UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________________

Form 10-Q

____________________________________________________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-35746

________________________________________________________________________________________

Bryn Mawr Bank Corporation

(Exact name of registrant as specified in its charter)

________________________________________________________________________________________

Pennsylvania	23-2434506
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
801 Lancaster Avenue, Bryn Mawr, Pennsylvania	19010
(Address of principal executive offices)	(Zip Code)

(610) 525-1700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1 par value	BMTC	The NASDAQ Stock Market

 ________________________________________________________________________________

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 2, 2021
Common Stock, par value $1	19,878,141

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED June 30, 2021

Index 

 

PART I -	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)
	Consolidated Financial Statements (unaudited)	Page 3
	Notes to Consolidated Financial Statements (unaudited)	Page 11
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 52
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 75
ITEM 4.	Controls and Procedures	Page 75
PART II -	OTHER INFORMATION	Page 76
ITEM 1.	Legal Proceedings	Page 76
ITEM 1A.	Risk Factors	Page 76
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 78
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, 2021		December 31, 2020
Assets
Cash and due from banks	$	10,829	$	11,287
Interest bearing deposits with banks	103,070		85,026
Cash and cash equivalents	113,899		96,313
Investment securities available for sale, at fair value (amortized cost of $719,804 and $1,161,098 as of June 30, 2021 and December 31, 2020, respectively)	728,738		1,174,964
Investment securities held to maturity, at amortized cost (fair value of $12,761 and $15,186 as of June 30, 2021 and December 31, 2020, respectively)	12,532		14,759
Investment securities, trading	8,266		8,623
Loans held for sale	653		6,000
Portfolio loans and leases, originated	3,414,256		3,380,727
Portfolio loans and leases, acquired	203,155		247,684
Total portfolio loans and leases	3,617,411		3,628,411
Less: Allowance for credit losses on originated loans and leases	(37,590)		(50,783)
Less: Allowance for credit losses on acquired loans and leases	(1,573)		(2,926)
Total allowance for credit losses on loans and leases	(39,163)		(53,709)
Net portfolio loans and leases	3,578,248		3,574,702
Premises and equipment, net	54,178		56,662
Operating lease right-of-use assets	33,759		34,601
Accrued interest receivable	13,519		15,440
Mortgage servicing rights	2,173		2,626
Bank owned life insurance	60,993		60,393
Federal Home Loan Bank stock	4,332		12,666
Goodwill	184,012		184,012
Intangible assets	13,891		15,564
Other investments	18,206		17,742
Other assets	131,301		156,955
Total assets	$	4,958,700	$	5,432,022
Liabilities
Deposits:
Noninterest-bearing	$	1,468,643	$	1,401,843
Interest-bearing	2,491,102		2,974,411
Total deposits	3,959,745		4,376,254
Short-term borrowings	21,553		72,161
Long-term FHLB advances	39,976		39,906
Subordinated notes	98,973		98,883
Junior subordinated debentures	22,030		21,935
Operating lease liabilities	39,400		40,284
Accrued interest payable	5,393		6,277
Other liabilities	127,618		154,000
Total liabilities	4,314,688		4,809,700
Shareholders' equity
Common stock, par value $1; authorized 100,000,000 shares; issued 24,714,768 and 24,713,968 shares as of June 30, 2021 and December 31, 2020, respectively and outstanding of 19,877,892 and 19,960,294 as of June 30, 2021 and December 31, 2020, respectively	24,715		24,714
Paid-in capital in excess of par value	382,655		381,653
Less: Common stock in treasury at cost - 4,836,876 and 4,753,674 shares as of June 30, 2021 and December 31, 2020, respectively	(91,825)		(89,164)
Accumulated other comprehensive income, net of tax	4,798		8,948
Retained earnings	324,450		296,941
Total Bryn Mawr Bank Corporation shareholders' equity	644,793		623,092
Noncontrolling interest	(781)		(770)
Total shareholders' equity	644,012		622,322
Total liabilities and shareholders' equity	$	4,958,700	$	5,432,022

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,
(dollars in thousands, except share and per share data)	2021		2020		2021		2020
Interest income:
Interest and fees on loans and leases	$	34,638	$	40,690	$	69,216	$	83,485
Interest on cash and cash equivalents	16		37		38		148
Interest on investment securities:
Taxable	2,984		2,870		6,022		6,046
Non-taxable	11		22		22		46
Dividends	1		2		2		3
Total interest income	37,650		43,621		75,300		89,728
Interest expense:
Interest on deposits	958		4,476		2,382		12,113
Interest on short-term borrowings	5		232		15		685
Interest on FHLB advances and other borrowings	205		155		408		399
Interest on subordinated notes	1,044		1,144		2,078		2,289
Interest on junior subordinated debentures	199		229		397		524
Total interest expense	2,411		6,236		5,280		16,010
Net interest income	35,239		37,385		70,020		73,718
(Recovery of) provision for credit losses	(6,581)		3,435		(11,827)		38,785
Net interest income after (recovery of) provision for credit losses	41,820		33,950		81,847		34,933
Noninterest income:
Fees for wealth management services	14,031		9,069		26,867		20,237
Insurance commissions	1,249		1,303		2,713		2,836
Capital markets revenue	1,290		2,975		2,886		5,336
Service charges on deposits	733		603		1,429		1,449
Loan servicing and other fees	397		452		701		913
Net gain on sale of loans	525		3,134		775		3,916
Net gain on sale of other real estate owned ("OREO")	—		—		—		148
Dividends on FHLB and FRB stock	239		243		461		687
Other operating income	2,502		2,787		4,975		3,344
Total noninterest income	20,966		20,566		40,807		38,866
Noninterest expenses:
Salaries and wages	16,700		16,926		33,530		33,915
Employee benefits	3,224		3,221		6,911		6,721
Occupancy and bank premises	2,629		3,033		5,521		6,048
Furniture, fixtures, and equipment	2,188		2,120		4,430		4,551
Advertising	413		196		589		597
Amortization of intangible assets	835		910		1,673		1,828
Due diligence, merger-related and merger integration expenses	266		—		1,912		—
Professional fees	1,629		1,575		3,062		2,943
Pennsylvania bank shares tax	718		116		1,467		232
Data processing	1,444		1,479		2,848		2,873
Other operating expenses	5,421		5,927		11,227		9,198
Total noninterest expenses	35,467		35,503		73,170		68,906
Income before income taxes	27,319		19,013		49,484		4,893
Income tax expense	5,988		4,010		11,070		1,053
Net income	21,331		15,003		38,414		3,840
Net loss attributable to noncontrolling interest	(11)		(32)		(11)		(32)
Net income attributable to Bryn Mawr Bank Corporation	$	21,342	$	15,035	$	38,425	$	3,872
Basic earnings per common share	$	1.07	$	0.75	$	1.93	$	0.19
Diluted earnings per common share	1.06		0.75		1.92		0.19
Dividends paid or accrued per common share	0.27		0.26		0.54		0.52
Weighted-average basic shares outstanding	19,878,981		19,926,737		19,893,347		19,989,948
Dilutive shares	171,838		81,482		153,809		87,211
Adjusted weighted-average diluted shares	20,050,819		20,008,219		20,047,156		20,077,159

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

 

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2021		2020		2021		2020
Net income attributable to Bryn Mawr Bank Corporation	$	21,342	$	15,035	$	38,425	$	3,872
Other comprehensive income:
Net change in unrealized (losses) gains on investment securities available for sale:
Unrealized investment gains (losses), net of tax expense (benefit) of $275, $34, $(1,035), and $1,804, respectively	1,034		127		(3,896)		6,786
Net change in unrealized losses on interest rate swaps used in cash flow hedges:
Net unrealized gains arising during the period, net of tax expense of $1,039, $0, $37, and $0, respectively	3,909		—		140		—
Reclassification adjustment for gains included in net income, net of tax expense of $87, $0, $126, and $0, respectively	(326)		—		(473)		—
Net unrealized gains (losses) on interest rate swaps used in cash flow hedges, net of tax expense (benefit) of $952, $0, $(89), and $0, respectively	3,583		—		(333)		—
Net change in unfunded pension liability:
Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax expense of $8, $6, $22, and $12, respectively	27		23		79		46
Total other comprehensive income (loss)	4,644		150		(4,150)		6,832
Total comprehensive income	$	25,986	$	15,185	$	34,275	$	10,704

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

	Six Months Ended June 30,
(dollars in thousands)	2021		2020
Operating activities:
Net income attributable to Bryn Mawr Bank Corporation	$	38,425	$	3,872
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
(Recovery of) provision for credit losses	(11,827)		38,785
Depreciation of fixed assets	3,136		4,001
Non-cash operating lease expense	1,417		1,613
Net amortization of investment premiums and discounts	3,697		1,891
Net gain on sale of loans	(775)		(3,916)
Stock based compensation	1,003		1,513
Amortization and net impairment of mortgage servicing rights	453		1,010
Net accretion of fair value adjustments	(1,432)		(1,989)
Amortization of intangible assets	1,673		1,828
Net gain on sale of OREO	—		(148)
Net increase in cash surrender value of bank owned life insurance ("BOLI")	(600)		(649)
Other, net	1,389		1,216
Loans originated for sale	(20,313)		(46,750)
Proceeds from loans sold	26,475		48,211
Provision for deferred income taxes	—		99
Change in income taxes payable/receivable, net	3,188		(4,963)
Change in accrued interest receivable	1,924		(3,095)
Change in accrued interest payable	(884)		1,659
Change in operating lease liabilities	(1,459)		(1,565)
Change in other assets	25,681		(96,979)
Change in other liabilities	(29,502)		88,683
Net cash provided by operating activities	41,669		34,327
Investing activities:
Purchases of investment securities available for sale	(158,069)		(120,458)
Purchases of investment securities held to maturity	—		(1,103)
Proceeds from maturity and paydowns of investment securities available for sale	578,314		557,125
Proceeds from maturity and paydowns of investment securities held to maturity	2,146		1,023
Net change in FHLB stock	8,334		19,238
Proceeds from calls of investment securities	17,434		45,500
Net change in other investments	(464)		(372)
Net portfolio loan and lease originations	9,456		(337,951)
Proceeds from sales of loans originally classified as portfolio loans and leases	—		302,169
Purchases of premises and equipment	(659)		(814)
Proceeds from sale of OREO	—		534
Net cash provided by investing activities	456,492		464,891
Financing activities:
Change in deposits	(416,401)		401,624
Change in short-term borrowings	(50,608)		(464,328)
Dividends paid	(10,755)		(10,438)
Change in long-term FHLB advances and other borrowings	—		(7,501)
Payment of contingent consideration for business combinations	(150)		(507)
Cash payments to taxing authorities on employees' behalf from shares withheld from stock-based compensation	(12)		(144)
Net purchase of treasury stock for deferred compensation plans	(82)		(90)
Net purchase of treasury stock through publicly announced plans	(2,567)		(7,249)
Proceeds from exercise of stock options	—		5
Net cash used in financing activities	(480,575)		(88,628)
Change in cash and cash equivalents	17,586		410,590
Cash and cash equivalents at beginning of period	96,313		53,931
Cash and cash equivalents at end of period	$	113,899	$	464,521
Supplemental cash flow information:
Cash paid during the year for:
Income taxes	$	7,874	$	5,922
Interest	$	6,164	$	14,351
Non-cash information:
Change in other comprehensive income	$	(4,150)	$	6,832
Change in deferred tax due to change in comprehensive income	$	(1,102)	$	1,816
Transfer of loans to OREO and repossessed assets	$	—	$	386

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

	For the Three Months Ended June 30, 2021
(dollars in thousands, except share and per share data)	Shares of Common Stock Issued	Common Stock		Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total Shareholders' Equity
Balance March 31, 2021	24,714,768	$	24,715	$	382,202	$	(91,774)	$	154	$	308,569	$	(770)	$	623,096
Net income attributable to Bryn Mawr Bank Corporation	—	—		—		—		—		21,342		—		21,342
Net loss attributable to noncontrolling interest	—	—		—		—		—		—		(11)		(11)
Dividends paid or accrued, $0.27 per share	—	—		—		—		—		(5,461)		—		(5,461)
Other comprehensive income, net of tax expense of $1,235	—	—		—		—		4,644		—		—		4,644
Stock based compensation	—	—		453		—		—		—		—		453
Net treasury stock activity for deferred compensation trusts	—	—		—		(51)		—		—		—		(51)
Balance June 30, 2021	24,714,768	$	24,715	$	382,655	$	(91,825)	$	4,798	$	324,450	$	(781)	$	644,012

Page 7

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity - Unaudited

	For the Six Months Ended June 30, 2021
(dollars in thousands, except share and per share data)	Shares of Common Stock Issued	Common Stock		Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total Shareholders' Equity
Balance December 31, 2020	24,713,968	$	24,714	$	381,653	$	(89,164)	$	8,948	$	296,941	$	(770)	$	622,322
Net income attributable to Bryn Mawr Bank Corporation	—	—		—		—		—		38,425		—		38,425
Net loss attributable to noncontrolling interest	—	—		—		—		—		—		(11)		(11)
Dividends paid or accrued, $0.54 per share	—	—		—		—		—		(10,916)		—		(10,916)
Other comprehensive loss, net of tax benefit of $1,102	—	—		—		—		(4,150)		—		—		(4,150)
Stock based compensation	—	—		1,003		—		—		—		—		1,003
Net purchase of treasury stock from stock awards for statutory tax withholdings	—	—		—		(12)		—		—		—		(12)
Net treasury stock activity for deferred compensation trusts	—	—		—		(82)		—		—		—		(82)
Purchase of treasury stock through publicly announced plans	—	—		—		(2,567)		—		—		—		(2,567)
Common stock issued:
Common stock issued through share-based awards and options exercises	800	1		(1)		—		—		—		—		—
Balance June 30, 2021	24,714,768	$	24,715	$	382,655	$	(91,825)	$	4,798	$	324,450	$	(781)	$	644,012

Page 8

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity - Unaudited

	For the Three Months Ended June 30, 2020
	Shares of Common Stock Issued	Common Stock		Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total Shareholders' Equity
Balance March 31, 2020	24,655,362	$	24,655	$	379,495	$	(88,540)	$	8,869	$	269,395	$	(695)	$	593,179
Net income attributable to Bryn Mawr Bank Corporation	—	—		—		—		—		15,035		—		15,035
Net loss attributable to noncontrolling interest	—	—		—		—		—		—		(32)		(32)
Dividends paid or accrued, $0.26 per share	—	—		—		—		—		(5,265)		—		(5,265)
Other comprehensive income, net of tax expense of $40	—	—		—		—		150		—		—		150
Stock based compensation	—	—		624		—		—		—		—		624
Retirement of treasury stock	(3,816)	(4)		(41)		45		—		—		—		—
Net purchase of treasury stock from stock awards for statutory tax withholdings	—	—		—		(63)		—		—		—		(63)
Net treasury stock activity for deferred compensation trusts	—	—		—		(54)		—		—		—		(54)
Common stock issued:
Common stock issued through share-based awards and options exercises	10,615	11		89		—		—		—		—		100
Balance June 30, 2020	24,662,161	$	24,662	$	380,167	$	(88,612)	$	9,019	$	279,165	$	(727)	$	603,674

Page 9

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity - Unaudited

	For the Six Months Ended June 30, 2020
	Shares of Common Stock Issued	Common Stock		Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Income		Retained Earnings		Noncontrolling Interest		Total Shareholders' Equity
Balance December 31, 2019	24,650,051	$	24,650	$	378,606	$	(81,174)	$	2,187	$	288,653	$	(695)	$	612,227
Net income attributable to Bryn Mawr Bank Corporation	—	—		—		—		—		3,872		—		3,872
Net loss attributable to noncontrolling interest	—	—		—		—		—		—		(32)		(32)
Dividends paid or accrued, $0.52 per share	—	—		—		—		—		(10,559)		—		(10,559)
Cumulative-effect adjustment due to the adoption of ASU No. 2016-13	—	—		—		—		—		(2,801)		—		(2,801)
Other comprehensive income, net of tax expense of $1,816	—	—		—		—		6,832		—		—		6,832
Stock based compensation	—	—		1,513		—		—		—		—		1,513
Retirement of treasury stock	(3,816)	(4)		(41)		45		—		—		—		—
Net purchase of treasury stock from stock awards for statutory tax withholdings	—	—		—		(144)		—		—		—		(144)
Net treasury stock activity for deferred compensation trusts	—	—		—		(90)		—		—		—		(90)
Purchase of treasury stock through publicly announced plans	—	—		—		(7,249)		—		—		—		(7,249)
Common stock issued:
Common stock issued through share-based awards and options exercises	15,926	16		89		—		—		—		—		105
Balance June 30, 2020	24,662,161	$	24,662	$	380,167	$	(88,612)	$	9,019	$	279,165	$	(727)	$	603,674

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

Page 10

 BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies

The Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).

The Unaudited Consolidated Financial Statements include the accounts of Bryn Mawr Bank Corporation (“BMBC,” and together with its subsidiaries, the “Corporation”) and its consolidated subsidiaries; BMBC's primary subsidiary is The Bryn Mawr Trust Company (the “Bank”). In connection with the merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into BMBC, and the merger of Royal Bank America with and into the Bank (collectively, the "RBPI Merger"), 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 are eliminated in consolidation and certain prior-period amounts have been reclassified when necessary in order to conform to the current period presentation.

In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

In preparing the Unaudited Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in BMBC’s Annual Report on Form 10-K for the twelve months ended December 31, 2020 (the “2020 Annual Report”). Except as described below, the accounting policies applied in these Unaudited Consolidated Financial Statements are the same as those applied in the 2020 Annual Report.

