional dealer counterparties that offset customer contracts in notional amount and term. Derivative contracts create counterparty credit risk with both the Bank’s customers and with institutional dealer counterparties. The Corporation manages customer counterparty credit risk through its credit policy, approval processes, monitoring procedures and by obtaining adequate collateral, when appropriate. The Bank seeks to minimize dealer counterparty credit risk by establishing credit limits and collateral agreements through industry standard agreements published by the International Swaps and Derivatives Association (ISDA) and associated credit support annex (CSA) agreements. None of the Bank’s outstanding derivative contracts associated with the customer derivative program is designated as a hedge and none is entered into for speculative purposes. Derivative instruments are recorded at fair value, with changes in fair values recognized in earnings as components of noninterest income and noninterest expense on the consolidated statements of income.

NONINTEREST EXPENSE

Three Months Ended June 30, 2018 Compared to the Same Period in 2017
 
Noninterest expense for the three months ended June 30, 2018 increased $7.3 million, to $35.8 million, as compared to the same period in 2017. The increase was primarily related to the additional expenses associated with the staff and facilities assumed in the RBPI Merger. In addition, the May 2017 acquisition of Hirshorn Boothby, the formation of our Capital Markets group in the second quarter of 2017 and, to a lesser extent, the May 2018 acquisition of Domenick contributed to the increase in noninterest expense. Due diligence, merger-related and merger integration expenses increased $1.8 million for the three months ended June 30, 2018 as compared to the same period in 2017, primarily related to the RBPI merger.







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Six Months Ended June 30, 2018 Compared to the Same Period in 2017
 
Noninterest expense for the six months ended June 30, 2018 increased $16.7 million, to $71.9 million, as compared to the same period in 2017. The increase was primarily related to the additional expenses associated with the staff and facilities assumed in the RBPI Merger. In addition, the May 2017 acquisition of Hirshorn Boothby and the formation of our Capital Markets group in the second quarter of 2017 contributed to the increase in noninterest expense. Due diligence, merger-related and merger integration expenses increased $5.6 million for the six months ended June 30, 2018 as compared to the same period in 2017, primarily related to the RBPI merger.

The following table provides details of other operating expenses for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2018
 
2017
 
2018
 
2017
Contributions
$
441

 
$
289

 
$
629

 
$
410

Deferred compensation trust expense
171

 
242

 
252

 
367

Director fees
177

 
179

 
338

 
336

Dues and subscriptions
250

 
263

 
507

 
417

FDIC insurance
552

 
369

 
752

 
743

Impairment of OREO and other repossessed assets
—

 
200

 
—

 
200

Insurance
214

 
211

 
441

 
418

Loan processing
599

 
527

 
869

 
1,050

Miscellaneous other expenses
992

 
252

 
1,555

 
357

MSR amortization and impairment / (recovery)
195

 
216

 
366

 
388

Other taxes
24

 
4

 
37

 
13

Outsourced services
67

 
20

 
133

 
119

Portfolio maintenance
113

 
130

 
236

 
229

Postage
192

 
156

 
355

 
304

Stationary and supplies
111

 
109

 
263

 
226

Telephone and data lines
531

 
394

 
936

 
794

Temporary help and recruiting
58

 
117

 
157

 
514

Travel and entertainment
298

 
222

 
476

 
397

Other operating expenses
$
4,985

 
$
3,900

 
$
8,302

 
$
7,282


INCOME TAXES
 
Although income before income taxes increased $4.1 million and $10.3 million for the three and six months ended June 30, 2018 as compared for the same periods in 2017, income tax expense decreased $1.2 million for both the three and six months ended June 30, 2018 as compared for the same periods in 2017. The effective tax rates for the three and six months ended June 30, 2018 decreased to 20.2% and 21.8% as compared to 34.2% and 34.1% as compared for the same periods in 2017. The decreases in income tax expense and effective tax rate were primarily due to the reduction in the federal corporate income tax rate as a result of the Tax Cuts and Jobs Act (“Tax Reform”).

