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:



(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 “Effective Date”), and the merger of Royal Bank America with and into the Bank (collectively, the "RBPI Merger"), pursuant to the Agreement and Plan of Merger, by and between RBPI and the Corporation, dated as of January 30, 2017 (the “Agreement”) was 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 Effective Date. 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 Effective Date, which include the effects of any measurement period adjustments in accordance with ASC 805-10, are summarized in the following table:



(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	566,228
Premises and equipment	8,264
Deferred income taxes	34,823
Bank-owned life insurance	16,550
Core deposit intangible	4,670
Favorable lease asset	566
Other assets	13,611
Total assets	$	783,391

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	$	62,532

Goodwill resulting from acquisition of RBPI	$	76,208

During the year ended December 31, 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 the Effective Date from the amounts originally reported in the 2017 Annual Report:



(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	4,145
Other assets	876
Deferred income taxes	(1,688		)
Total Fair Value Adjustments	3,333

Goodwill from the acquisition of RBPI as of December 31, 2018	$	76,208

As of December 31, 2018, the estimates of the fair value of identifiable assets acquired and liabilities assumed in the RBPI merger were final.

Methods Used to Estimate the Fair Value of 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, “Business Combinations,” in the Notes to the Consolidated Financial Statements in the 2017 Annual Report on Form 10-K.

Loans Held for Investment

During the first and third quarters 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. 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 increases of $3.0 million and $1.6 million in nonaccretable difference in the first and third quarters of 2018, respectively. The adjustment to the aggregate expected cash flows less the Effective Date fair value resulted in an increase in accretable yield of $325 thousand. There were no adjustments to the fair value mark applied to the acquired loan portfolio during the second and fourth quarters of 2018.

The following table provides an updated summary of the acquired impaired loans and leases as of the Effective Date, 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	$	40,741
Contractual cash flows not expected to be collected (nonaccretable difference)	(17,637		)
Cash flows expected to be collected	23,104
Interest component of expected cash flows (accretable yield)	(2,644		)
Fair value of loans acquired with deterioration of credit quality	$	20,460

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. The consideration paid by the Bank was $7.5 million, of which $5.8 million was paid at closing, one contingent cash payment of $575 thousand was paid during the second quarter of 2018, and two contingent cash payments, not to exceed $575 thousand each, to be payable in 2019 and 2020, subject to certain conditions. 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.

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 are final.

Pro Forma Income Statements (unaudited)

The following pro forma income statements for the years ended December 31, 2017 and 2016 present the pro forma results of operations of the combined institution (RBPI and the Corporation) as if the RBPI Merger occurred on January 1, 2016 and January 1, 2017, respectively. The pro forma income statement adjustments are limited to the effects of fair value mark amortization and accretion and intangible asset amortization, and include the impacts of measurement period adjustments made in accordance with ASC 805-10. No cost savings or additional merger expenses have been included in the pro forma results of operations. Due to the immaterial contribution to net income of the Hirshorn acquisition, which occurred during the two-year period shown in the table, the pro forma effects of these acquisitions are excluded.



(dollars in thousands, except per share data)	Year Ended December 31,
	2017		2016
Total interest income	$	171,155	$	157,276
Total interest expense	20,065		17,086
Net interest income	151,090		140,190
Provision for loan and lease losses	3,454		5,568
Net interest income after provision for loan and lease losses	147,636		134,622
Total noninterest income	61,423		58,275
Total noninterest expenses⁽¹⁾	140,756		124,261
Income before income taxes	68,303		68,636
Income tax expense	40,841		23,006
Net income	$	27,462	$	45,630
Per share data⁽²⁾:
Weighted-average basic shares outstanding	20,248,879		19,958,377
Dilutive shares	257,591		168,499
Adjusted weighted-average diluted shares	20,506,470		20,126,876
Basic earnings per common share	$	1.36	$	2.29
Diluted earnings per common share	$	1.34	$	2.27

(1) Total noninterest expense includes RBPI Net Income Attributable to Noncontrolling Interest and Preferred Stock Series A Accumulated Dividend and Accretion for pro-forma presentation.

(2) Assumes that the shares of RBPI common stock outstanding as of December 31, 2017 were outstanding for the full twelve month periods ended December 31, 2017 and 2016, respectively.

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:



	Year Ended December 31,
(dollars in thousands)	2018		2017		2016
Advertising	$	61	$	180	$	—
Employee Benefits	271		21		—
Occupancy and bank premises	2,145		—		—
Furniture, fixtures, and equipment	365		109		—
Information technology	421		837		—
Professional fees	1,450		3,160		—
Salaries and wages	852		1,285		—
Other	2,196		512		—
Total due diligence, merger-related and merger integration expenses	$	7,761	$	6,104	$	—