Note 2 – Recent Accounting Pronouncements

The following FASB Accounting Standards Updates (“ASUs”) are divided into pronouncements which have been adopted by the Corporation since January 1, 2021, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of June 30, 2021.

Adopted Pronouncements:

FASB ASU 2018-14 (Topic 715), “Compensation-Retirement Benefits - Defined Benefit Plans-General”

Issued in August 2018, ASU 2018-14, modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements to financial statement users. The guidance became effective for the Corporation on January 1, 2021 and the adoption of this ASU did not have a material impact on our Consolidated Financial Statements and related disclosures.

FASB ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”

Issued in December 2019, ASU 2019-12 adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification. The guidance became effective for the Corporation on January 1, 2021 and 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 No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”

Page 11

Issued in March 2020, ASU No. 2020-04 provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Specifically, the guidance permits an entity, when certain criteria are met, to consider amendments to contracts made to comply with reference rate reform to meet the definition of a modification under GAAP. It further allows hedge accounting to be maintained and a one-time transfer or sale of qualifying held-to-maturity securities. The expedients and exceptions provided by the amendments are permitted to be adopted any time through December 31, 2022 and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for certain optional expedients elected for certain hedging relationships existing as of December 31, 2022. Management is currently evaluating the potential impact of ASU 2020-04 on our Consolidated Financial Statements and related disclosures.

Note 3 - Business Combinations

Pending Business Combination – WSFS Financial Corporation

On March 10, 2021, WSFS Financial Corporation (“WSFS”) and BMBC jointly announced the signing of a definitive Agreement and Plan of Merger, dated as of March 9, 2021, between WSFS and BMBC whereby BMBC will merge with WSFS, in a 100% stock-consideration transaction with a fixed exchange ratio of 0.90 shares of WSFS common stock for each share of BMBC common stock outstanding. Simultaneously with the merger, the Bank will merge into WSFS Bank, a wholly-owned subsidiary of WSFS. Closing of the transaction is subject to customary regulatory approvals.

The Corporation recorded $266 thousand and $1.9 million of due diligence and merger-related expenses for the three and six months ended June 30, 2021, respectively, related to the pending merger with WSFS. These expenses primarily consisted of legal fees and investment banker fees.

Note 4 – Investment Securities

The amortized cost and fair value of investment securities available for sale as of June 30, 2021 and December 31, 2020 are as follows:

As of June 30, 2021

(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	117,543		660		(1,502)		116,701
Obligations of state and political subdivisions	2,156		12		—		2,168
Mortgage-backed securities	474,153		9,969		(1,537)		482,585
Collateralized mortgage obligations	14,687		458		—		15,145
Collateralized loan obligations	99,515		158		(38)		99,635
Corporate bonds	11,000		754		—		11,754
Other investment securities	650		—		—		650
Total	$	719,804	$	12,011	$	(3,077)	$	728,738

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As of December 31, 2020

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	500,095	$	5	$	—	$	500,100
Obligations of the U.S. government and agencies	92,449		868		(219)		93,098
Obligations of state and political subdivisions	2,149		22		—		2,171
Mortgage-backed securities	441,575		12,739		(457)		453,857
Collateralized mortgage obligations	18,680		583		—		19,263
Collateralized loan obligations	94,500		1		(97)		94,404
Corporate bonds	11,000		421		—		11,421
Other investment securities	650		—		—		650
Total	$	1,161,098	$	14,639	$	(773)	$	1,174,964

The following tables present the aggregate amount of gross unrealized losses as of June 30, 2021 and December 31, 2020 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, 2021

	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	$	70,508	$	(1,502)	$	—	$	—	$	70,508	$	(1,502)
Mortgage-backed securities	196,757		(1,537)		—		—		196,757		(1,537)
Collateralized loan obligations	18,962		(38)		—		—		18,962		(38)
Total	$	286,227	$	(3,077)	$	—	$	—	$	286,227	$	(3,077)

As of December 31, 2020

	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	$	19,777	$	(219)	$	—	$	—	$	19,777	$	(219)
Mortgage-backed securities	79,990		(457)		—		—		79,990		(457)
Collateralized loan obligations	31,903		(97)		—		—		31,903		(97)
Total	$	131,670	$	(773)	$	—	$	—	$	131,670	$	(773)

As of June 30, 2021, the Corporation’s available for sale investment securities consisted of 453 securities, 85 of which were in an unrealized loss position.

As of June 30, 2021, management had not made a decision to sell any of the Corporation’s available for sale investment securities in an unrealized loss position, nor did management consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. Management has evaluated available for sale debt securities that are in an unrealized loss position and has determined that the decline in value is unrelated to credit loss and is related to the change in market interest rates since purchase. Factors considered in this evaluation included the extent to which fair value is less than amortized cost, any explicit or implicit guarantees by the U.S. government, any changes to the rating of the security by the rating agency, and adverse conditions specifically related to the security, among other factors. As of June 30, 2021, approximately 84.6% of the Corporation’s available for sale investment securities were U.S. Treasuries or mortgage-backed securities or collateral mortgage obligations which were issued or guaranteed by U.S. government-sponsored entities and agencies. In addition, none of the available for sale debt securities held by the Corporation are past due as of June 30, 2021. Accrued interest receivable on available for sale debt securities, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $2.3 million at June 30, 2021 and is excluded from the estimate of credit losses.

Page 13

As of June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

As of June 30, 2021 and December 31, 2020, securities having a fair value of $218.7 million and $282.3 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the Federal Reserve Bank of Philadelphia (the “FRB”) discount window program, Federal Home Loan Bank (“FHLB”) borrowings, collateral requirements in derivative contracts, 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, 2021 and December 31, 2020, 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, 2021				December 31, 2020
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities:
Due in one year or less	$	2,249	$	2,253	$	502,465	$	502,489
Due after one year through five years	23,944		24,666		18,679		19,167
Due after five years through ten years	103,722		102,604		77,433		77,681
Due after ten years	101,049		101,485		102,266		102,507
Subtotal	230,964		231,008		700,843		701,844
Mortgage-related securities(1)	488,840		497,730		460,255		473,120
Total	$	719,804	$	728,738	$	1,161,098	$	1,174,964

(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.

The amortized cost and fair value of investment securities held to maturity as of June 30, 2021 and December 31, 2020 are as follows:

As of June 30, 2021

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities	$	12,532	$	352	$	(123)	$	12,761

As of December 31, 2020

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities	$	14,759	$	451	$	(24)	$	15,186

The following table presents the aggregate amount of gross unrealized losses as of June 30, 2021 and December 31, 2020 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, 2021

	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	$	4,062	$	(123)	$	—	$	—	$	4,062	$	(123)

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As of December 31, 2020

	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	$	4,224	$	(24)	$	—	$	—	$	4,224	$	(24)

As of June 30, 2021, two of the Corporation’s held to maturity investment securities were in an unrealized loss position. The Corporation’s held to maturity debt securities consist of mortgage-backed securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, the bank considers the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero, even if the U.S. government were to default. The bank does not record expected credit losses for these securities. Accrued interest receivable on held to maturity debt securities totaled $31 thousand at June 30, 2021 and is excluded from the estimate of credit losses.

The amortized cost and fair value of held to maturity investment securities as of June 30, 2021 and December 31, 2020, by contractual maturity, are shown below:

	June 30, 2021				December 31, 2020
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Mortgage-backed securities(1)	$	12,532	$	12,761	$	14,759	$	15,186

(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, 2021 and December 31, 2020, the Corporation’s investment securities held in trading accounts totaled $8.3 million and $8.6 million, respectively, and primarily consist 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 rabbi trust accounts established to fund certain unqualified pension obligations. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income. Changes in the fair value of investments held in the deferred compensation trust accounts create corresponding changes in the liability to the deferred compensation plan participants.

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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 prior acquisitions. Certain tables in this footnote are presented with a breakdown between originated and acquired loans and leases.

A. The following table details the amortized cost of loans and leases as of the dates indicated:

 

Loans and Leases
	June 30, 2021						December 31, 2020
(dollars in thousands)	Originated		Acquired		Total Loans and Leases		Originated		Acquired		Total Loans and Leases
Loans held for sale	$	653	$	—	$	653	$	6,000	$	—	$	6,000
Real estate loans:
Commercial real estate (CRE) - nonowner-occupied	1,332,293		87,333		1,419,626		1,330,947		104,628		1,435,575
Commercial real estate (CRE) - owner-occupied	531,584		21,880		553,464		544,782		33,727		578,509
Home equity lines of credit	141,337		10,355		151,692		157,385		11,952		169,337
Residential mortgage - 1st liens	510,515		69,142		579,657		540,307		81,062		621,369
Residential mortgage - junior liens	24,462		1,072		25,534		22,375		1,420		23,795
Construction	195,581		8,777		204,358		153,131		8,177		161,308
Total real estate loans	2,735,772		198,559		2,934,331		2,748,927		240,966		2,989,893
Commercial & Industrial	494,764		3,333		498,097		442,283		4,155		446,438
Consumer	44,787		27		44,814		39,603		80		39,683
Leases	138,933		1,236		140,169		149,914		2,483		152,397
Total portfolio loans and leases	3,414,256		203,155		3,617,411		3,380,727		247,684		3,628,411
Total loans and leases	$	3,414,909	$	203,155	$	3,618,064	$	3,386,727	$	247,684	$	3,634,411
Loans with fixed rates	$	1,129,382	$	108,684	$	1,238,066	$	1,198,908	$	134,084	$	1,332,992
Loans with adjustable or floating rates	2,285,527		94,471		2,379,998		2,187,819		113,600		2,301,419
Total loans and leases	$	3,414,909	$	203,155	$	3,618,064	$	3,386,727	$	247,684	$	3,634,411
Net deferred loan origination fees (costs) included in the above loan table	$	1,180	$	—	$	1,180	$	673	$	—	$	673

B. The following table details the components of net investment in leases:

 

Components of Net Investment in Leases
	June 30, 2021						December 31, 2020
(dollars in thousands)	Originated		Acquired		Total Leases		Originated		Acquired		Total Leases
Minimum lease payments receivable	$	151,783	$	1,275	$	153,058	$	164,556	$	2,583	$	167,139
Unearned lease income	(18,755)		(57)		(18,812)		(20,746)		(138)		(20,884)
Initial direct costs and deferred fees	5,905		18		5,923		6,104		38		6,142
Total Leases	$	138,933	$	1,236	$	140,169	$	149,914	$	2,483	$	152,397

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C. The following table details the amortized cost of nonperforming loans and leases as of the dates indicated:

   

Nonperforming Loans and Leases
	June 30, 2021						December 31, 2020
(dollars in thousands)	Originated		Acquired		Total Loans and Leases		Originated		Acquired		Total Loans and Leases
CRE - nonowner-occupied	$	396	$	—	$	396	$	57	$	—	$	57
CRE - owner-occupied	877		180		1,057		823		836		1,659
Home equity lines of credit	779		166		945		515		214		729
Residential mortgage - 1st liens	3,931		141		4,072		26		73		99
Residential mortgage - junior liens	148		32		180		50		35		85
Construction	216		—		216		—		—		—
Commercial & Industrial	3,050		—		3,050		1,657		118		1,775
Consumer	24		—		24		30		—		30
Leases	635		90		725		791		81		872
Total non-performing loans and leases	$	10,056	$	609	$	10,665	$	3,949	$	1,357	$	5,306

D. 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:

Payment Status of All Portfolio Loans and Leases
	Accruing Loans and Leases
As of June 30, 2021	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)
CRE - nonowner-occupied	$	—	$	731	$	—	$	731	$	1,418,499	$	1,419,230	$	396	$	1,419,626
CRE - owner-occupied	—		—		—		—		552,407		552,407		1,057		553,464
Home equity lines of credit	—		60		—		60		150,687		150,747		945		151,692
Residential mortgage - 1st liens	1,308		443		—		1,751		573,834		575,585		4,072		579,657
Residential mortgage - junior liens	28		—		—		28		25,326		25,354		180		25,534
Construction	—		—		—		—		204,142		204,142		216		204,358
Commercial & Industrial	—		8		—		8		495,039		495,047		3,050		498,097
Consumer	34		—		—		34		44,756		44,790		24		44,814
Leases	445		111		—		556		138,888		139,444		725		140,169
Total portfolio loans and leases	$	1,815	$	1,353	$	—	$	3,168	$	3,603,578	$	3,606,746	$	10,665	$	3,617,411

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Payment Status of All Portfolio Loans and Leases
	Accruing Loans and Leases
As of December 31, 2020	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)
CRE - nonowner-occupied	$	—	$	—	$	—	$	—	$	1,435,518	$	1,435,518	$	57	$	1,435,575
CRE - owner-occupied	1,907		416		—		2,323		574,527		576,850		1,659		578,509
Home equity lines of credit	87		—		—		87		168,521		168,608		729		169,337
Residential mortgage - 1st liens	6,020		217		—		6,237		615,033		621,270		99		621,369
Residential mortgage - junior liens	88		58		—		146		23,564		23,710		85		23,795
Construction	—		—		—		—		161,308		161,308		—		161,308
Commercial & Industrial	—		—		—		—		444,663		444,663		1,775		446,438
Consumer	32		16		—		48		39,605		39,653		30		39,683
Leases	1,196		810		—		2,006		149,519		151,525		872		152,397
Total portfolio loans and leases	$	9,330	$	1,517	$	—	$	10,847	$	3,612,258	$	3,623,105	$	5,306	$	3,628,411

The following tables present an aging of originated portfolio loans and leases as of the dates indicated:

Payment Status of Originated Portfolio Loans and Leases
	Accruing Loans and Leases
As of June 30, 2021	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)
CRE - nonowner-occupied	$	—	$	536	$	—	$	536	$	1,331,361	$	1,331,897	$	396	$	1,332,293
CRE - owner-occupied	—		—		—		—		530,707		530,707		877		531,584
Home equity lines of credit	—		60		—		60		140,498		140,558		779		141,337
Residential mortgage - 1st liens	521		385		—		906		505,678		506,584		3,931		510,515
Residential mortgage - junior liens	28		—		—		28		24,286		24,314		148		24,462
Construction	—		—		—		—		195,365		195,365		216		195,581
Commercial & Industrial	—		8		—		8		491,706		491,714		3,050		494,764
Consumer	34		—		—		34		44,729		44,763		24		44,787
Leases	445		111		—		556		137,742		138,298		635		138,933
Total portfolio loans and leases	$	1,028	$	1,100	$	—	$	2,128	$	3,402,072	$	3,404,200	$	10,056	$	3,414,256

Payment Status of Originated Portfolio Loans and Leases
	Accruing Loans and Leases
As of December 31, 2020	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)
CRE - nonowner-occupied	$	—	$	—	$	—	$	—	$	1,330,890	$	1,330,890	$	57	$	1,330,947
CRE - owner-occupied	1,907		416		—		2,323		541,636		543,959		823		544,782
Home equity lines of credit	87		—		—		87		156,783		156,870		515		157,385
Residential mortgage - 1st liens	4,109		217		—		4,326		535,955		540,281		26		540,307
Residential mortgage - junior liens	84		56		—		140		22,185		22,325		50		22,375
Construction	—		—		—		—		153,131		153,131		—		153,131
Commercial & Industrial	—		—		—		—		440,626		440,626		1,657		442,283
Consumer	32		16		—		48		39,525		39,573		30		39,603
Leases	1,196		735		—		1,931		147,192		149,123		791		149,914
Total portfolio loans and leases	$	7,415	$	1,440	$	—	$	8,855	$	3,367,923	$	3,376,778	$	3,949	$	3,380,727

Page 18

The following tables present an aging of acquired portfolio loans and leases as of the dates indicated:

Payment Status of Acquired Portfolio Loans and Leases
	Accruing Loans and Leases
As of June 30, 2021	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)
CRE - nonowner-occupied	$	—	$	195	$	—	$	195	$	87,138	$	87,333	$	—	$	87,333
CRE - owner-occupied	—		—		—		—		21,700		21,700		180		21,880
Home equity lines of credit	—		—		—		—		10,189		10,189		166		10,355
Residential mortgage - 1st liens	787		58		—		845		68,156		69,001		141		69,142
Residential mortgage - junior liens	—		—		—		—		1,040		1,040		32		1,072
Construction	—		—		—		—		8,777		8,777		—		8,777
Commercial & Industrial	—		—		—		—		3,333		3,333		—		3,333
Consumer	—		—		—		—		27		27		—		27
Leases	—		—		—		—		1,146		1,146		90		1,236
Total portfolio loans and leases	$	787	$	253	$	—	$	1,040	$	201,506	$	202,546	$	609	$	203,155

Payment Status of Acquired Portfolio Loans and Leases
	Accruing Loans and Leases
As of December 31, 2020	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)
CRE - nonowner-occupied	$	—	$	—	$	—	$	—	$	104,628	$	104,628	$	—	$	104,628
CRE - owner-occupied	—		—		—		—		32,891		32,891		836		33,727
Home equity lines of credit	—		—		—		—		11,738		11,738		214		11,952
Residential mortgage - 1st liens	1,911		—		—		1,911		79,078		80,989		73		81,062
Residential mortgage - junior liens	4		2		—		6		1,379		1,385		35		1,420
Construction	—		—		—		—		8,177		8,177		—		8,177
Commercial & Industrial	—		—		—		—		4,037		4,037		118		4,155
Consumer	—		—		—		—		80		80		—		80
Leases	—		75		—		75		2,327		2,402		81		2,483
Total portfolio loans and leases	$	1,915	$	77	$	—	$	1,992	$	244,335	$	246,327	$	1,357	$	247,684

E. Allowance for Credit Losses (“ACL”) on Loans and Leases

The ACL on loans and leases represents management’s estimate of all expected credit losses over the expected contractual life of our existing portfolio loans and leases. Determining the appropriateness of the ACL on loans and leases is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACL on loans and leases in those future periods.