Income tax expense for the three and six months ended June 30, 2018 included a net discrete tax benefit of $111 thousand and a net discrete tax expense of $118 thousand, respectively, as compared to net discrete tax benefits of $113 thousand and $259 thousand as compared for the same periods in 2017. These discrete items were the result of excess tax benefits from stock-based compensation as well as the re-measurement of deferred tax items related to Tax Reform.

BALANCE SHEET ANALYSIS
 
Total assets of $4.39 billion as of June 30, 2018 decreased $55.5 million from $4.45 billion as of December 31, 2017. The following sections detail the changes:





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Loans and Leases
 
The table below compares the portfolio loans and leases outstanding at June 30, 2018 to December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Change
(dollars in thousands)
Balance
 
Percent of
Portfolio
 
Balance
 
Percent of
Portfolio
 
Amount
 
Percent
Commercial mortgage
$
1,613,721

 
47.6
%
 
$
1,523,377

 
46.4
%
 
$
90,344

 
5.9
 %
Home equity lines & loans
206,429

 
6.1
%
 
218,275

 
6.6
%
 
(11,846
)
 
(5.4
)%
Residential mortgage
449,060

 
13.2
%
 
458,886

 
14.0
%
 
(9,826
)
 
(2.1
)%
Construction
190,874

 
5.6
%
 
212,454

 
6.5
%
 
(21,580
)
 
(10.2
)%
Commercial and industrial
745,306

 
22.0
%
 
719,312

 
21.9
%
 
25,994

 
3.6
 %
Consumer
51,462

 
1.5
%
 
38,153

 
1.2
%
 
13,309

 
34.9
 %
Leases
132,649

 
3.9
%
 
115,401

 
3.5
%
 
17,248

 
14.9
 %
Total portfolio loans and leases
3,389,501

 
100.0
%
 
3,285,858

 
100.0
%
 
103,643

 
3.2
 %
Loans held for sale
4,204

 
 
 
3,794

 
 
 
410

 
10.8
 %
Total loans and leases
$
3,393,705

 
 
 
$
3,289,652

 
 
 
$
104,053

 
3.2
 %

Cash and Investment Securities
 
As of June 30, 2018, liquidity remained strong as the Corporation had $36.2 million of cash balances at the Federal Reserve and $11.0 million in other interest-bearing accounts, along with significant borrowing capacity as discussed in the “Liquidity” section below.
 
Investment securities available for sale as of June 30, 2018 totaled $531.1 million, as compared to $689.2 million as of December 31, 2017. The decrease was primarily related to the maturing, in January 2018, of $200.0 million of short-term U.S. Treasury securities.

Deposits
 
Deposits as of June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
 
Change
(dollars in thousands)
Balance
 
Percent of
Deposits
 
Balance
 
Percent of
Deposits
 
Amount
 
Percent
Interest-bearing demand
$
617,258

 
18.4
%
 
$
481,336

 
14.3
%
 
$
135,922

 
28.2
 %
Money market
814,530

 
24.2
%
 
862,639

 
25.6
%
 
(48,109
)
 
(5.6
)%
Savings
291,858

 
8.7
%
 
338,572

 
10.0
%
 
(46,714
)
 
(13.8
)%
Retail time deposits
536,287

 
16.0
%
 
532,202

 
15.8
%
 
4,085

 
0.8
 %
Wholesale non-maturity deposits
36,826

 
1.1
%
 
62,276

 
1.8
%
 
(25,450
)
 
(40.9
)%
Wholesale time deposits
169,770

 
5.1
%
 
171,929

 
5.1
%
 
(2,159
)
 
(1.3
)%
Interest-bearing deposits
2,466,529

 
73.4
%
 
2,448,954

 
72.6
%
 
17,575

 
0.7
 %
Noninterest-bearing deposits
892,386

 
26.6
%
 
924,844

 
27.4
%
 
(32,458
)
 
(3.5
)%
Total deposits
$
3,358,915

 
100.0
%
 
$
3,373,798

 
100.0
%
 
$
(14,883
)
 
(0.4
)%











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Table of Contents

Borrowings
 
Borrowings as of June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
 
Change
(dollars in thousands)
Balance
 
Percent of
Borrowings
 
Balance
 
Percent of
Borrowings
 
Amount
 
Percent
Short-term borrowings
$
227,059

 
52.2
%
 
$
237,865

 
47.9
%
 
$
(10,806
)
 
