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 endedJune 30, 2018

Commission File Number1-35746

________________________________________________________________________________________

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

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED JUNE 30, 2018

Index

PART I -	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)
	Consolidated Financial Statements (unaudited)	Page 3
	Notes to Consolidated Financial Statements (unaudited)	Page 8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 55
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 77
ITEM 4.	Controls and Procedures	Page 77
PART II -	OTHER INFORMATION	Page 77
ITEM 1.	Legal Proceedings	Page 77
ITEM 1A.	Risk Factors	Page 77
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 77
ITEM 3.	Defaults Upon Senior Securities	Page 79
ITEM 4.	Mine Safety Disclosures	Page 79
ITEM 5.	Other Information	Page 79
ITEM 6.	Exhibits	Page 80

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

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.

Page 4

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.

Page 5

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.

Page 6

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 Revenuefrom 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,

Page 8

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.

Page 9

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:

Page 10

(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:

Page 11

(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:

Page 12

(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.

Page 13

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.

Page 14

(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

Page 15

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.

Page 17

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

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 detailsportfolio 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

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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 theexception of$87 thousandand $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

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

	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

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

(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

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

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

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.

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• 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 inthousands)	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

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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 inthousands)	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.

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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

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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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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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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 thousandof 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:

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	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

Note6- 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:

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(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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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.

Note8-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

Note9-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		%

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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-termFHLB 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, 2018balances.

(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.

Note10– 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.

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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.

Note18–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 Stockand 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

Note19-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 anon-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, 2018increased$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, 2018increased$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, 2018increased$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, 2018increased$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, 2018decreased$55.5 million from $4.45 billion as of December 31, 2017.

• Total shareholders’ equity of $542.5 million as of June 30, 2018increased$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, 2018decreased$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 billionDecember 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-equivalentbasis)*

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 thetax-equivalentincome is 21% for 2018 and 35% for 2017

Tax-EquivalentNet 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 millionincrease 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, 2018increased$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, 2018increased$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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	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, 2018increased$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, 2018decreased$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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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	Amended and Restated By-Laws, effective November 20, 2007, incorporated by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007
3.2	Amended and Restated Articles of Incorporation, effective November 21, 2007, incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007
10.1	Third Amended and Restated Dividend Reinvestment and Stock Purchase Plan, effective May 25, 2018, incorporated by reference to the Corporation’s Prospectus (Form 424B2) filed with the SEC on May 25, 2018.
31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
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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