The expense for credit loss recorded through earnings is the amount necessary to maintain the ACL on loans and leases at the amount of expected credit losses inherent within the loans and leases portfolio. The amount of expense and the corresponding level of ACL on loans and leases are based on management’s evaluation of the collectability of the loan and lease portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. The ACL on loans and leases, as reported in our Consolidated Statements of Financial Condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan and lease amounts, net of recoveries.

Management employs a disciplined process and methodology to establish the ACL on loans and leases that has two basic components: first, an asset-specific component involving individual loans and leases that do not share risk characteristics with other loans and leases and the measurement of expected credit losses for such individual loans; and second, a collective (pooled) component for estimated expected credit losses for pools of loans and leases that share similar risk characteristics.

Based upon this methodology, management establishes an asset-specific ACL on loans and leases that do not share risk characteristics with other loans and leases based on the amount of expected credit losses calculated on those loans and leases and charges off amounts

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determined to be uncollectible. Factors we consider in measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

When a loan or lease does not share risk characteristics with other loans or leases, management measures expected credit loss as the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate except that, for collateral dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. If the calculated expected credit loss is determined to be permanent, fixed or nonrecoverable, the credit loss portion of the loan will be charged off against the ACL on loans and leases. Loans and leases designated as having significantly increased credit risk are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status.

In estimating the component of the ACL on loans and leases that share common risk characteristics, loans and leases are segregated into portfolio segments based on federal call report codes which classify loans and leases based on the primary collateral supporting the loan or lease. Methods utilized by management to estimate expected credit losses include 1) a discounted cash flow (“DCF”) methodology that discounts instrument-level contractual cash flows, adjusted for prepayments and curtailments, incorporating loss expectations, and 2) a weighted average remaining maturity (“WARM”) methodology which contemplates expected losses at a pool-level, utilizing historic loss information.

Under both methodologies, management estimates the ACL on loans and leases using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. After the end of the reasonable and supportable forecast period, the loss rates revert to the long-term mean loss rate, or in the case of an input-driven predictive method, the long-term mean of the input, using a reversion period where applicable. Historical credit loss experience, including examination of loss experience at representative peer institutions when the Corporation’s first-party loss history does not result in estimations that are meaningful to users of the Corporation’s Consolidated Financial Statements, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.

The DCF methodology uses inputs of current and forecasted macroeconomic indicators to predict future loss rates. The current macroeconomic indicator utilized by the bank is the Pennsylvania unemployment rate. In building the Current Expected Credit Loss (“CECL”) model utilized in the DCF methodology, a correlation between this indicator and historic loss levels was developed, enabling a prediction of future loss rates related to future Pennsylvania unemployment rates. The portfolio segments utilizing the DCF methodology as of June 30, 2021 included: CRE - owner-occupied and nonowner-occupied loans, home equity lines of credit, residential mortgages (first and junior liens), construction loans and consumer loans.

The WARM methodology uses combined historic loss rates for the Bank and peer institutions, if necessary, gathered from Call Report filings. The selected period for which historic loss rates are used is dependent on management's evaluation of current conditions and expectations of future loss conditions. The portfolio segments utilizing the WARM methodology as of June 30, 2021 included commercial and industrial loans and leases.

For the three months ended June 30, 2021, there was a favorable change in the economic outlook impacting the ACL on loans and leases. Our CECL model, which had included a sharp deterioration in the Pennsylvania unemployment rate during the first and second quarters of 2020, began forecasting a declining rate of Pennsylvania unemployment as of the third quarter of 2020 and as of March 31, 2021, is forecasting a continued decrease in the rate through the first quarter of 2022, followed by a reversion to the long-term 15-year average.

In addition to these assumptions, management applied additional qualitative factors related to the continued stress, brought on by the COVID-19 pandemic, on certain segments of the loan portfolio. In particular, the retail and hospitality sectors of the nonowner-occupied CRE segment were directly impacted by the many shutdowns and curtailments of consumer activity during most of 2020.

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The following tables present the activity in the ACL on loans and leases, by portfolio segment, for the three and six months ended June 30, 2021 and 2020:

Roll-Forward of ACL on Loans and Leases
(dollars in thousands)	CRE - nonowner-occupied		CRE - owner-occupied		Home equity lines of credit		Residential mortgage - 1st liens		Residential mortgage - junior liens		Construction		Commercial & Industrial		Consumer		Leases		Total
Balance, March 31, 2021	$	15,777	$	5,845	$	1,280	$	5,638	$	439	$	3,124	$	8,611	$	381	$	6,467	$	47,562
Loans and leases charged-off	—		(5)		(46)		(24)		—		(116)		(2,592)		(156)		(425)		(3,364)
Recoveries collected	—		475		—		1		—		1		269		11		216		973
PCL on loans and leases	(3,875)		(1,769)		(204)		(995)		(59)		(734)		2,582		131		(1,085)		(6,008)
Balance, June 30, 2021	$	11,902	$	4,546	$	1,030	$	4,620	$	380	$	2,275	$	8,870	$	367	$	5,173	$	39,163

Roll-Forward of ACL on Loans and Leases

(dollars in thousands)	CRE - nonowner-occupied		CRE - owner-occupied		Home equity lines of credit		Residential mortgage - 1st liens		Residential mortgage - junior liens		Construction		Commercial & Industrial		Consumer		Leases		Total
Balance, December 31, 2020	$	19,382	$	6,982	$	1,406	$	7,782	$	382	$	2,707	$	8,087	$	325	$	6,656	$	53,709
Loans and leases charged-off	—		(194)		(46)		(25)		—		(116)		(2,720)		(278)		(1,075)		(4,454)
Recoveries collected	—		475		—		1		—		2		451		26		466		1,421
PCL on loans and leases	(7,480)		(2,717)		(330)		(3,138)		(2)		(318)		3,052		294		(874)		(11,513)
Balance, June 30, 2021	$	11,902	$	4,546	$	1,030	$	4,620	$	380	$	2,275	$	8,870	$	367	$	5,173	$	39,163

Roll-Forward of ACL on Loans and Leases

(dollars in thousands)	CRE - nonowner-occupied		CRE - owner-occupied		Home equity lines of credit		Residential mortgage - 1st liens		Residential mortgage - junior liens		Construction		Commercial & Industrial		Consumer		Leases		Total
Balance, March 31, 2020	$	13,329	$	4,192	$	2,748	$	8,316	$	517	$	6,984	$	8,734	$	341	$	8,909	$	54,070
Loans and leases charged-off	—		(1,234)		—		(556)		—		—		(522)		(296)		(1,443)		(4,051)
Recoveries collected	4		—		4		136		—		1		22		57		428		652
PCL on loans and leases	1,998		2,125		(1,125)		302		4		(924)		(246)		338		1,831		4,303
Balance, June 30, 2020	$	15,331	$	5,083	$	1,627	$	8,198	$	521	$	6,061	$	7,988	$	440	$	9,725	$	54,974

Roll-Forward of ACL on Loans and Leases

(dollars in thousands)	CRE - nonowner-occupied		CRE - owner-occupied		Home equity lines of credit		Residential mortgage - 1st liens		Residential mortgage - junior liens		Construction		Commercial & Industrial		Consumer		Leases		Total
Balance, December 31, 2019 Prior to Adoption of ASC 326	$	7,960	$	2,825	$	1,114	$	2,501	$	338	$	1,230	$	3,835	$	438	$	2,361	$	22,602
Impact of Adopting ASC 326	(467)		16		(46)		2,408		79		(359)		(159)		140		1,594		3,206
Loans and leases charged-off	—		(1,233)		(114)		(1,284)		—		—		(1,149)		(590)		(4,069)		(8,439)
Recoveries collected	6		—		4		137		—		2		37		90		692		968
PCL on loans and leases	7,832		3,475		669		4,436		104		5,188		5,424		362		9,147		36,637
Balance, June 30, 2020	$	15,331	$	5,083	$	1,627	$	8,198	$	521	$	6,061	$	7,988	$	440	$	9,725	$	54,974

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As part of the process of determining the ACL for the different segments of the loan and lease portfolio, management considers certain credit quality indicators. Periodic reviews of loans are conducted 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.

•Pass-Watch – Loans that are performing, but which may have a potential deficiency which the borrower appears to be managing or a possible deficiency in the future.

•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.

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The following table details the amortized cost of portfolio loans and leases, by year of origination (for term loans) and by risk grade within each portfolio segment as of June 30, 2021:

		Term Loans												Revolving Loans
		Amortized Cost Basis by Origination Year(1)												Amortized Cost Basis
(dollars in thousands)	Risk Rating	2021		2020		2019		2018		2017		2016 and Prior		Revolving Lines of Credit		Revolving Lines of Credit Converted to Term Loans		Total
CRE - nonowner-occupied	Pass	$	89,743	$	303,370	$	424,830	$	152,520	$	104,325	$	163,757	$	36,407	$	—	$	1,274,952
	Pass-Watch	—		2,467		2,781		15,331		9,060		22,395		—		—		52,034
	Special Mention	—		—		—		8,889		3,335		25,915		—		—		38,139
	Substandard	955		7,868		27,586		10,874		815		6,403		—		—		54,501
	Total	$	90,698	$	313,705	$	455,197	$	187,614	$	117,535	$	218,470	$	36,407	$	—	$	1,419,626
CRE - owner-occupied	Pass	$	36,900	$	120,057	$	115,172	$	95,522	$	61,496	$	69,492	$	14,108	$	—	$	512,747
	Pass-Watch	—		13,376		2,327		2,478		153		1,542		335		—		20,211
	Special Mention	—		1,398		269		3,870		—		456		—		—		5,993
	Substandard	473		4,704		2,847		4,439		—		1,951		99		—		14,513
	Total	$	37,373	$	139,535	$	120,615	$	106,309	$	61,649	$	73,441	$	14,542	$	—	$	553,464
Home equity lines of credit	Pass	$	—	$	(17)	$	813	$	—	$	79	$	2,431	$	146,547	$	795	$	150,648
	Special Mention	—		—		—		—		—		—		99		—		99
	Substandard	—		392		—		261		153		139		—		—		945
	Total	$	—	$	375	$	813	$	261	$	232	$	2,570	$	146,646	$	795	$	151,692
Residential mortgage - 1st liens	Pass	$	73,920	$	106,645	$	104,657	$	49,492	$	62,204	$	172,835	$	1,215	$	—	$	570,968
	Pass-Watch	—		—		461		—		—		619		—		—		1,080
	Special Mention	—		1,257		—		340		—		—		—		—		1,597
	Substandard	—		874		842		2,103		225		1,968		—		—		6,012
	Total	$	73,920	$	108,776	$	105,960	$	51,935	$	62,429	$	175,422	$	1,215	$	—	$	579,657
Residential mortgage - junior liens	Pass	$	6,674	$	2,463	$	3,667	$	3,096	$	2,314	$	7,036	$	67	$	—	$	25,317
	Special Mention	—		—		—		36		—		—		—		—		36
	Substandard	102		—		—		—		—		79		—		—		181
	Total	$	6,776	$	2,463	$	3,667	$	3,132	$	2,314	$	7,115	$	67	$	—	$	25,534
Construction	Pass	$	51,740	$	72,565	$	41,586	$	2,866	$	819	$	5,573	$	20,024	$	—	$	195,173
	Pass-Watch	—		6,432		—		2,537		—		—		—		—		8,969
	Substandard	—		—		216		—		—		—		—		—		216
	Total	$	51,740	$	78,997	$	41,802	$	5,403	$	819	$	5,573	$	20,024	$	—	$	204,358
Commercial & Industrial	Pass	$	69,108	$	120,033	$	29,924	$	58,022	$	6,849	$	31,335	$	99,233	$	—	$	414,504
	Pass-Watch	3,984		13,366		4,011		839		4,284		1,016		6,763		—		34,263
	Special Mention	9,432		19,122		700		3,949		—		—		4,040		—		37,243
	Substandard	584		3,370		1,918		3,178		1,275		1,448		314		—		12,087
	Total	$	83,108	$	155,891	$	36,553	$	65,988	$	12,408	$	33,799	$	110,350	$	—	$	498,097
Consumer	Pass	$	527	$	1,051	$	2,492	$	988	$	105	$	144	$	38,534	$	—	$	43,841
	Substandard	—		949		7		17		—		—		—		—		973
	Total	$	527	$	2,000	$	2,499	$	1,005	$	105	$	144	$	38,534	$	—	$	44,814
Leases	Pass	$	22,190	$	43,264	$	45,009	$	24,244	$	4,503	$	233	$	—	$	—	$	139,443
	Substandard	—		—		256		336		128		6		—		—		726
	Total	$	22,190	$	43,264	$	45,265	$	24,580	$	4,631	$	239	$	—	$	—	$	140,169
Total portfolio loans and leases		$	366,332	$	845,006	$	812,371	$	446,227	$	262,122	$	516,773	$	367,785	$	795	$	3,617,411

(1) Year originated or renewed, whichever is more recent.

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The following tables present the amortized cost basis of loans and leases on nonaccrual status and loans and leases past due over 89 days still accruing as of the dates indicated:

As of June 30, 2021
(dollars in thousands)	Nonaccrual with No ACL		Nonaccrual with ACL		Loans Past Due Over 89 Days Still Accruing
CRE - nonowner-occupied	$	396	$	—	$	—
CRE - owner-occupied	1,057		—		—
Home equity lines of credit	945		—		—
Residential mortgage - 1st liens	4,072		—		—
Residential mortgage - junior liens	181		—		—
Construction	216		—		—
Commercial & Industrial	3,049		—		—
Consumer	—		24		—
Leases	—		725		—
Total non-performing loans and leases	$	9,916	$	749	$	—

As of December 31, 2020
(dollars in thousands)	Nonaccrual with No ACL		Nonaccrual with ACL		Loans Past Due Over 89 Days Still Accruing
CRE - nonowner-occupied	$	57	$	—	$	—
CRE - owner-occupied	1,659		—		—
Home equity lines of credit	729		—		—
Residential mortgage - 1st liens	99		—		—
Residential mortgage - junior liens	85		—		—
Construction	—		—		—
Commercial & Industrial	1,775		—		—
Consumer	—		30		—
Leases	—		872		—
Total non-performing loans and leases	$	4,404	$	902	$	—

For the six months ended June 30, 2021, $140 thousand of interest income was recognized on nonaccrual loans and leases.

Collateral-dependent loans and leases for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral are, in general, individually evaluated for credit losses. Identified shortfalls between the amortized cost of the individually evaluated loan or lease and the value, less selling costs, of the underlying collateral are charged against the ACL. In certain cases, when the loan or lease is serviced by a third-party, and management is unable to process a timely charge-down of the loan or lease, it will assess a specific ACL to the individual loan or lease. This ACL represents the shortfall between the amortized cost and realizable value of the collateral.

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The following tables present the amortized cost basis of collateral-dependent loans and leases, indicating the type of collateral and the ACL determined through individual evaluation for credit loss, as of the dates indicated:

As of June 30, 2021
(dollars in thousands)	Real Estate Collateral		Non-Real Estate Collateral		Individually Evaluated ACL
CRE - nonowner-occupied	$	396	$	—	$	—
CRE - owner-occupied	1,057		—		—
Home equity lines of credit	945		—		—
Residential mortgage - 1st liens	4,072		—		—
Residential mortgage - junior liens	181		—		—
Construction	216		—		—
Commercial & Industrial	—		3,049		—
Consumer	—		24		24
Leases	—		725		633
Total collateral-dependent loans and leases	$	6,867	$	3,798	$	657

As of December 31, 2020
(dollars in thousands)	Real Estate Collateral		Non-Real Estate Collateral		Individually Evaluated ACL
CRE - nonowner-occupied	$	57	$	—	$	—
CRE - owner-occupied	1,659		—		—
Home equity lines of credit	729		—		—
Residential mortgage - 1st liens	99		—		—
Residential mortgage - junior liens	85		—		—
Construction	—		—		—
Commercial & Industrial	—		1,775		—
Consumer	—		30		30
Leases	—		872		814
Total collateral-dependent loans and leases	$	2,629	$	2,677	$	844

F. 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.

The Corporation has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), loans to borrowers experiencing financial difficulty related to the COVID-19 pandemic which were granted short-term modifications after March 1, 2020 and which were not more than 30 days past due as of December 31, 2019 are exempt from TDR classification. In addition, for loans modified in response to the COVID-19 pandemic that do not meet the above delinquency criteria (e.g., not more than 30 days past due as of December 31, 2019), the Corporation applies the guidance included in an interagency statement issued by the bank regulatory agencies. This guidance states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were less than 30 days past due as of the

Page 25

implementation date of a loan modification program or modifications granted under government mandated modification programs, are also exempt from TDR classification. For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. As of June 30, 2021, 11 consumer loans and leases in the amount of $1.6 million and 25 commercial loans in the amount of $63.1 million were within a deferral period under the Bank's modification programs, the total comprising 1.8% of the Bank’s portfolio loans and leases as of that date. As of December 31, 2020, 66 consumer loans and leases in the amount of $7.3 million and 37 commercial loans in the amount of $67.7 million were within a deferral period under the Bank's COVID-19 modification programs, the total comprising 2.1% of the Bank’s portfolio loans and leases as of that date.