(4.5
)%
Long-term FHLB advances
87,808

 
20.2
%
 
139,140

 
28.0
%
 
(51,332
)
 
(36.9
)%
Subordinated notes
98,491

 
22.6
%
 
98,416

 
19.8
%
 
75

 
0.1
 %
Junior subordinated debentures
21,497

 
4.9
%
 
21,416

 
4.3
%
 
81

 
0.4
 %
Total borrowed funds
$
434,855

 
100.0
%
 
$
496,837

 
100.0
%
 
$
(61,982
)
 
(12.5
)%

Capital
 
Consolidated shareholder’s equity of the Corporation was $542.5 million, or 12.3% of total assets as of June 30, 2018, as compared to $528.1 million, or 11.9% of total assets as of December 31, 2017. The following table presents the Corporation’s and Bank’s regulatory capital ratios and the minimum capital requirements to be considered “Well Capitalized” by regulators as of June 30, 2018 and December 31, 2017:

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Actual
 
Minimum to be Well
Capitalized
(dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets:
 
 
 
 
 
 
 
Corporation
$
480,659

 
13.87
%
 
$
346,524

 
10.00
%
Bank
$
412,626

 
11.91
%
 
$
346,376

 
10.00
%
Tier I capital to risk weighted assets:
 
 
 
 
 
 
 
Corporation
$
362,504

 
10.46
%
 
$
277,219

 
8.00
%
Bank
$
392,962

 
11.34
%
 
$
277,101

 
8.00
%
Common equity Tier I risk weighted assets:
 
 
 
 
 
 
 
Corporation
$
341,685

 
9.86
%
 
$
225,240

 
6.50
%
Bank
$
392,962

 
11.34
%
 
$
225,145

 
6.50
%
Tier I leverage ratio (Tier I capital to total quarterly average assets):
 
 
 
 
 
 
 
Corporation
$
362,504

 
8.75
%
 
$
207,189

 
5.00
%
Bank
$
392,962

 
9.49
%
 
$
207,120

 
5.00
%
Tangible common equity to tangible assets(1)
 
 
 
 
 
 
 
Corporation
$
335,042

 
8.00
%
 
—

 
—

Bank
$
387,787

 
9.27
%
 
—

 
—

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets:
 
 
 
 
 
 
 
Corporation
$
463,637

 
13.92
%
 
$
333,068

 
10.00
%
Bank
$
387,067

 
11.65
%
 
$
332,388

 
10.00
%
Tier I capital to risk weighted assets:
 
 
 
 
 
 
 
Corporation
$
347,187

 
10.42
%
 
$
266,454

 
8.00
%
Bank
$
369,033

 
11.10
%
 
$
265,910

 
8.00
%
Common equity Tier I risk weighted assets:
 
 
 
 
 
 
 
Corporation
$
328,676

 
9.87
%
 
$
216,494

 
6.50
%
Bank
$
369,033

 
11.10
%
 
$
216,052

 
6.50
%
Tier I leverage ratio (Tier I capital to total quarterly average assets):
 
 
 
 
 
 
 
Corporation
$
347,187

 
10.10
%
 
$
171,915

 
5.00
%
Bank
$
369,033

 
10.76
%
 
$
171,609

 
5.00
%
Tangible common equity to tangible assets(1)
 
 
 
 
 
 
 
Corporation
$
322,964

 
7.61
%
 
—

 
—

Bank
$
367,457

 
8.67
%
 
—

 
—

 
(1) There is no official regulatory guideline for the tangible common equity to tangible asset ratio.
 
The capital ratios for the Bank and the Corporation, as of June 30, 2018, as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” Excluding the Bank’s and Corporation’s Tier I leverage ratio, all regulatory capital ratios increased or are relatively unchanged from their December 31, 2017 levels. The Tier I leverage ratio, which is the ratio of Tier I capital to average quarterly assets, for both the Bank and Corporation decreased from December 31, 2017, as the average assets acquired in the December 15, 2017 RBPI Merger were present for a full quarter.