The following table presents the balance of TDRs as of the indicated dates:

Troubled Debt Restructurings
(dollars in thousands)	June 30, 2021		December 31, 2020
TDRs included in nonperforming loans and leases	$	893	$	1,737
TDRs in compliance with modified terms	5,629		7,046
Total TDRs	$	6,522	$	8,783

There were no loan and lease modifications categorized as TDRs during the three months ended June 30, 2021. The following table presents information regarding loan and lease modifications categorized as TDRs for the six months ended June 30, 2021: 

Troubled Debt Restructurings
	For the Six Months Ended June 30, 2021
(dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential mortgage - 1st liens	1	$	101	$	102
Leases	7	332		332
Total	8	$	433	$	434

The following table presents information regarding the types of loan and lease modifications made for the six months ended June 30, 2021:

Troubled Debt Restructurings
	Number of Contracts for the Six Months Ended June 30, 2021
	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
Residential mortgage - 1st liens	—	1	—	—	—
Leases	—	—	—	7	—
Total	—	1	—	7	—

For the six months ended June 30, 2021, two commercial & industrial loans, in the aggregate amount of $124 thousand and one lease in the amount of $27 thousand that were modified as TDRs during the past 12 months defaulted and were charged off.

G. ACL on Off-Balance Sheet ("OBS") Credit Exposures

Management estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The ACL on OBS credit exposure, included within Other Liabilities on the Consolidated Balance Sheet, is adjusted as a provision for credit loss expense included within Provision for Credit Losses on the Consolidated Statement of Income. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the bank and applying the loss factors used in the ACL on loans and leases methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for OBS credit exposures that are unconditionally cancellable by the Bank.

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The ACL on OBS credit exposure as of June 30, 2021 and December 31, 2020 was $2.6 million and $2.9 million, respectively. For the three and six months ended June 30, 2021, the Corporation recorded releases from ACL on OBS of $570 thousand and $311 thousand, respectively. For the three months ended June 30, 2020, the Corporation recorded a release from ACL on OBS of $867 thousand. For the six months ended June 30, 2020, the Corporation recorded a provision for credit losses on OBS credit exposures of $2.1 million.

H. ACL on Accrued Interest Receivable

Accrued interest receivable on loans and leases, which is reported in Accrued interest receivable on the Consolidated Balance Sheet, totaled $9.9 million and $12.1 million as of June 30, 2021 and December 31, 2020, respectively, and is excluded from the estimate of credit losses due to our charge-off policy to reverse accrued interest in a timely manner on loans and leases that are 90-days past due and deemed nonperforming. However, the Corporation continued to accrue interest on loans and leases for which payment deferrals have been extended to borrowers affected by the COVID-19 pandemic. Deferrals under the Corporation's modification program may be for durations which exceed the Corporation’s 90-day write-off policy for accrued interest. Therefore, these interest deferrals do not qualify for the Corporation’s election to not recognize a credit loss allowance for credit losses on accrued interest receivable. Accordingly, the Corporation has estimated credit losses for COVID-19 interest deferrals of $60 thousand and $64 thousand as of June 30, 2021 and December 31, 2020, respectively, which is included as a reduction to Accrued interest receivable on the Consolidated Balance Sheet.

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Note 6 – Mortgage Servicing Rights

The following table summarizes the Corporation’s activity related to mortgage servicing rights (“MSRs”) for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30,
(dollars in thousands)	2021		2020
Balance, beginning of period	$	2,493	$	4,115
Additions	—		—
Amortization	(272)		(453)
Impairment	(48)		(222)
Balance, end of period	$	2,173	$	3,440
Fair value	$	2,173	$	3,440
Residential mortgage loans serviced for others	$	303,628	$	445,233

	Six Months Ended June 30,
(dollars in thousands)	2021		2020
Balance, beginning of period	$	2,626	$	4,450
Additions	—		—
Amortization	(405)		(557)
Impairment	(48)		(453)
Balance, end of period	$	2,173	$	3,440

As of June 30, 2021, and December 31, 2020, key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10% and 20% adverse changes in those assumptions are as follows:

(dollars in thousands)	June 30, 2021			December 31, 2020
Fair value amount of MSRs	$	2,173		$	2,632
Weighted average life (in years)	4.4			4.9
Prepayment speeds (constant prepayment rate)(1)	14.8		%	13.1		%
Impact on fair value:
10% adverse change	$	(117)		$	(141)
20% adverse change	(226)			(273)
Discount rate	9.06		%	9.56		%
Impact on fair value:
10% adverse change	$	(60)		$	(81)
20% adverse change	(117)			(156)

(1) Represents the weighted average prepayment rate for the life of the MSR asset.

At June 30, 2021 and December 31, 2020, the fair value of the MSRs was $2.2 million and $2.6 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.

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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 Intangible Assets

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 six months ended June 30, 2021:

(dollars in thousands)	Balance December 31, 2020		Amortization		Balance June 30, 2021		Amortization Period
Goodwill – Wealth	$	20,412	$	—	$	20,412	Indefinite
Goodwill – Banking	156,991		—		156,991		Indefinite
Goodwill – Insurance	6,609		—		6,609		Indefinite
Total Goodwill	184,012		—		184,012
Core deposit intangible	3,488		(462)		3,026		10 years
Customer relationships	10,012		(899)		9,113		5 to 20 years
Non-compete agreements	722		(95)		627		5 to 10 years
Trade name	1,191		(217)		974		3 to 5 years
Domain name	151		—		151		Indefinite
Total Intangible Assets	15,564		(1,673)		13,891
Total Goodwill and Intangible Assets	$	199,576	$	(1,673)	$	197,903

Management conducted its annual impairment tests for goodwill and indefinite-lived intangible assets as of October 31, 2020 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, 2021, management determined there were no events that would necessitate impairment testing of goodwill or indefinite-lived intangible assets.

Note 8 – Deposits

The following table details the components of deposits:

(dollars in thousands)	June 30, 2021		December 31, 2020
Interest-bearing demand	$	668,664	$	885,802
Money market	1,183,252		1,163,620
Savings	289,108		282,406
Retail time deposits	270,926		331,527
Wholesale non-maturity deposits	73,011		275,011
Wholesale time deposits	6,141		36,045
Total interest-bearing deposits	2,491,102		2,974,411
Noninterest-bearing deposits	1,468,643		1,401,843
Total deposits	$	3,959,745	$	4,376,254

Note 9 – Short-Term Borrowings and Long-Term FHLB Advances

A. Short-term borrowings

The Corporation’s short-term borrowings (original maturity of one year or less), which consist of funds obtained from overnight repurchase agreements with commercial customers, FHLB advances with original maturities of one year or less and overnight fed funds, are detailed below.

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A summary of short-term borrowings is as follows:

(dollars in thousands)	June 30, 2021		December 31, 2020
Repurchase agreements(1) – commercial customers	$	21,553	$	38,836
Short-term FHLB advances	—		33,325
Total short-term borrowings	$	21,553	$	72,161

(1) 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)	2021			2020			2021			2020
Balance at period-end	$	21,553		$	28,891		$	21,553		$	28,891
Maximum amount outstanding at any month end	22,559			174,431			60,027			174,431
Average balance outstanding during the period	19,935			136,816			25,944			138,700
Weighted-average interest rate:
As of the period-end	0.10		%	0.10		%	0.10		%	0.10		%
Paid during the period	0.10		%	0.68		%	0.12		%	0.99		%

Average balances outstanding during the year represent daily average balances and average interest rates represent interest expense divided by the related average balance.

B. Long-term FHLB Advances

As of June 30, 2021 and December 31, 2020, the Corporation had $40.0 million and $39.9 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, 2021		December 31, 2020
Within one year	$	39,976	$	39,906
Over one year through five years	—		—
Total	$	39,976	$	39,906

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, 2021		December 31, 2020
Bullet maturity – fixed rate	8/24/2021	11/12/2021	1.68	%	1.40	%	1.85	%	$	39,976	$	39,906

(1) Maturity range, weighted average rate and coupon rate range refers to June 30, 2021 balances.

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 $4.3 million at June 30, 2021, and $12.7 million at December 31, 2020. 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

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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 $1.77 billion as of June 30, 2021 of which the unused capacity was $1.73 billion. In addition, there were $74.0 million in the overnight federal funds line available and $118.9 million of FRB discount window capacity.

Note 10 – Subordinated Notes

On December 13, 2017, BMBC 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, BMBC 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 subordinated notes qualify as Tier 2 capital

for regulatory capital purposes, subject to applicable limitations.

The following tables detail the subordinated notes, including debt issuance costs, as of June 30, 2021, and December 31, 2020:

	June 30, 2021				December 31, 2020
(dollars in thousands)	Balance		Rate(1)(2)		Balance		Rate(1)(2)
Subordinated notes – due 2027	$	69,196	4.25	%	$	69,133	4.25	%
Subordinated notes – due 2025	29,777		3.46		29,750		3.29
Total subordinated notes	$	98,973			$	98,883

(1) The 2027 Notes bear interest at an annual fixed rate of 4.25% from the date of issuance until and including 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 were bearing interest at an annual fixed rate of 4.75% from the date of issuance until and including August 14, 2020, and thereafter bear interest at a variable rate that resets 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 BMBC 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 BMBC assumed as a result of the RBPI Merger, junior subordinated debentures to the Trusts of $10.7 million each, totaling $21.4 million. The junior subordinated debentures incur interest at a coupon rate of 2.27% as of June 30, 2021. 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 BMBC. As a result of the RBPI Merger, BMBC 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 BMBC any time. 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.

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Note 12 – Operating Leases

The Corporation’s operating leases consist of various retail branch locations and corporate offices. As of June 30, 2021, the Corporation’s leases have remaining lease terms ranging from eleven months to 21 years including extension options that the Corporation is reasonably certain will be exercised.

The Corporation’s leases include fixed rental payments, and certain of our leases also include variable rental payments where lease payments may increase at pre-determined dates based on the change in the consumer price index. The Corporation’s lease agreements include gross leases as well as leases in which we make separate payments to the lessor for items such as the property taxes assessed on the property or a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and non-lease components for all of our building leases. The Corporation also elected to not recognize right-of-use assets (“ROU assets”) and lease liabilities for short-term leases, which consist of certain leases of the Corporation’s limited-hour retirement community offices.

As of June 30, 2021, the Corporation’s ROU assets and related lease liabilities were $33.8 million and $39.4 million, respectively.

The components of lease expense were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
(dollars in thousands)
Operating lease expense	$	1,013	$	1,198	$	2,116	$	2,396
Short term lease expense	14		14		29		29
Variable lease expense	297		308		621		665
Sublease income	(5)		(8)		(10)		(17)
Total lease expense	$	1,319	$	1,512	$	2,756	$	3,073

Supplemental cash flow information related to leases was as follows:

	Six Months Ended June 30,
	2021		2020
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,158	$	2,348
ROU assets obtained in exchange for lease liabilities	575		—

Maturities of operating lease liabilities under FASB ASC 842 “Leases” as of June 30, 2021 are as follows:

	June 30, 2021
(dollars in thousands)
2021	$	2,161
2022	4,214
2023	3,918
2024	3,793
2025	3,859
2026 and thereafter	32,548
Total lease payments	50,493
Less: imputed interest	11,093
Present value of operating lease liabilities	$	39,400

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As of June 30, 2021, the weighted-average remaining lease term, including extension options that the Corporation is reasonably certain will be exercised, for all operating leases is 13.46 years.

Because we generally do not have access to the rate implicit in the lease, we utilize our incremental borrowing rate as the discount rate. The weighted average discount rate associated with operating leases as of June 30, 2021 is 3.57%.

As of June 30, 2021, the Corporation had not entered into any material leases that have not yet commenced.

Note 13 – Derivative Instruments and Hedging Activities

A.Derivatives not designated as hedging instruments

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 Corporation enters into derivative transactions as an economic hedge of 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 with commercial loan customers and correspondent banks wishing to manage interest rate risk. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge the exposure arising from these contracts. 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, 2021, there were no fair value adjustments related to credit quality.

Foreign Exchange Forward Contracts. The Corporation enters into foreign exchange forward contracts (“FX forwards”) with customers to exchange one currency for another on an agreed date in the future at an agreed exchange rate. The Corporation then enters into corresponding FX forwards with swap dealer counterparties to economically hedge its exposure on the exchange rate component of the customer agreements. The FX forwards with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. Exposure to gains and losses on these contracts increase or decrease over their respective lives as currency exchange and interest rates fluctuate. As the FX forwards are structured to offset each other, changes to the underlying term structure of currency exchange 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, 2021, 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.”

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The following table details the derivatives not designated as hedging instruments as of June 30, 2021 and December 31, 2020:

	Asset Derivatives				Liability Derivatives
(dollars in thousands)	Notional Amount		Fair Value(1)		Notional Amount		Fair Value(2)
Derivatives not designated as hedging instruments
As of June 30, 2021:
Customer derivatives – interest rate swaps	$	1,188,491	$	87,483	$	1,188,491	$	87,483
FX forwards	1,036		20		269		3
RPAs sold	—		—		44,675		18
RPAs purchased	59,101		230		—		—
Total derivatives	$	1,248,628	$	87,733	$	1,233,435	$	87,504
As of December 31, 2020:
Customer derivatives – interest rate swaps	$	1,102,753	$	113,848	$	1,102,753	$	113,848
FX forwards	9,146		52		9,856		70
RPAs sold	—		—		33,111		30
RPAs purchased	55,415		342		—		—
Total derivatives	$	1,167,314	$	114,242	$	1,145,720	$	113,948

(1) Included within Other Assets on the Unaudited Consolidated Balance Sheet.

(2) Included within Other Liabilities on the Unaudited Consolidated Balance Sheet.

B.Derivatives designated as hedging instruments

Management's objectives in using interest rate derivative financial instruments are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Corporation has entered into interest rate swaps designated as cash flow hedges that involve the receipt of fixed rate amounts from a counterparty in exchange for the Corporation making variable rate payments. As of June 30, 2021, the Corporation had entered into three interest rate swaps with an aggregate notional value of $150.0 million. The Corporation will pay a floating rate component of interest equal to the one-month LIBOR rate for up to ten years while receiving a fixed rate of interest. The interest paid on the variable rate component is intended to offset the interest received on variable rate commercial mortgages within the Corporation's loan portfolio. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The exchange of cash flows is determined by reference to the notional amount and the other terms of the interest rate swap agreement.

The following table summarizes information about the interest rate swaps designated as cash flow hedges as of June 30, 2021:

(dollars in thousands)
Notional Amount	$	150,000
Weighted average fixed-receive rate	1.19		%
Weighted average pay-float rate	0.10		%
Weighted average maturity in years	8.99

The following table details the derivatives designated as hedging instruments as of June 30, 2021. The Corporation did not have derivatives designated as hedging instruments as of December 31, 2020:

	Asset Derivatives				Liability Derivatives
(dollars in thousands)	Notional Amount		Fair Value(1)		Notional Amount		Fair Value(2)
Derivatives designated as hedging instruments
As of June 30, 2021:
Interest rate swaps	$	100,000	$	342	$	50,000	$	764

(1) Included within Other Assets on the Unaudited Consolidated Balance Sheet.

(2) Included within Other Liabilities on the Unaudited Consolidated Balance Sheet.

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The following table presents the effect of cash flow hedge accounting on accumulated other comprehensive income for the three months ended June 30, 2021:

(dollars in thousands)	Amount of Gain (Loss) Recognized in OCI on Derivative		Location of Gain (Loss) Reclassified from OCI into Income	Amount of Gain (Loss) Reclassified from OCI into Income
Interest rate swaps	$	4,948	Interest Income	$	413

The following table presents the effect of cash flow hedge accounting on accumulated other comprehensive income for the six months ended June 30, 2021:

(dollars in thousands)	Amount of Gain (Loss) Recognized in OCI on Derivative		Location of Gain (Loss) Reclassified from OCI into Income	Amount of Gain (Loss) Reclassified from OCI into Income
Interest rate swaps	$	176	Interest Income	$	599

During the next twelve months, the Corporation estimates that $679 thousand will be reclassified from OCI as an increase to interest income.

Gains and losses on interest rate swaps related to funding liabilities are recorded in interest income. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Unaudited Consolidated Statement of Changes in Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in other income or expense.

C.Pledged Collateral

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, 2021 and December 31, 2020 was $82.5 million and $124.8 million, respectively, and is comprised of a combination of cash and investment securities. 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 $78.9 million and $113.2 million as of June 30, 2021 and December 31, 2020, respectively.

Note 14 – 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 2017.

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 six months ended June 30, 2021 or 2020.

Note 15 – Shareholders’ Equity

Dividend

On July 22, 2021, BMBC’s Board of Directors declared a regular quarterly dividend of $0.28 per share payable September 1, 2021 to shareholders of record as of August 2, 2021. During the second quarter of 2021, the Corporation paid or accrued, as

Page 35

applicable, a regular quarterly dividend of $0.27 per share. This dividend totaled $5.6 million, based on outstanding shares and restricted stock units as of May 4, 2021 of 20,235,885 shares.

S-3 Shelf Registration Statement and Offerings Thereunder

In May 2018, BMBC filed a shelf registration statement on Form S-3, SEC File No. 333-224849 (the “Shelf Registration Statement”), which expired in May 2021. While active, the Shelf Registration Statement allowed BMBC 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. BMBC was allowed to 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, BMBC 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. A RFW is granted based on a variety of factors, including BMBC’s current and projected capital needs, prevailing market prices of BMBC’s common stock and general economic and market conditions.