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Liquidity
 
The Corporation’s liquidity position is managed on a daily basis as part of the daily settlement function and continuously as part of the formal asset liability management process. The Bank’s liquidity is maintained by managing its core deposits as the primary source, purchasing federal funds, selling loans in the secondary market, borrowing from the FHLB and the Federal Reserve Bank, and purchasing and issuing wholesale certificates of deposit as its secondary sources.
 
Unused availability is detailed on the following table:
(dollars in millions)
Available
Funds as of
June 30,
2018
 
Percent of
Total
Borrowing
Capacity
 
Available
Funds as of
December 31, 2017
 
Percent of Total
Borrowing
Capacity
 
Dollar
Change
 
Percent
Change
Federal Home Loan Bank of Pittsburgh
$
1,192.1

 
80.0
%
 
$
1,020.0

 
74.4
%
 
$
172.1

 
16.9
%
Federal Reserve Bank of Philadelphia
145.5

 
100.0
%
 
121.3

 
100.0
%
 
24.2

 
20.0
%
Fed Funds Lines (seven banks)
79.0

 
100.0
%
 
79.0

 
100.0
%
 
—

 
—

Total
$
1,416.6

 
82.6
%
 
$
1,220.3

 
77.6
%
 
$
196.3

 
16.1
%

Quarterly, the ALCO reviews the Corporation’s liquidity needs and reports its findings to the Corporation’s Board of Directors.

The Corporation has an agreement with IND to provide up to $40 million, excluding accrued interest, of money market and NOW funds at an agreed upon interest rate equal to the current Fed Funds rate plus 20 basis points. The Corporation had $23.5 million in balances as of June 30, 2018 under this program.

The Corporation continually evaluates the cost and mix of its retail and wholesale funding sources relative to earning assets and expected future earning-asset growth. The Corporation believes that with its current branch network, along with the available borrowing capacity at FHLB and other sources, it has sufficient capacity available to fund expected earning-asset growth.

Discussion of Segments
 
The Corporation has two principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking and Wealth Management (see Note 22 in the accompanying Notes to Unaudited Consolidated Financial Statements).
 
The Wealth Management segment recorded a pre-tax segment profit (“PTSP”) of $4.4 million and $8.5 million for the three and six months ended June 30, 2018, as compared to PTSP of $3.7 million and $7.2 million for the same periods in 2017. The Wealth Management segment provided 24.0% and 22.3% of the Corporation’s pre-tax profit for the three and six months ended June 30, 2018, as compared to 25.7% and 25.7% for the same periods in 2017. For the three and six month periods ended June 30, 2018, both fees for wealth management services and insurance commissions increased as compared to the same periods in 2017.
 
The Banking segment recorded a PTSP of $14.0 million and $29.8 million for the three and six months ended June 30, 2018, as compared to PTSP of $10.7 million and $20.8 million for the same periods in 2017. The Banking segment provided 76.0% and 77.7% of the Corporation’s pre-tax profit for the three and six month periods ended June 30, 2018, as compared to 74.3% and 74.3% for the same periods in 2017.

Off Balance Sheet Arrangements
 
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at June 30, 2018 were $829.1 million, as compared to $748.3 million at December 31, 2017.
 
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is

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similar to that involved in granting loan facilities to customers. The Bank’s obligation under standby letters of credit at June 30, 2018 amounted to $21.8 million, as compared to $17.7 million at December 31, 2017.
 
Estimated fair values of the Corporation’s off-balance sheet arrangements are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet arrangements.

Contractual Cash Obligations of the Corporation as of June 30, 2018:
(dollars in millions)
Total
 
Within
1 Year
 
2 - 3
Years
 
4 - 5
Years
 
After
5 Years
Deposits without a stated maturity
$
2,652.9

 
$
2,652.9

 
$
—

 
$
—

 
$
—

Wholesale and retail time deposit
706.0

 
572.4

 
113.6

 
19.0

 
1.0

Short-term borrowings
227.1

 
227.1

 
—

 
—

 
—

Long-term FHLB Advances
87.8

 
39.9

 
47.9

 
—

 
—

Subordinated Notes
100.0

 
—

 
—

 
—

 
100.0

Junior subordinated debentures
25.8

 
—

 
—

 
—

 
25.8

Operating leases
29.1

 
5.3

 
8.1

 
5.9

 
9.8

Purchase obligations
5.1

 
3.4

 
1.7

 
—

 
—

Total
$
3,833.8

 
$
3,501.0

 
$
171.3

 
$
24.9

 
$
136.6



Other Information

Effects of Inflation
 
Inflation has some impact on the Corporation’s operating costs. Unlike many industrial companies, however, substantially all of the Corporation’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
 
Effects of Government Monetary Policies
 
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits. 
 
The Corporation is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Corporation’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation cannot be predicted.

Special Cautionary Notice Regarding Forward Looking Statements
 
Certain of the statements contained in this report and the documents incorporated by reference herein may constitute forward-looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. As such, they are only predictions and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Bryn Mawr Bank Corporation (the “Corporation”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include statements with respect to the Corporation’s financial goals, business plans, business prospects, credit quality, credit risk, reserve adequacy, liquidity, origination and sale of residential mortgage loans, mortgage servicing rights, the effect of changes in accounting standards, and market and pricing trends loss. The words “may,” “would,” “could,” “will,” “likely,” “expect,” “anticipate,” “intend,” “estimate,” “plan,”

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“forecast,” “project,” “believe,” and similar expressions are intended to identify such forward-looking statements. The Corporation’s actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation:
 
•
local, regional, national and international economic conditions, their impact on us and our customers, and our ability to assess those impacts;
•
sources of liquidity and financial resources in the amounts, at the times, and on the terms required to support our future business;
•
changes in policy, laws or existing statutes, regulatory guidance, legislation or judicial decisions that affect our the financial services industry as a whole, the Corporation, or our subsidiaries individually or collectively;
•
results of examinations by the Federal Reserve Board of the Corporation or its subsidiaries, including the possibility that such regulator may, among other things, require us to increase our allowance for loan losses or to write down assets, or restrict our ability to: engage in new products or services; engage in future mergers or acquisitions; open new branches; pay future dividends; or otherwise take action, or refrain from taking action, in order to correct activities or practices that the Federal Reserve believes may violate applicable law or constitute an unsafe or unsound banking practice;
•
effectiveness of our capital management strategies and activities;
•
changes in accounting requirements or interpretations;
•
the accuracy of assumptions underlying the provisions for loan and lease losses and estimates in the value of collateral, and various financial assets and liabilities;
•
estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
•
changes in interest rates, spreads on interest-earning assets and interest-bearing liabilities, and interest rate sensitivity;
•
changes in relationships with employees, customers, and/or suppliers;
•
our success in continuing to generate new business in our existing markets, as well as identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time;
•
changes in consumer and business spending, borrowing and savings habits, and demand for financial services in the relevant market areas;
•
rapid technological developments and changes;
•
competitive pressure and practices of other commercial banks, thrifts, mortgage companies, finance companies, credit unions, securities brokerage firms, insurance companies, money-market and mutual funds and other institutions operating in our market areas and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;
•
risks related to our mergers and acquisitions, including, but not limited to: reputational risks, client and customer retention risks; diversion of management time on integration-related issues; risk that integration may take longer than anticipated or cost more than expected; risk that the anticipated benefits of the merger or acquisition, including any anticipated cost savings or strategic gains, may take longer or be significantly harder to achieve or may fail to be achieved;
•
our ability to contain costs and expenses;
•
protection and validity of intellectual property rights;
•
reliance on large customers;
•
the outcome of pending and future litigation and governmental proceedings;
•
any extraordinary events (such as natural disasters, acts of terrorism, wars or political conflicts);
•
ability to retain key employees and members of senior management;
•
the ability of key third-party providers to perform their obligations to us and our subsidiaries;
•
other material adverse changes in operations or earnings; and

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•
our success in managing the risks involved in the foregoing.