For the three and six months ended June 30, 2021, BMBC did not issue any shares under the Plan. The Plan administrator conducted dividend reinvestments for Plan participants through open market purchases. No RFWs were approved during the three and six months ended June 30, 2021. No sales of equity securities were executed under the Shelf Registration Statement during the three and six months ended June 30, 2021 and prior to its expiration.

Option Exercises and Vesting of Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”)

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, 2021, no shares were issued pursuant to the exercise of stock options. The increase in shareholders’ equity related to the vesting of RSUs and PSUs, which is recognized over the vesting period through stock based compensation expense, was $452 thousand and $1.0 million for the three and six months ended June 30, 2021, respectively.

Stock Repurchases

On April 18, 2019, BMBC announced a stock repurchase program (the “2019 Program”) pursuant to which the Corporation may repurchase up to 1,000,000 shares of BMBC's common stock. Under the 2019 Program, the Corporation may repurchase BMBC's common stock at any price, but the aggregate purchase price is not to exceed $45 million. The 2019 Program became effective in the second quarter of 2019. During the three months ended March 31, 2021, 80,788 shares were repurchased under the 2019 Program at an average price of $31.77. No shares were repurchased during the three months ended June 30, 2021. During the three months ended March 31, 2020, 207,201 shares were repurchased under the 2019 Program at an average price of $34.99. No shares were repurchased during the three months ended June 30, 2020. All share repurchases were accomplished in open market transactions. As of June 30, 2021, the maximum number of shares remaining authorized for repurchase under the 2019 Program was 629,244, at an aggregate purchase price not to exceed $32.2 million.

In addition to the 2019 Program, it is BMBC’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.

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Note 16 – Accumulated Other Comprehensive Income (Loss)

The following table details the components of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020:

(dollars in thousands)	Net Change in Unrealized Gains on Available-for- Sale Investment Securities		Net Change in Fair Value of Derivative Used for Cash Flow Hedge		Net Change in Unfunded Pension Liability		Accumulated Other Comprehensive Income (Loss)
Balance, March 31, 2021	$	6,024	$	(3,916)	$	(1,954)	$	154
Other comprehensive income	1,034		3,583		27		4,644
Balance, June 30, 2021	$	7,058	$	(333)	$	(1,927)	$	4,798
Balance, March 31, 2020	$	10,569	$	—	$	(1,700)	$	8,869
Other comprehensive income	127		—		23		150
Balance, June 30, 2020	$	10,696	$	—	$	(1,677)	$	9,019

(dollars in thousands)	Net Change in Unrealized Gains on Available-for- Sale Investment Securities		Net Change in Fair Value of Derivative Used for Cash Flow Hedge		Net Change in Unfunded Pension Liability		Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2020	$	10,954	$	—	$	(2,006)	$	8,948
Other comprehensive (loss) income	(3,896)		(333)		79		(4,150)
Balance, June 30, 2021	$	7,058	$	(333)	$	(1,927)	$	4,798
Balance, December 31, 2019	$	3,910	$	—	$	(1,723)	$	2,187
Other comprehensive income	6,786		—		46		6,832
Balance, June 30, 2020	$	10,696	$	—	$	(1,677)	$	9,019

The following table details the amounts reclassified from each component of accumulated other comprehensive income (loss) to each component’s applicable income statement line, for the three and six months ended June 30, 2021 and 2020:

	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Description of Accumulated Other Comprehensive Income (Loss) Component	Three Months Ended June 30,				Affected Income Statement Category
	2021		2020
Net unrealized losses on interest rate swaps used in cash flow hedges:
Reclassification adjustment for gains included in net income	$	(413)	$	—	Interest income
Income tax effect	87		—		Income tax expense
Net of income tax	$	(326)	$	—	Net income
Unfunded pension liability:
Amortization of net loss included in net periodic pension costs(1)	$	34	$	17	Other operating expenses
Income tax effect	(7)		(3)		Income tax expense
Net of income tax	$	27	$	14	Net income

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	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Description of Accumulated Other Comprehensive Income (Loss) Component	Six Months Ended June 30,				Affected Income Statement Category
	2021		2020
Net unrealized losses on interest rate swaps used in cash flow hedges:
Reclassification adjustment for gains included in net income	$	(599)	$	—	Interest income
Income tax effect	126		—		Income tax expense
Net of income tax	$	(473)	$	—	Net income
Unfunded pension liability:
Amortization of net loss included in net periodic pension costs(1)	$	69	$	35	Other operating expenses
Income tax effect	(14)		(7)		Income tax expense
Net of income tax	$	55	$	28	Net income

(1) Accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost.

Note 17 – 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 RSUs and PSUs were vested. Proceeds assumed to have been received on option exercises are assumed to be used to purchase shares of BMBC’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)	2021		2020		2021		2020
Numerator:
Net income available to common shareholders	$	21,342	$	15,035	$	38,425	$	3,872
Denominator for basic earnings per share – weighted average shares outstanding	19,878,981		19,926,737		19,893,347		19,989,948
Effect of dilutive common shares	171,838		81,482		153,809		87,211
Denominator for diluted earnings per share – adjusted weighted average shares outstanding	20,050,819		20,008,219		20,047,156		20,077,159
Basic earnings per share	$	1.07	$	0.75	$	1.93	$	0.19
Diluted earnings per share	1.06		0.75		1.92		0.19
Antidilutive shares excluded from computation of average dilutive earnings per share	—		76,038		—		71,260

Note 18 – 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, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.

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	Three Months Ended June 30, 2021						Three Months Ended June 30, 2020
(dollars in thousands)	Banking		Wealth Management		Consolidated		Banking		Wealth Management		Consolidated
Fees for wealth management services	$	—	$	14,031	$	14,031	$	—	$	9,069	$	9,069
Insurance commissions	—		1,249		1,249		—		1,303		1,303
Capital markets revenue(1)	1,290		—		1,290		2,975		—		2,975
Service charges on deposit accounts	733		—		733		603		—		603
Loan servicing and other fees(1)	397		—		397		452		—		452
Net gain on sale of loans(1)	525		—		525		3,134		—		3,134
Dividends on FHLB and FRB stock(1)	239		—		239		243		—		243
Other operating income(2)	2,367		135		2,502		2,699		88		2,787
Total noninterest income	$	5,551	$	15,415	$	20,966	$	10,106	$	10,460	$	20,566

(1) Not within the scope of ASC 606.

(2) Other operating income includes Visa debit card income, safe deposit box rentals, and rent income totaling $839 thousand and $733 thousand for the three months ended June 30, 2021 and 2020, respectively, which are within the scope of ASC 606.

	Six Months Ended June 30, 2021						Six Months Ended June 30, 2020
(dollars in thousands)	Banking		Wealth Management		Consolidated		Banking		Wealth Management		Consolidated
Fees for wealth management services	$	—	$	26,867	$	26,867	$	—	$	20,237	$	20,237
Insurance commissions	—		2,713		2,713		—		2,836		2,836
Capital markets revenue(1)	2,886		—		2,886		5,336		—		5,336
Service charges on deposit accounts	1,429		—		1,429		1,449		—		1,449
Loan servicing and other fees(1)	701		—		701		913		—		913
Net gain on sale of loans(1)	775		—		775		3,916		—		3,916
Net gain (loss) on sale of OREO	—		—		—		148		—		148
Dividends on FHLB and FRB stock(1)	461		—		461		687		—		687
Other operating income(2)	4,828		147		4,975		3,243		101		3,344
Total noninterest income	$	11,080	$	29,727	$	40,807	$	15,692	$	23,174	$	38,866

(1) Not within the scope of ASC 606.

(2) Other operating income includes Visa debit card income, safe deposit box rentals, and rent income totaling $1.6 million and $1.4 million for the six months ended June 30, 2021 and 2020, respectively, which are within the scope of ASC 606.

A description of the Corporation’s primary 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.

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Fees that are determined based on the market value of the assets held in their accounts are generally billed monthly or quarterly, 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.

Insurance Commissions: The Corporation earns commissions from the sale of insurance policies, which are generally calculated as a percentage of the policy premium, and contingent income, which is calculated based on the volume and performance of the policies held by each carrier. Obligations for the sale of insurance policies are generally satisfied at the point in time which the policy is executed and are recognized at the point in time in which the amounts are known and collection is reasonably assured. Performance metrics for contingent income are generally satisfied over time, not exceeding one year, and are recognized at the point in time in which the amounts are known and collection is reasonably assured.

Visa Debit Card Income: The Corporation earns income fees from debit cardholder transactions conducted through the Visa payment network. Fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.

Note 19 – Stock-Based Compensation

A. General Information

BMBC 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 BMBC’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of BMBC’s common stock were made available for award grants. On April 28, 2010, the shareholders approved BMBC’s “2010 Long Term Incentive Plan” under which a total of 445,002 shares of BMBC’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, BMBC 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 BMBC’s common stock, RSUs and 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.

PSUs have restrictions based on performance criteria and the passage of time. The performance criteria may be a market-based criteria measured by BMBC’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 BMBC’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 BMBC’s stock on the date of the grant. PSU grants may have a vesting percent ranging from 0% to 150%.

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B. Other Stock Option Information

No options were forfeited, expired, or exercised the three and six months ended June 30, 2021. The following table provides information about options outstanding as of June 30, 2021:

	Shares	Weighted Average Exercise Price	Weighted Average Grant Date Fair Value
Options outstanding, June 30, 2021	225	18.33	12.93

As of June 30, 2021 there were no unvested options.

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2021		2020		2021		2020
Proceeds from exercise of stock options	$	—	$	—	$	—	$	5
Related tax benefit recognized	—		—		—		2
Net proceeds of options exercised	$	—	$	—	$	—	$	7
Intrinsic value of options exercised	$	—	$	—	$	—	$	8

The following table provides information about options outstanding and exercisable at June 30, 2021:

(dollars in thousands, except share data and exercise price)	Outstanding		Exercisable
Number of shares	225		225
Weighted average exercise price	$	18.33	$	18.33
Aggregate intrinsic value	$	3	$	3
Weighted average remaining contractual term in years	2.6		2.6

C. Restricted Stock Units and Performance Stock 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, 2021, the Corporation recognized $503 thousand and $1.0 million, respectively, of expense related to the Corporation’s RSUs. As of June 30, 2021, there was $2.3 million of unrecognized compensation cost related to RSUs. This cost will be recognized over a weighted average period of 1.7 years.

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The following table details the RSUs for the three and six months ended June 30, 2021:

	Three Months Ended June 30, 2021			Six Months Ended June 30, 2021
	Number of Shares	Weighted Average Grant Date Fair Value		Number of Shares	Weighted Average Grant Date Fair Value
Beginning balance	150,837	$	37.25	114,846	$	38.00
Granted	—	—		36,791	35.09
Vested	—	—		(800)	43.95
Forfeited	(767)	38.55		(767)	38.55
Ending balance	150,070	37.25		150,070	37.25

PSUs

For the three months ended June 30, 2021, the Corporation recognized a $51 thousand release of expense related to the PSUs, primarily due to changes in vesting percentages and forfeitures during the three months ended June 30, 2021. For the six months ended June 30, 2021, the Corporation recognized $52 thousand of expense related to the PSUs. As of June 30, 2021, there was $3.0 million of unrecognized compensation cost related to PSUs. This cost will be recognized over a weighted average period of 2.1 years.

The following table details the PSUs for the three and six months ended June 30, 2021:

	Three Months Ended June 30, 2021			Six Months Ended June 30, 2021
	Number of Shares	Weighted Average Grant Date Fair Value		Number of Shares	Weighted Average Grant Date Fair Value
Beginning balance	206,055	$	36.89	149,911	$	37.60
Granted	—	—		56,144	34.99
Vested	—	—		—	—
Forfeited	(990)	39.70		(990)	39.70
Ending balance	205,065	36.88		205,065	36.88

Note 20 – 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).

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).

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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, FX Forwards, and Risk Participation Agreements 

The Corporation’s interest rate swaps, FX forwards, 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, 2021 and December 31, 2020:

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As of June 30, 2021
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury securities	$	100	$	100	$	—	$	—
Obligations of U.S. government & agencies	116,701		—		116,701		—
Obligations of state & political subdivisions	2,168		—		2,168		—
Mortgage-backed securities	482,585		—		482,585		—
Collateralized mortgage obligations	15,145		—		15,145		—
Collateralized loan obligations	99,635		—		99,635		—
Corporate bonds	11,754		—		11,754		—
Other investment securities	650		—		650		—
Total investment securities available for sale	728,738		100		728,638		—
Investment securities trading:
Mutual funds	8,266		8,266		—		—
Derivatives:
Interest rate swaps	87,483		—		87,483		—
RPAs purchased	230		—		230		—
FX forwards	20		—		20		—
Total derivatives	87,733		—		87,733		—
Total recurring fair value measurements	$	824,737	$	8,366	$	816,371	$	—

 

As of December 31, 2020
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale:
U.S. Treasury securities	$	500,100	$	500,100	$	—	$	—
Obligations of U.S. government & agencies	93,098		—		93,098		—
Obligations of state & political subdivisions	2,171		—		2,171		—
Mortgage-backed securities	453,857		—		453,857		—
Collateralized mortgage obligations	19,263		—		19,263		—
Collateralized loan obligations	94,404		—		94,404		—
Corporate bonds	11,421		—		11,421		—
Other investment securities	650		—		650		—
Total investment securities available for sale	1,174,964		500,100		674,864		—
Investment securities trading:
Mutual funds	8,623		8,623		—		—
Derivatives:
Interest rate swaps	113,848		—		113,848		—
RPAs purchased	342		—		342		—
FX forwards	52		—		52		—
Total derivatives	114,242		—		114,242		—
Total recurring fair value measurements	$	1,297,829	$	508,723	$	789,106	$	—

There have been no transfers between levels during the three and six months ended June 30, 2021.

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B. Assets and liabilities measured on a non-recurring basis

Fair value is used on a nonrecurring basis to evaluate certain financial assets and financial liabilities in specific circumstances. Similarly, fair value is used on a nonrecurring basis for nonfinancial assets and nonfinancial liabilities such as foreclosed assets, OREO, intangible assets, nonfinancial assets and liabilities evaluated in a goodwill impairment analysis and other nonfinancial assets measured at fair value for purposes of assessing impairment. A description of the valuation methodologies used for financial and nonfinancial assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.

Loans and Leases Individually Evaluated for Credit Losses

Collateral-dependent loans and leases for which the repayment is expected to be provided substantially through the sale of the collateral and the borrower is experiencing financial difficulty are, in general, individually evaluated for credit losses. Management evaluates and values collateral-dependent loans and leases when management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, and the fair values of such loans and leases 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 loan or lease. 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. For loans and leases that are not collateral-dependent, management measures expected credit loss as the difference between the amortized cost basis of the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate.

Other Real Estate Owned (“OREO”)

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. The Corporation did not have any OREO at June 30, 2021 or December 31, 2020.

Mortgage Servicing Rights

The model to value MSRs estimates the present value of projected net servicing cash flows of the remaining servicing portfolio based on various assumptions, including changes in anticipated loan prepayment rates, the discount rate, reflective of a market participant's required return on an investment for similar assets, and other market-based economic factors. All of these assumptions are considered to be unobservable inputs. Accordingly, MSRs are classified within Level 3 of the fair value hierarchy.

The following tables present the Corporation’s assets measured at fair value on a non-recurring basis as of June 30, 2021 and December 31, 2020:

As of June 30, 2021
(dollars in thousands)	Total		Level 1		Level 2		Level 3
MSRs	$	2,173	$	—	$	—	$	2,173
Loans and leases individually evaluated for credit losses	15,626		—		—		15,626
Total non-recurring fair value measurements	$	17,799	$	—	$	—	$	17,799

As of December 31, 2020
(dollars in thousands)	Total		Level 1		Level 2		Level 3
MSRs	$	2,632	$	—	$	—	$	2,632
Loans and leases individually evaluated for credit losses	11,142		—		—		11,142
Total non-recurring fair value measurements	$	13,774	$	—	$	—	$	13,774

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During the three and six months ended June 30, 2021, net decreases of $184 thousand and $45 thousand, respectively, were recorded in the ACL on loans and leases as a result of adjusting the carrying value and estimated fair value of loans and leases individually evaluated for credit losses in the above tables.

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Note 21 – 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. 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:

		June 30, 2021				December 31, 2020
(dollars in thousands)	Fair Value Hierarchy Level(1)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	113,899	$	113,899	$	96,313	$	96,313
Investment securities - available for sale	See Note 20	728,738		728,738		1,174,964		1,174,964
Investment securities - trading	See Note 20	8,266		8,266		8,623		8,623
Investment securities – held to maturity	Level 2	12,532		12,761		14,759		15,186
Loans held for sale	Level 2	653		653		6,000		6,000
Net portfolio loans and leases	Level 3	3,578,248		3,512,883		3,574,702		3,489,322
MSRs	Level 3	2,173		2,173		2,626		2,632
Interest rate swaps	Level 2	87,483		87,483		113,848		113,848
FX forwards	Level 2	20		20		52		52
RPAs purchased	Level 2	230		230		342		342
Other assets	Level 3	36,057		36,057		45,847		45,847
Total financial assets		$	4,568,299	$	4,503,163	$	5,038,076	$	4,953,129
Financial liabilities:
Deposits	Level 2	$	3,959,745	$	3,960,432	$	4,376,254	$	4,379,021
Short-term borrowings	Level 2	21,553		21,553		72,161		72,161
Long-term FHLB advances	Level 2	39,976		40,171		39,906		40,441
Subordinated notes	Level 2	98,973		91,800		98,883		90,735
Junior subordinated debentures	Level 2	22,030		19,512		21,935		27,812
Interest rate swaps	Level 2	87,483		87,483		113,848		113,848
FX forwards	Level 2	3		3		70		70
RPAs sold	Level 2	18		18		30		30
Other liabilities	Level 3	45,507		45,507		45,734		45,734
Total financial liabilities		$	4,275,288	$	4,266,479	$	4,768,821	$	4,769,852

(1) See Note 20 in the Notes to Unaudited Consolidated Financial Statements above for a description of hierarchy levels.