All written or oral forward-looking statements attributed to the Corporation are expressly qualified in their entirety by the factors, risks, and uncertainties set forth in the foregoing cautionary statements, along with those set forth under the caption titled “Risk Factors” beginning on page 12 of the 2017 Annual Report. All forward-looking statements included in this Report and the documents incorporated by reference herein are based upon the Corporation’s beliefs and assumptions as of the date of this Report. The Corporation assumes no obligation to update any forward-looking statement, whether the result of new information, future events, uncertainties or otherwise, as of any future date. In light of these risks, uncertainties and assumptions, you should not put undue reliance on any forward-looking statements discussed in this Report or incorporated documents.
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks
 
See the discussion of quantitative and qualitative disclosures about market risks in the Corporation’s 2017 Annual Report, as updated by the disclosure in “Management’s Discussion and Analysis of Results of Operations – Interest Rate Sensitivity,” “– Summary of Interest Rate Simulation,” “Customer Derivatives” and “– Gap Analysis” in this quarterly report on Form 10-Q.

ITEM 4. Controls and Procedures
 
As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer, Francis J. Leto, and Chief Financial Officer, Michael W. Harrington, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2018.
 
There were no changes in the Corporation’s internal controls over financial reporting during the last fiscal quarter 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.
 
The information required by this Item is set forth in the “Legal Matters” discussion in Note 21 “Contingencies” in the Notes to Unaudited Consolidated Financial Statements in Part I Item I of this Form 10-Q, which is incorporated herein by reference in response to this Item.
 
ITEM 1A. Risk Factors
None.
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Share Repurchase
 
The following table presents the shares repurchased by the Corporation during the second quarter of 2018:
Period
Total Number of
Shares Purchased(1)(2)
 
Average Price
Paid
Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs(3)
 
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the Plan
or Programs
April 1, 2018 – April 30, 2018
268

 
$
44.45

 
—

 
189,300

May 1, 2018 – May 31, 2018
2,030

 
$
46.43

 
—

 
189,300

June 1, 2018 – June 30, 2018
1,617

 
$
45.02

 
—

 
189,300

Total
3,915

 
$
45.71

 
—

 
189,300

 



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(1)
On June 30, 2018, 1,617 shares were purchased by the Corporation’s deferred compensation plans through open market transactions.
(2)
Includes shares purchased to cover statutory tax withholding requirements on vested stock awards for certain officers of the Corporation or Bank as follows: 268 shares on April 4, 2018; 1,045 shares on May 8, 2018; and 985 shares on May 21, 2018.
(3)
On August 6, 2015, the Corporation announced a stock repurchase program (the “2015 Program”) under which the Corporation may repurchase up to 1,200,000 shares of the Corporation’s common stock, at an aggregate purchase price not to exceed $40 million. There is no expiration date on the 2015 Program and the Corporation has no plans for an early termination of the 2015 Program. All share repurchases under the 2015 Program were accomplished in open market transactions. As of March 31, 2018, the maximum number of shares remaining authorized for repurchase under the 2015 Program was 189,300.

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ITEM 3. Defaults Upon Senior Securities
None.
 
ITEM 4. Mine Safety Disclosures.
Not applicable.
 
ITEM 5. Other Information
None.

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ITEM 6. Exhibits
 
Exhibit No.
 
Description and References
 
 
 
3.1
 
3.2
 
10.1
 
31.1
 
31.2
 
32.1
 
32.2
 
 
 
 
101.INS XBRL
 
Instance Document, filed herewith
 
 
 
101.SCH XBRL
 
Taxonomy Extension Schema Document, filed herewith
 
 
 
101.CAL XBRL
 
Taxonomy Extension Calculation Linkbase Document, filed herewith
 
 
 
101.DEF XBRL
 
Taxonomy Extension Definition Linkbase Document, filed herewith
 
 
 
101.LAB XBRL
 
Taxonomy Extension Label Linkbase Document, filed herewith
 
 
 
101.PRE XBRL
 
Taxonomy Extension Presentation Linkbase Document, filed herewith

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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.
 
 
Bryn Mawr Bank Corporation
 
 
 
 
Date: August 3, 2018
 
By:
/s/ Francis J. Leto
 
 
 
 
Francis J. Leto
 
 
 
 
President & Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
Date: August 3, 2018
 
By:
/s/ Michael W. Harrington
 
 
 
 
Michael W. Harrington
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 



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