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Note 22 – 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, 2021 and December 31, 2020 were $999.9 million and $924.5 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, 2021 and December 31, 2020 were $19.9 million and $21.1 million, respectively.

Contingencies

Legal Matters

In the ordinary course of its operations, BMBC 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 ordinary routine litigation incidental to our 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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Crusader Servicing Corporation (“Crusader”), which was an 80% owned subsidiary of Royal Bank America that was acquired by the Bank in the RBPI Merger, along with the Bank as successor-in-interest to Royal Bank America, are defendants in the case captioned Snyder v. Crusader Servicing Corporation et al., Case No. 2007-01027, in the Court of Common Pleas of Montgomery County, Pennsylvania. The case involves claims brought by a former Crusader shareholder in 2007 against Crusader, its former directors and remaining shareholders related, among other things, to a purported failure to pay amounts allegedly due to Snyder for his shares of Crusader stock. On May 1, 2019, the Court rendered a decision in favor of Snyder and ordered Crusader to pay Snyder the amount of $2,190,000 plus interest at the rate of 6% from December 1, 2006. The matter was appealed, and on March 18, 2020, the Superior Court of the Commonwealth of Pennsylvania returned an opinion reversing in part and affirming in part the trial court's judgment. The effect of this was to vacate the initial judgment awarded by the trial court, and instead to require an appraisal process in accordance with Crusader's Shareholders' Agreement to determine the value of Mr. Snyder's shares. The parties anticipate the appraisal to commence within the coming months. We do not believe that this ruling and the monetary award, if any, ultimately payable by Crusader will be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation.

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 was one such repurchase of approximately $200 thousand during the six months ended June 30, 2021.

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 4 – “Loans and Leases” for additional information.

Note 23 – 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, bank owned life insurance (“BOLI”) income and 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 is included in the Wealth Management segment of the Corporation since it has similar economic characteristics, products and services to those of the Wealth Management Division of the Bank. BMT Investment Advisers, formed in May 2017, which served as investment adviser to BMT Investment Funds, a Delaware statutory trust, prior to its wind-down in the second quarter of 2020, was 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.

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The following tables detail the Corporation’s segments for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30, 2021									Three Months Ended June 30, 2020
(dollars in thousands)	Banking			Wealth Management			Consolidated			Banking			Wealth Management			Consolidated
Net interest income	$	35,238		$	1		$	35,239		$	37,384		$	1		$	37,385
(Recovery of) provision for credit losses	(6,581)			—			(6,581)			3,435			—			3,435
Net interest income after PCL	41,819			1			41,820			33,949			1			33,950
Noninterest income:
Fees for wealth management services	—			14,031			14,031			—			9,069			9,069
Insurance commissions	—			1,249			1,249			—			1,303			1,303
Capital markets revenue	1,290			—			1,290			2,975			—			2,975
Service charges on deposit accounts	733			—			733			603			—			603
Loan servicing and other fees	397			—			397			452			—			452
Net gain on sale of loans	525			—			525			3,134			—			3,134
Other operating income	2,606			135			2,741			2,942			88			3,030
Total noninterest income	5,551			15,415			20,966			10,106			10,460			20,566
Noninterest expenses:
Salaries & wages	11,275			5,425			16,700			11,699			5,227			16,926
Employee benefits	2,253			971			3,224			2,301			920			3,221
Occupancy and bank premises	2,108			521			2,629			2,535			498			3,033
Amortization of intangible assets	231			604			835			291			619			910
Professional fees	1,542			87			1,629			1,357			218			1,575
Other operating expenses	9,044			1,406			10,450			8,363			1,475			9,838
Total noninterest expenses	26,453			9,014			35,467			26,546			8,957			35,503
Segment profit	20,917			6,402			27,319			17,509			1,504			19,013
Intersegment (revenues) expenses(1)	(161)			161			—			(177)			177			—
Pre-tax segment profit after eliminations	$	20,756		$	6,563		$	27,319		$	17,332		$	1,681		$	19,013
% of segment pre-tax profit after eliminations	76.0		%	24.0		%	100.0		%	91.2		%	8.8		%	100.0		%
Segment assets (dollars in millions)	$	4,910.3		$	48.4		$	4,958.7		$	5,221.7		$	49.6		$	5,271.3

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	Six Months Ended June 30, 2021									Six Months Ended June 30, 2020
(dollars in thousands)	Banking			Wealth Management			Consolidated			Banking			Wealth Management			Consolidated
Net interest income	$	70,019		$	1		$	70,020		$	73,716		$	2		$	73,718
(Recovery of) provision for credit losses	(11,827)			—			(11,827)			38,785			—			38,785
Net interest income after PCL	81,846			1			81,847			34,931			2			34,933
Noninterest income:
Fees for wealth management services	—			26,867			26,867			—			20,237			20,237
Insurance commissions	—			2,713			2,713			—			2,836			2,836
Capital markets revenue	2,886			—			2,886			5,336			—			5,336
Service charges on deposit accounts	1,429			—			1,429			1,449			—			1,449
Loan servicing and other fees	701			—			701			913			—			913
Net gain on sale of loans	775			—			775			3,916			—			3,916
Net gain on sale of OREO	—			—			—			148			—			148
Other operating income	5,289			147			5,436			3,930			101			4,031
Total noninterest income	11,080			29,727			40,807			15,692			23,174			38,866
Noninterest expenses:
Salaries & wages	22,703			10,827			33,530			23,558			10,357			33,915
Employee benefits	4,851			2,060			6,911			4,898			1,823			6,721
Occupancy and bank premises	4,479			1,042			5,521			5,051			997			6,048
Amortization of intangible assets	462			1,211			1,673			583			1,245			1,828
Professional fees	2,794			268			3,062			2,454			489			2,943
Other operating expenses	19,792			2,681			22,473			14,584			2,867			17,451
Total noninterest expenses	55,081			18,089			73,170			51,128			17,778			68,906
Segment profit (loss)	37,845			11,639			49,484			(505)			5,398			4,893
Intersegment (revenues) expenses(1)	(321)			321			—			(355)			355			—
Pre-tax segment profit (loss) after eliminations	$	37,524		$	11,960		$	49,484		$	(860)		$	5,753		$	4,893
% of segment pre-tax profit after eliminations	75.8		%	24.2		%	100.0		%	(17.6)		%	117.6		%	100.0		%
Segment assets (dollars in millions)	$	4,910.3		$	48.4		$	4,958.7		$	5,221.7		$	49.6		$	5,271.3

(1) Inter-segment revenues consist of rental payments, interest on deposits and management fees.

Wealth Management Segment Information

(dollars in millions)	June 30, 2021		December 31, 2020
Assets under management, administration, supervision and brokerage	$	20,630.1	$	18,976.5

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ITEM 2. Management’s Discussion and Analysis of Results of Operation and Financial Condition

The following discussion describes the significant changes to the financial condition of the Corporation that have occurred during the first six months of 2021 compared to the financial condition as of December 31, 2020. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Corporation for the three and six months ended June 30, 2021, compared to the same periods in 2020. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”). Certain financial condition comparisons to the prior year and results of operations comparisons for the linked quarter are included for additional trend analysis.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

Certain of the statements contained in this Quarterly Report on Form 10-Q 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, and the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Such forward-looking statements may include financial and other projections as well as statements regarding the Corporation’s financial goals, future 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,” “might,” “would,” “should,” “could,” “will,” “likely,” “possibly,” “expect,” “anticipate,” “intend,” “indicate,” “estimate,” “target,” “potentially,” “promising,” “probably,” “outlook,” “predict,” “contemplate,” “continue,” “plan,” “strategy,” “forecast,” “project,” “annualized,” “are optimistic,” “are looking,” “are looking forward,” and “believe” or other similar expressions may identify statements that constitute forward-looking statements. Persons reading this Quarterly Report on Form 10-Q are cautioned that such statements are only predictions and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Corporation to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Given the ongoing and dynamic nature of the COVID-19 pandemic, the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects remain uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill in future periods. Changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to the COVID-19 pandemic, could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance. In addition, 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:

•the possibility that the proposed merger with WSFS does not close when expected or at all because required regulatory or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;

•the delay in or failure to close the proposed merger for any other reason;

•changes in WSFS’s share price before closing of the proposed merger;

•the outcome of any legal proceedings that have, or may in the future, be instituted against WSFS or BMBC;

•the occurrence of any event, change or other circumstance that could give rise to the right of one or both of WSFS and BMBC to terminate the merger agreement providing for the merger;

•the risk that the businesses of WSFS and the Corporation will not be integrated successfully;

•the possibility that the cost savings and any synergies or other anticipated benefits from the proposed merger may not be fully realized or may take longer to realize than expected;

•disruption from the proposed merger making it more difficult to maintain relationships with employees, customers or other parties with whom WSFS or the Corporation have business relationships;

•diversion of management time on merger-related issues;

•risks relating to the potential dilutive effect of the shares of WSFS common stock to be issued in the proposed transaction;

•the reaction to the proposed transaction of the companies’ customers, employees and counterparties;

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•uncertainty as to the extent of the duration, scope, and impacts of the COVID-19 pandemic on WSFS, BMBC and the proposed merger;

•local, regional, national and international economic conditions, their impact on us and our customers, and our ability to assess those impacts;

•our need for capital;

•reduced demand for our products and services, and lower revenues and earnings due to an economic recession;

•lower earnings due to other-than-temporary impairment charges related to our investment securities portfolios or other assets;

•changes in monetary or fiscal policy, or existing statutes, regulatory guidance, legislation or judicial decisions, including those concerning banking, securities. insurance or taxes, that adversely affect our business, the financial services industry as a whole, the Corporation, or our subsidiaries individually or collectively;

•changes in the level of non-performing assets and charge-offs;

•effectiveness of capital management strategies and activities;

•the accuracy of assumptions underlying the establishment of provisions for loan and lease losses, estimates in the value of collateral, and various financial assets and liabilities;

•the accuracy of assumptions underlying the establishment of provisions for loan and lease losses, estimates in the value of collateral, and various financial assets and liabilities;

•uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021;

•the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB or other accounting standards setters, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the CECL model, which has changed how we estimate credit losses and may result in further increases in the required level of our allowance for credit losses;

•inflation, securities market and monetary fluctuations, including changes in the market values of financial assets and the stability of particular securities markets;

•changes in interest rates, spreads on interest-earning assets and interest-bearing liabilities, and interest rate sensitivity;

•prepayment speeds, loan originations and credit losses;

•changes in the value of our mortgage servicing rights;

•sources of liquidity and financial resources in the amounts, at the times, and on the terms required to support our future business;

•possible credit-related impairments of securities held by us;

•results of examinations by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) of the Corporation, 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;

•variances in common stock outstanding and/or volatility in common stock price;

•fair value of and number of stock-based compensation awards to be issued in future periods;

•the credit risks of lending activities and overall quality of the composition of acquired loan, lease and securities portfolio;

•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;

•our ability to continue to generate investment results for customers or introduce competitive new products and services on a timely, cost-effective basis, including investment and banking products that meet customers’ needs;

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•changes in consumer and business spending, borrowing and savings habits and demand for financial services in the relevant market areas;

•extent to which products or services previously offered (including but not limited to mortgages and asset back securities) require us to incur liabilities or absorb losses not contemplated at their initiation or origination;

•rapid technological developments and changes;

•technological systems failures, interruptions and security breaches, internally or through a third-party provider, could negatively impact our operations, customers and/or reputation;

•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;

•protection and validity of intellectual property rights;

•reliance on large customers;

•technological, implementation and cost/financial risks in contracts;

•the outcome of pending and future litigation and governmental proceedings;

•any extraordinary events (such as natural disasters, global health risks or pandemics, acts of terrorism, wars or political conflicts), including the COVID-19 pandemic, and the effects of the economic and business environments in which we operate, including our credit quality and business operations, as well as the continued impact on general economic and financial market conditions;

•ability to retain key employees and members of senior management;

•changes in relationships with employees, customers, and/or suppliers;

•the ability of key third-party providers to perform their obligations to us and our subsidiaries;

•our need for capital, or our ability to control operating costs and expenses or manage loan and lease delinquency rates;

•other material adverse changes in operations or earnings; and

•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 14 of the Corporation's 2020 Annual Report, as supplemented by those set forth under the caption titled “Risk Factors” beginning on page 76 of this Quarterly Report on Form 10-Q. All forward-looking statements included in this Quarterly Report and the documents incorporated by reference herein are based upon the Corporation’s beliefs and assumptions as of the date of this Quarterly 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 Quarterly Report or incorporated documents. For a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the SEC, including our 2020 Annual Report, as updated by our quarterly or other reports subsequently filed with the SEC.

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 (“BMBC”, and together with its subsidiaries, the “Corporation”) was formed and the Bank became a wholly-owned subsidiary of BMBC. The Bank and BMBC are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation offers a full range of personal and business banking services, consumer and commercial loans, equipment finance, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from, as of June 30, 2021, 39 banking locations, seven wealth management offices and two insurance and risk management locations in the following counties: Montgomery, Chester, Delaware, Philadelphia, and Dauphin Counties in

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Pennsylvania; New Castle County in Delaware; and Mercer and Camden Counties in New Jersey. The common stock of BMBC 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. BMBC and its subsidiaries are regulated by many agencies including the Securities and Exchange Commission (“SEC”), NASDAQ, Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Bank of Philadelphia (the “FRB”) 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 conform to U.S. generally accepted accounting principles (“GAAP”). All significant intercompany balances and transactions are eliminated in consolidation and certain prior-period amounts have been reclassified when necessary in order to conform to current period presentation. In preparing the Consolidated Financial Statements, management 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 credit losses (“ACL”) on loans and leases, the ACL on Off-Balance Sheet (“OBS”) Credit Exposures, 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. 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.

As a result, management has identified the accounting policies and estimates related to the ACL on loans and leases that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company’s financial statements are appropriate. For a further description of our accounting policies, see Note 1, “Summary of Significant Accounting Policies,” in the Notes to the audited Consolidated Financial Statements in the 2020 Annual Report, as well as Note 1, “Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies,” in the accompanying Notes to Unaudited Consolidated Financial Statements.

Impact of COVID-19

In the first quarter of 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the spread and impact of COVID-19. Our banking products and services are delivered primarily in Southeastern Pennsylvania, Southern and Central New Jersey, and Delaware, each of which had a stay-at-home orders in place and had mandated closure all non-essential businesses during periods of 2020.

To address the economic impact in the U.S., in March and April 2020, President Trump signed into law four economic stimulus packages to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among other measures, the CARES Act created funding for the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), which provided forgivable loans to small businesses to help them keep their employees on payroll and to make other eligible payments. The first round of PPP funding allocated $349 billion to small businesses. This first round was followed by two subsequent rounds of PPP funding of $310 billion, expiring in August 2020 and $284 billion expiring March 31, 2021.

On April 9, 2020, the Federal Reserve took additional steps to bolster the economy by providing additional funding sources for small and mid-sized businesses as well as for state and local governments as they worked through cash flow stresses caused by the COVID-19 pandemic. Additionally, the Federal Reserve took other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on the Federal Reserve’s discount window, and implemented programs to promote liquidity in certain securities markets. The Federal Reserve, along with other U.S. banking regulators, also issued interagency guidance to financial institutions that are working with borrowers affected by the COVID-19 pandemic.

To provide relief from the economic impacts of COVID-19, the Corporation has offered assistance to our commercial, consumer and small business clients by waiving fees for early CD redemptions, overdrafts, and minimum deposit balance requirements, as well as implemented consumer and commercial loan modification programs.

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The Corporation’s modification program for consumer credit products includes a six-month deferral of principal and interest, with interest continuing to accrue on unpaid principal. Upon completion of the deferral period, resumed payments will be applied to the interest accrued during the deferral period, followed by principal and interest payments through the extended maturity date. As of June 30, 2021, 11 consumer loans in an aggregate amount of $1.6 million were within a deferral period under the program. As of December 31, 2020, 66 consumer loans and leases in the amount of $7.3 million were within a deferral period under the program. Management is taking proactive measures and is working prudently with borrowers who may be unable to meet their obligations due to continuing financial challenges caused by COVID-19. As a result, an additional deferral period may be extended to a borrower who is continuing to experience financial difficulties associated with the COVID-19 pandemic.

The Corporation’s modification programs for commercial loan and lease products include a three- or six-month deferral of principal and interest or a three- or six-month period of interest-only payments, with interest continuing to accrue on unpaid principal. Upon completion of the deferral period, resumed payments will be applied to the interest accrued during the deferral period, followed by principal and interest payments through the contractual maturity date. As of June 30, 2021 25 commercial loans in an aggregate amount of $63.1 million were within a deferral period under the program. As of December 31, 2020, 37 commercial loans in the amount of $67.7 million were within a deferral period under the program. Management is taking proactive measures and is working prudently with borrowers who may be unable to meet their obligations due to continuing financial challenges caused by COVID-19. As a result, the Bank may enter into an additional modification in an effort to mitigate losses for the Bank and the borrower.

Based on the provisions of the CARES Act, COVID-19 related modifications to consumer and commercial loans that were not more than 30 days past due as of December 31, 2019 are exempt from TDR classification under GAAP. In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were less than 30 days past due as of the loan modification program implementation date are not considered TDRs. For more information, see Section F - Troubled Debt Restructurings of Note 5 – Loans and Leases, in the Notes to the Unaudited Consolidated Financial Statements.

As discussed in more detail below, we recorded a recovery of PCL on loans and leases during the first quarter of 2021,driven by the current and forward-looking easing of the economic impacts of the COVID-19 pandemic. Due to the high degree of continued uncertainty surrounding the COVID-19 pandemic, the full extent of COVID-19’s effects on our business, operations or the economy as a whole remain unknown and may adversely affect our business, results of operations and financial condition in future fiscal periods. For more information on how the risks related to COVID-19, see the section titled Risk Factors in Part I, Item 1A of our 2020 Annual Report.

Executive Overview 

The following items highlight the Corporation’s results of operations for the three and six months ended June 30, 2021, as compared to the same period in 2020, and the changes in its financial condition as of June 30, 2021 as compared to December 31, 2020. More detailed information related to these highlights can be found in the sections that follow.

Three Month Results of Operations

•Net income attributable to the Corporation was $21.3 million, or $1.06 diluted earnings per share, for the three months ended June 30, 2021 as compared to $15.0 million, or $0.75 diluted earnings per share for the same period in 2020.

•Return on average equity (“ROAE”) and return on average assets (“ROAA”) for the three months ended June 30, 2021 were 13.54% and 1.73%, respectively, as compared to ROAE and ROAA of 10.07% and 1.16%, respectively, for the same period in 2020.

•Tax-equivalent net interest income decreased $2.1 million, or 5.7%, to $35.3 million for the three months ended June 30, 2021, as compared to $37.4 million for the same period in 2020.

•The provision for credit losses (“PCL”), which includes the provision for credit losses on loans and leases, off-balance sheet credit exposures, and accrued interest receivable on COVID-19 deferrals, for the three months ended June 30, 2021 was a recovery of $6.6 million, a decrease of $10.0 million from the $3.4 million PCL recorded for the same period in 2020.

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•Noninterest income of $21.0 million for the three months ended June 30, 2021 increased $400 thousand as compared to $20.6 million for the same period in 2020. Fees for wealth management services of $14.0 million for the three months ended June 30, 2021 increased $5.0 million as compared to the same period in 2020. Capital markets revenue and insurance commissions of $1.3 million and of $1.2 million, respectively, for the three months ended June 30, 2021 decreased $1.7 million and $54 thousand, respectively, as compared to the same period in 2020.

•Noninterest expense of $35.5 million for the three months ended June 30, 2021 decreased $36 thousand, from $35.5 million for the same period in 2020. Included in noninterest expense for the three months ended June 30, 2021 are $266 thousand of due diligence and merger-related expenses related to the pending merger with WSFS. These expenses primarily consisted of legal and other professional fees.

Six Month Results of Operations

•Net income attributable to the Corporation for the six months ended June 30, 2021 was $38.4 million, an increase of $34.5 million as compared to $3.9 million for the same period in 2020. Diluted earnings per share was $1.92 for the six months ended June 30, 2021 as compared to $0.19 for the same period in 2020.

•ROAE and ROAA for the six months ended June 30, 2021 were 12.33% and 1.56%, respectively, as compared to 1.28% and 0.15%, respectively, for the same period in 2020.

•Tax-equivalent net interest income decreased $3.7 million, or 5.0%, to $70.2 million for the six months ended June 30, 2021, as compared to $73.9 million for the same period in 2020.

•PCL for the six months ended June 30, 2021 was a recovery of $11.8 million, a decrease of $50.6 million from the $38.8 million PCL recorded for the same period in 2020.

•Noninterest income of $40.8 million for the six months ended June 30, 2021 increased $1.9 million as compared to $38.9 million for the same period in 2020. Fees for wealth management services of $26.9 million for the six months ended June 30, 2021 increased $6.6 million as compared to the same period in 2020. Capital markets revenue and insurance commissions of $2.9 million and $2.7 million, respectively, for the six months ended June 30, 2021 decreased $2.5 million and $123 thousand as compared to the same period in 2020.

•Noninterest expense of $73.2 million for the six months ended June 30, 2021 increased $4.3 million, from $68.9 million for the same period in 2020. Included in noninterest expense for the three months ended June 30, 2021 are $1.9 million of due diligence and merger-related expenses related to the pending merger with WSFS. These expenses primarily consisted of legal fees and investment banker fees.

Changes in Financial Condition

•Total assets of $4.96 billion as of June 30, 2021 decreased $473.3 million from $5.43 billion as of December 31, 2020.

•Total shareholders’ equity of $644.0 million as of June 30, 2021 increased $21.7 million from $622.3 million as of December 31, 2020.

•Total portfolio loans and leases as of June 30, 2021 were $3.62 billion, a decrease of $11.0 million from $3.63 billion as of December 31, 2020.

•Total non-performing loans and leases of $10.7 million represented 0.29% of portfolio loans and leases as of June 30, 2021 as compared to $5.3 million, or 0.15% of portfolio loans and leases as of December 31, 2020.

•The $39.2 million ACL on loans and leases, as of June 30, 2021, represented 1.08% of portfolio loans and leases, as compared to $53.7 million or 1.48% of portfolio loans and leases as of December 31, 2020.

•Total deposits of $3.96 billion as of June 30, 2021 decreased $416.5 million from $4.38 billion as of December 31, 2020.

•Wealth assets under management, administration, supervision and brokerage as of June 30, 2021 were $20.63 billion, an increase of $1.65 billion from $18.98 billion as of December 31, 2020.

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Key Performance Ratios

Key financial performance ratios for the three and six months ended June 30, 2021 and 2020 are shown in the table below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Return on average equity	13.54		%	10.07		%	12.33		%	1.28		%
Return on average assets	1.73			1.16			1.56			0.15
Tax-equivalent net interest margin	3.17			3.22			3.17			3.30
Equity to assets ratio	12.80			11.49			12.69			12.07
Basic earnings per share	$	1.07		$	0.75		$	1.93		$	0.19
Diluted earnings per share	1.06			0.75			1.92			0.19
Dividends paid or accrued per share	0.27			0.26			0.54			0.52
Dividends paid or accrued per share to net income per basic common share	25.2		%	34.7		%	28.0		%	273.7		%

The following table presents certain key period-end balances and ratios as of June 30, 2021 and December 31, 2020:

(dollars in millions, except per share amounts)	June 30, 2021			December 31, 2020
Book value per share	$	32.40		$	31.18
ACL on loans and leases as a percentage of portfolio loans and leases	1.08		%	1.48		%
Tier I capital to risk weighted assets	12.42			11.86
Loan to deposit ratio	91.4			82.9
Wealth assets under management, administration, supervision and brokerage	$	20,630.1		$	18,976.5
Portfolio loans and leases	3,617.4			3,628.4
Total assets	4,958.7			5,432.0
Total shareholders’ equity	644.0			622.3

The following sections discuss, in greater detail, the Corporation’s results of operations for the three and six months ended June 30, 2021, as compared to the same period in 2020, and the changes in its financial condition as of June 30, 2021 as compared to December 31, 2020.

Other Matters

Crusader Servicing Corporation (“Crusader”), which was an 80% owned subsidiary of Royal Bank America that was acquired by the Bank in the RBPI Merger, along with the Bank as successor-in-interest to Royal Bank America, are defendants in the case captioned Snyder v. Crusader Servicing Corporation et al., Case No. 2007-01027, in the Court of Common Pleas of Montgomery County, Pennsylvania. The case involves claims brought by a former Crusader shareholder in 2007 against Crusader, its former directors and remaining shareholders related, among other things, to a purported failure to pay amounts allegedly due to Snyder for his shares of Crusader stock. On May 1, 2019, the Court rendered a decision in favor of Snyder and ordered Crusader to pay Snyder the amount of $2,190,000 plus interest at the rate of 6% from December 1, 2006. The matter was appealed, and on March 18, 2020, the Superior Court of the Commonwealth of Pennsylvania returned an opinion reversing in part and affirming in part the trial court's judgment. The effect of this was to vacate the initial judgment awarded by the trial court, and instead to require an appraisal process in accordance with Crusader's Shareholders' Agreement to determine the value of Mr. Snyder's shares. The parties anticipate the appraisal to commence within the coming months. We do not believe that this ruling and any monetary award ultimately payable by Crusader will be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation.

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;

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•Provision for Credit Losses, or changes in the ACL on loans and leases, off-balance sheet credit exposures, and other financial assets measured at amortized cost;

•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 includes state and federal jurisdictions.

TAX-EQUIVALENT NET INTEREST INCOME

Net interest income is the primary source of the Corporation’s revenue. The tables within "Management’s Discussion and Analysis of Results of Operation and Financial Condition – Analyses of Interest Rates and Interest Differential” beginning at page 61 below present a summary, for the three and six months ended June 30, 2021 and 2020, 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 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, 2021 Compared to the Same Period in 2020

For the three months ended June 30, 2021, tax-equivalent net interest income decreased $2.2 million, or 5.7%, to $35.3 million, as compared to $37.5 million for the same period in 2020.

The decrease in tax-equivalent net interest income was driven by a decrease of $6.0 million in tax-equivalent interest and fees earned on loans and leases, partially offset by decreases of $3.5 million and $227 thousand in interest paid on deposits and interest expense on short-term borrowings, respectively, and an increase of $128 thousand in tax-equivalent interest income on available for sale investment securities for the three months ended June 30, 2021 as compared to the same period in 2020.

Tax-equivalent interest and fees earned on loans and leases for the three months ended June 30, 2021 decreased $6.0 million as compared to the same period in 2020. The tax-equivalent yield on average loans and leases for the three months ended June 30, 2021 was 3.86%, a 30 basis point decrease as compared to the same period in 2020. Average loans and leases decreased $328.6 million for the three months ended June 30, 2021 as compared to same period in 2020.

Interest expense on deposits for the three months ended June 30, 2021 decreased $3.5 million as compared to the same period in 2020. The rate paid on average interest-bearing deposits for the three months ended June 30, 2021 was 0.15%, a 46 basis point decrease as compared to the same period in 2020. Average interest-bearing deposits for the three months ended June 30, 2021 decreased $448.8 million as compared to the same period in 2020.

Interest expense on short-term borrowings for the three months ended June 30, 2021 decreased $227 thousand as compared to the same period in 2020. The decrease was primarily due to a $116.9 million decrease in average short-term borrowings for the three months ended June 30, 2021 as compared to the same period in 2020, coupled with a 58 basis point decrease in the rate paid for the three months ended June 30, 2021 as compared to the same period in 2020.

Tax-equivalent interest income on available for sale investment securities for the three months ended June 30, 2021 increased $128 thousand as compared to the same period in 2020. The tax-equivalent yield on average available for sale investment securities for the three months ended June 30, 2021 was 1.58%, a 58 basis point decrease as compared to the same period in 2020. Average available for sale investment securities increased $223.0 million for the three months ended June 30, 2021 as compared to the same period in 2020.

Six Months Ended June 30, 2021 Compared to the Same Period in 2020

For the six months ended June 30, 2021, tax-equivalent net interest income decreased $3.7 million, or 5.0%, to $70.2 million, as compared to $73.9 million for the same period in 2020.

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The decrease in tax-equivalent net interest income was driven by a decrease of $14.3 million in tax-equivalent interest and fees earned on loans and leases, partially offset by decreases of $9.7 million and $670 thousand in interest paid on deposits and interest expense on short-term borrowings, respectively, for the six months ended June 30, 2021 as compared to the same period in 2020.

Tax-equivalent interest and fees earned on loans and leases for the six months ended June 30, 2021 decreased $14.3 million as compared to the same period in 2020. The tax-equivalent yield on average loans and leases for the six months ended June 30, 2021 was 3.88%, a 50 basis point decrease as compared to the same period in 2020. Average loans and leases decreased $229.9 million for the six months ended June 30, 2021 as compared to same period in 2020. Included in tax-equivalent interest and fees earned on loans and leases for the six months ended June 30, 2020 was the recognition of $1.8 million of net deferred PPP loan origination fees.

Interest expense on deposits for the six months ended June 30, 2021 decreased $9.7 million as compared to the same period in 2020. The rate paid on average interest-bearing deposits for the six months ended June 30, 2021 was 0.19%, a 65 basis point decrease as compared to the same period in 2020. Average interest-bearing deposits for the six months ended June 30, 2021 decreased $345.0 million as compared to the same period in 2020.

Interest expense on short-term borrowings for the six months ended June 30, 2021 decreased $670 thousand as compared to the same period in 2020. The decrease was primarily due to a $112.8 million decrease in average short-term borrowings for the six months ended June 30, 2021 as compared to the same period in 2020, coupled with an 87 basis point decrease in the rate paid for the six months ended June 30, 2021 as compared to the same period in 2020.

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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.

 

	Three Months Ended June 30,
	2021						2020
(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	$	86,383	$	16	0.07	%	$	195,966	$	37	0.08	%
Investment securities - available for sale:
Taxable	742,212		2,915		1.58		516,823		2,775		2.16
Tax-exempt(4)	2,168		14		2.59		4,572		26		2.29
Total investment securities – available for sale	744,380		2,929		1.58		521,395		2,801		2.16
Investment securities – held to maturity	13,414		49		1.47		13,126		73		2.24
Investment securities – trading	8,780		21		0.96		7,800		24		1.24
Loans and leases(1)(2)(3)(4)	3,611,479		34,730		3.86		3,940,032		40,779		4.16
Total interest-earning assets	4,464,436		37,745		3.39		4,678,319		43,714		3.76
Cash and due from banks	9,741						16,263
ACL on loans and leases	(47,192)						(54,113)
Other assets	510,722						585,605
Total assets	$	4,937,707					$	5,226,074
Liabilities:
Savings, NOW, and market rate accounts	$	2,154,206	$	274	0.05		$	2,313,150	$	2,341	0.41
Wholesale deposits	78,936		76		0.39		245,052		486		0.80
Retail time deposits	287,128		608		0.85		410,911		1,649		1.61
Total interest-bearing deposits	2,520,270		958		0.15		2,969,113		4,476		0.61
Short-term borrowings	19,935		5		0.10		136,816		232		0.68
Long-term FHLB advances	39,956		205		2.06		46,161		155		1.35
Subordinated notes	98,949		1,044		4.23		98,770		1,144		4.66
Junior subordinated debt	22,002		199		3.63		21,814		229		4.22
Total interest-bearing liabilities	2,701,112		2,411		0.36		3,272,674		6,236		0.77
Noninterest-bearing deposits	1,437,442						1,126,139
Other liabilities	167,083						226,698
Total noninterest-bearing liabilities	1,604,525						1,352,837
Total liabilities	4,305,637						4,625,511
Shareholders’ equity	632,070						600,563
Total liabilities and shareholders’ equity	$	4,937,707					$	5,226,074
Net interest spread					3.03						2.99
Effect of noninterest-bearing sources					0.14						0.23
Net interest income/margin on earning assets(4)			$	35,334	3.17				$	37,478	3.22
Tax-equivalent adjustment(4)			$	95	0.01	%			$	93	0.01	%

(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 net accretion of deferred fees of $432 thousand and $258 thousand for the three months ended June 30, 2021 and 2020, respectively.

(4)Tax rate used for tax-equivalent calculations is 21% for 2021 and 2020.

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	Six Months Ended June 30,
	2021						2020
(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	$	98,610	$	38	0.08	%	$	123,148	$	148	0.24	%
Investment securities - available for sale:
Taxable	738,879		5,861		1.60		516,534		5,840		2.27
Tax-exempt(4)	2,169		28		2.60		4,740		54		2.29
Total investment securities – available for sale	741,048		5,889		1.60		521,274		5,894		2.27
Investment securities – held to maturity	13,869		123		1.79		13,160		160		2.44
Investment securities – trading	8,699		40		0.93		8,164		49		1.21
Loans and leases(1)(2)(3)(4)	3,609,358		69,404		3.88		3,839,208		83,677		4.38
Total interest-earning assets	4,471,584		75,494		3.40		4,504,954		89,928		4.01
Cash and due from banks	10,279						14,371
Allowance for loan and lease losses	(50,369)						(39,950)
Other assets	521,545						556,120
Total assets	$	4,953,039					$	5,035,495
Liabilities:
Savings, NOW, and market rate accounts	$	2,166,401	$	648	0.06		$	2,255,215	$	7,322	0.65
Wholesale deposits	98,215		333		0.68		249,186		1,463		1.18
Retail time deposits	301,765		1,401		0.94		407,011		3,328		1.64
Total interest-bearing deposits	2,566,381		2,382		0.19		2,911,412		12,113		0.84
Short-term borrowings	25,944		15		0.12		138,700		685		0.99
Long-term FHLB advances	39,938		408		2.06		46,748		399		1.72
Subordinated notes	98,926		2,078		4.24		98,748		2,289		4.66
Junior subordinated debt	21,979		397		3.64		21,791		524		4.84
Total interest-bearing liabilities	2,753,168		5,280		0.39		3,217,399		16,010		1.00
Noninterest-bearing deposits	1,391,602						1,010,202
Other liabilities	179,719						200,107
Total noninterest-bearing liabilities	1,571,321						1,210,309
Total liabilities	4,324,489						4,427,708
Shareholders’ equity	628,550						607,787
Total liabilities and shareholders’ equity	$	4,953,039					$	5,035,495
Net interest spread					3.01						3.01
Effect of noninterest-bearing sources					0.16						0.29
Net interest income/margin on earning assets(4)			$	70,214	3.17				$	73,918	3.30
Tax-equivalent adjustment(4)			$	194	0.01	%			$	200	0.01	%

(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 $992 thousand and $620 thousand for the six months ended June 30, 2021 and 2020, respectively.

(4)Tax rate used for tax-equivalent calculations is 21% for 2021 and 2020.

Rate/Volume Analysis (tax-equivalent basis)(1)

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, 2021 as compared to the same periods in 2020, 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.

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	2021 Compared to 2020
(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	$	(19)	$	(2)	$	(21)	$	(30)	$	(80)	$	(110)
Investment securities - taxable	4,670		(4,557)		113		5,040		(5,065)		(25)
Investment securities -nontaxable	(22)		10		(12)		(35)		9		(26)
Loans and leases	(3,374)		(2,675)		(6,049)		(5,111)		(9,162)		(14,273)
Total interest income	1,255		(7,224)		(5,969)		(136)		(14,298)		(14,434)
Interest expense:
Savings, NOW and market rate accounts	(160)		(1,907)		(2,067)		(288)		(6,386)		(6,674)
Wholesale deposits	(330)		(80)		(410)		(886)		(244)		(1,130)
Retail time deposits	(497)		(544)		(1,041)		(867)		(1,060)		(1,927)
Short-term borrowings	(198)		(29)		(227)		(557)		(113)		(670)
Long-term FHLB advances	(118)		168		50		(122)		131		9
Subordinated notes	14		(114)		(100)		12		(223)		(211)
Junior subordinated debt	13		(43)		(30)		13		(140)		(127)
Total interest expense	(1,276)		(2,549)		(3,825)		(2,695)		(8,035)		(10,730)
Interest differential	$	2,531	$	(4,675)	$	(2,144)	$	2,559	$	(6,263)	$	(3,704)

(1) The tax rate used in the calculation of the tax-equivalent income is 21% for 2021 and 2020.

Tax-Equivalent Net Interest Margin

The tax-equivalent net interest margin of 3.17% for the three months ended June 30, 2021 was a 5 basis point decrease from 3.22% for the same period in 2020. The decrease in the tax-equivalent net interest margin was primarily due to the reduced interest rates during the three months ended June 30, 2021 as compared to the same period in 2020.

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 2021	3.39%	0.36%	3.03%	0.14%	3.17%
1st Quarter 2021	3.42	0.41	3.01	0.15	3.16
4th Quarter 2020	3.33	0.45	2.88	0.16	3.04
3rd Quarter 2020	3.42	0.58	2.84	0.19	3.03
2nd Quarter 2020	3.76	0.77	2.99	0.23	3.22

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 changes associated with interest rate movements and to achieve sustainable growth in net interest income. The Corporation’s Asset Liability Committee (“ALCO”), using policies 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, and Insured Cash Sweep (“ICS”).

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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. Management compares the results of these analyses to limits established by the Corporation’s ALCO policies and makes adjustments as appropriate if the results are outside the established limits.

The below 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, 2021				Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2020
	Amount		Percentage		Amount		Percentage
+300 basis points	$	25,047	17.94	%	$	24,525	17.35	%
+200 basis points	16,205		11.60		15,172		10.73
+100 basis points	7,658		5.48		6,298		4.46
-100 basis points	(2,296)		(1.64)		(2,262)		(1.60)

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of June 30, 2021 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 similarly asset sensitive in the +100 basis point scenario as of June 30, 2021 than it was as of December 31, 2020.

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 emerging from an 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 years. 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. 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 industry 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 industry practice has 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. These assumptions are also reflected in the above interest rate simulation.

The following table presents the Corporation’s gap analysis as of June 30, 2021:

(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	$	103.1		$	—		$	—		$	—		$	—	$	103.1
Investment securities(1)	128.3			132.8			335.9			152.5			—		749.5
Loans and leases(2)	1,912.5			312.2			1,066.0			327.4			—		3,618.1
ACL on loans and leases	—			—			—			—			(39.2)		(39.2)
Cash and due from banks	—			—			—			—			10.8		10.8
Operating lease right-of-use assets	0.3			0.9			9.5			23.1			—		33.8
Other assets	—			—			—			—			482.6		482.6
Total assets	2,144.2			445.9			1,411.4			503.0			454.2		4,958.7
Liabilities and shareholders’ equity:
Demand, noninterest-bearing	41.7			125.1			432.1			869.7			—		1,468.6
Savings, NOW and market rate	107.3			321.8			924.8			787.1			—		2,141.0
Time deposits	71.1			157.8			40.9			1.1			—		270.9
Wholesale non-maturity deposits	73.0			—			—			—			—		73.0
Wholesale time deposits	—			0.9			5.2			—			—		6.1
Short-term borrowings	21.6			—			—			—			—		21.6
Long-term FHLB advances	15.0			25.0			—			—			—		40.0
Subordinated notes	30.0			—			69.0			—			—		99.0
Junior subordinated debentures	22.0			—			—			—			—		22.0
Operating lease liabilities	0.4			1.1			11.1			26.8			—		39.4
Other liabilities	—			—			—			—			133.1		133.1
Shareholders’ equity	23.0			69.0			368.0			184.0			—		644.0
Total liabilities and shareholders’ equity	405.1			700.7			1,851.1			1,868.7			133.1		4,958.7
Interest-earning assets	2,143.9			445.0			1,401.9			479.9			—		4,470.7
Interest-bearing liabilities	340.0			505.5			1,039.9			788.2			—		2,673.6
Difference between interest-earning assets and interest-bearing liabilities	1,803.9			(60.5)			362.0			(308.3)			—		1,797.1
Cumulative difference between interest earning assets and interest-bearing liabilities	$	1,803.9		$	1,743.4		$	2,105.4		$	1,797.1		$	—	$	1,797.1
Cumulative earning assets as a % of cumulative interest-bearing liabilities	631		%	306		%	212		%	167		%

(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, 2020.

PROVISION FOR CREDIT LOSSES ON LOANS AND LEASES

For the three and six months ended June 30, 2021, the Corporation recorded a recovery of PCL on loans and leases of $6.0 million and a recovery of PCL on loans and leases of $11.5 million, respectively, as compared to a PCL on loans and leases of $4.3 million and a PCL on loans and leases$36.6 million for the same respective periods in 2020. As of June 30, 2021 the ACL on loans and leases of $39.2 million was 1.08% of portfolio loans and leases, as compared to an ACL on loans and leases of $53.7 million, or 1.48% of portfolio loans and leases, as of December 31, 2020. The difference in ACL on loans and leases between the two periods was driven by the current and forward-looking economic impacts of the COVID-19 pandemic, as well as projected prepayments, included in the estimation of expected credit losses on loans and leases as of June 30, 2021 as compared to December 31, 2020. Net charge-offs for the three and six months ended June 30, 2021 were $2.4 million and $3.0 million, respectively, as compared to $3.4 million and $7.5 million for the same respective periods in 2020.

The following table details the allocation of the ACL as of the dates indicated:

Allocation of ACL
	June 30, 2021				December 31, 2020
(dollars in thousands)	ACL		% Loans and Leases to Total Loans and Leases		ACL		% Loans and Leases to Total Loans and Leases
CRE - nonowner-occupied	$	11,902	39.2	%	$	19,382	39.6	%
CRE - owner-occupied	4,546		15.3		6,982		15.9
Home equity lines of credit	1,030		4.2		1,406		4.7
Residential mortgage - 1st liens	4,620		16.0		7,782		17.1
Residential mortgage - junior liens	380		0.7		382		0.7
Construction	2,275		5.6		2,707		4.4
Commercial & Industrial	8,870		13.8		8,087		12.3
Consumer	367		1.2		325		1.1
Leases	5,173		3.9		6,656		4.2
Total ACL on loans and leases	$	39,163	100.0	%	$	53,709	100.0	%

Asset Quality and Analysis of Credit Risk

As of June 30, 2021, total nonperforming loans and leases increased by $5.4 million to $10.7 million, representing 0.29% of portfolio loans and leases, as compared to $5.3 million, or 0.15% of portfolio loans and leases, as of December 31, 2020. The increase in nonperforming loans and leases was related to pay-offs and pay-downs of $2.1 million, charge-offs of $145 thousand and return to accrual status of $103 thousand. These decreases in nonperforming loans and leases were offset by the addition of $7.9 million of new nonperforming loans and leases during the six months ended June 30, 2021. All nonperforming loans are evaluated for impairment and charged-off to net realizable value, when necessary.

As of June 30, 2021, the ACL on loans and leases of $39.2 million represented 1.08% of portfolio loans and leases, a decrease of 40 basis points from December 31, 2020. The decrease in coverage was driven by improving current and forecasted economic conditions, which determine the level of ACL required to absorb expected credit losses.

As of June 30, 2021, the Corporation had $6.5 million of TDRs, of which $5.6 million were in compliance with modified terms and excluded from non-performing loans and leases. As of December 31, 2020, the Corporation had $8.8 million of TDRs, of which $7.0 million were in compliance with modified terms, and were excluded from non-performing loans and leases. As of June 30, 2021, 36 loans and leases in the amount of $64.7 million, comprising 1.8% of the Bank's portfolio loans and leases, are within a deferral period under the Bank's consumer and commercial loan and lease modification programs, as compared to 103 loans and leases in the amount of $75.0 million, comprising 2.1% of the Bank's portfolio loans and leases, as of December 31, 2020. For more information on our loan modification programs offered in response to the COVID-19 pandemic, which are not

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classified as TDRs, see Section F - Troubled Debt Restructurings of Note 5 – Loans and Leases, in the Notes to the Unaudited Consolidated Financial Statements.

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.

Nonperforming Assets and Related Ratios

Nonperforming assets and related ratios as of June 30, 2021 and December 31, 2020 were as follows:

(dollars in thousands)	June 30, 2021			December 31, 2020
Nonperforming Assets:
Nonperforming loans and leases	$	10,665		$	5,306
Other real estate owned	—			—
Total nonperforming assets	$	10,665		$	5,306
Troubled Debt Restructurings:
TDRs included in non-performing loans	$	893		$	1,737
TDRs in compliance with modified terms	5,629			7,046
Total TDRs	$	6,522		$	8,783
Loan and Lease quality indicators:
Allowance for credit losses on loans and leases to nonperforming loans and leases	367.2		%	1,012.2		%
Nonperforming loans and leases to total portfolio loans and leases	0.29			0.15
Allowance for credit losses on loans and leases to total portfolio loans and leases	1.08			1.48
Nonperforming assets to total loans and leases and OREO	0.29			0.15
Nonperforming assets to total assets	0.22			0.10
Total portfolio loans and leases	$	3,617,411		$	3,628,411
Allowance for credit losses on loans and leases	39,163			53,709

NONINTEREST INCOME

Three Months Ended June 30, 2021 Compared to the Same Period in 2020

Noninterest income of $21.0 million for the three months ended June 30, 2021 increased $400 thousand as compared to $20.6 million for the same period in 2020. The increase was driven by a $5.0 million increase in fees for wealth management services partially offset by decreases of $2.6 million and $1.7 million in net gain on sale of loans and capital markets revenue, respectively. The increase in fees for wealth management services was driven by the lack of non-recurring costs associated with the wind-down of BMT Investment Advisers, which had a $2.2 million impact on fees for wealth management services in the second quarter of 2020, as well as the $3.62 billion increase in wealth assets under management, administration, supervision and brokerage between June 30, 2021 and June 30, 2020. The decrease in net gain on sale of loans was driven by a $2.4 million gain on the sale of approximately $292.1 million of PPP loans in the second quarter of 2020.

Six Months Ended June 30, 2021 Compared to the Same Period in 2020

Noninterest income of $40.8 million for the six months ended June 30, 2021 increased $1.9 million as compared to $38.9 million for the same period in 2020. The increase was primarily due to increases of $6.6 million and $1.6 million in fees for wealth management services and other operating income, respectively, partially offset by decreases of $3.1 million and $2.5 million in net gain on sale of loans and capital markets revenue, respectively. The increase in fees for wealth management services was driven by the lack of non-recurring costs associated with the wind-down of BMT Investment Advisers, which had a $2.2 million impact on fees for wealth management services in the second quarter of 2020, as well as the $3.62 billion increase in wealth assets under management, administration, supervision and brokerage between June 30, 2021 and June 30, 2020. The decrease in net gain on sale of loans was driven by a $2.4 million gain on the sale of approximately $292.1 million of PPP loans in the second quarter of 2020. The decrease in capital markets revenue was primarily due to the decreased volume

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and size of interest rate swap transactions with commercial loan customers for the six months ended June 30, 2021 as compared to the same period in 2020.

The following table provides details of other operating income for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2021		2020		2021		2020
Visa debit card income	$	752	$	643	$	1,395	$	1,174
BOLI income	272		330		600		650
Commissions and fees	351		264		706		568
Safe deposit box rentals	82		82		155		162
Other investment income	128		20		358		39
Rental income	5		8		10		17
Gain on trading investments	300		1,017		437		39
Miscellaneous other income	612		423		1,314		695
Other operating income	$	2,502	$	2,787	$	4,975	$	3,344

 The following table provides supplemental information regarding mortgage loan originations and sales:

	As of or for the Three Months Ended June 30,						As of or for the Six Months Ended June 30,
(dollars in thousands)	2021			2020			2021			2020
Mortgage originations	$	21,540		$	38,771		$	56,420		$	68,134
Mortgage loans sold:
Servicing retained	—			—			—			—
Servicing released	9,988			31,984			25,660			46,883
Total mortgage loans sold	$	9,988		$	31,984		$	25,660		$	46,883
Percentage of originated mortgage loans sold	46.4		%	82.5		%	45.5		%	68.8		%
Servicing retained %	—			—			—			—
Servicing released %	100.0			100.0			100.0			100.0
Residential mortgage loans serviced for others	$	303,628		$	445,233		$	303,628		$	445,233
Mortgage servicing rights	2,173			3,440			2,173			3,440
Gain on sale of mortgage loans	311			615			561			1,213
Loan servicing and other fees	397			452			701			913
Amortization of MSRs	272			453			405			557
(Impairment) recovery of MSRs	(48)			(222)			(48)			(453)

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” 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.

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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, 2021		March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020
Market value	$	7,614,127	$	7,258,019	$	7,121,474	$	6,557,898	$	6,661,996
Fixed fee	13,015,941		12,801,352		11,855,070		10,686,409		10,350,908
Total	$	20,630,068	$	20,059,371	$	18,976,544	$	17,244,307	$	17,012,904

	Percentage of Wealth Assets as of:
Fee Basis	June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020
Market value	36.9	%	36.2	%	37.5	%	38.0	%	39.2	%
Fixed fee	63.1	%	63.8	%	62.5	%	62.0	%	60.8	%
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, 2021		March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020
Market value	$	9,463	$	9,232	$	8,572	$	8,344	$	5,525
Fixed fee	4,568		3,604		4,016		3,363		3,544
Total	$	14,031	$	12,836	$	12,588	$	11,707	$	9,069

	Percentage of Fees for Wealth Management for the Three Months Ended:
Fee Basis	June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020
Market value	67.4	%	71.9	%	68.1	%	71.3	%	60.9	%
Fixed fee	32.6	%	28.1	%	31.9	%	28.7	%	39.1	%
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. 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, 2021, there were no fair value adjustments related to credit quality.

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NONINTEREST EXPENSE

Three Months Ended June 30, 2021 Compared to the Same Period in 2020

Noninterest expense of $35.5 million for the three months ended June 30, 2021 decreased $36 thousand as compared to $35.5 million for the same period in 2020. Decreases of $506 thousand, $404 thousand, and $226 thousand in other operating expenses, occupancy and bank premises expense, and salaries and wages, respectively, were partially offset by increases of $602 thousand, $266 thousand, and $217 thousand in Pennsylvania bank shares tax expense, merger-related expenses, and advertising expenses, respectively.

Six Months Ended June 30, 2021 Compared to the Same Period in 2020

Noninterest expense of $73.2 million for the six months ended June 30, 2021 increased $4.3 million as compared to $68.9 million for the same period in 2020. Increases of $2.0 million, $1.9 million, and $1.2 million in other operating expenses, merger-related expenses, and Pennsylvania bank shares tax expense, respectively, were partially offset by decreases of $527 thousand and $385 thousand in occupancy and bank premises expense and salaries and wages, respectively.

The following table provides details of other operating expenses for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2021		2020		2021		2020
Amortization expense of capitalized costs for cloud computing arrangements	$	430	$	90	$	843	$	180
Contributions	118		521		240		968
Deferred compensation expense	(1)		654		806		(441)
Director fees	88		151		239		304
Dues and subscriptions	404		523		822		884
FDIC insurance	287		673		716		823
Insurance	304		302		609		541
Loan processing	104		139		300		282
Miscellaneous other expenses	2,038		1,241		3,875		2,471
MSR amortization and impairment	320		675		453		1,010
Other taxes	15		2		20		24
Outsourced services	46		63		92		125
Wealth custodian fees	109		116		226		229
Postage	170		158		294		314
Stationary and supplies	69		79		139		224
Telephone and data lines	527		438		936		866
Temporary help and recruiting	308		67		506		134
Travel and entertainment	85		35		111		260
Other operating expenses	$	5,421	$	5,927	$	11,227	$	9,198

INCOME TAXES

Income tax expense for the three months ended June 30, 2021 was $6.0 million, a decrease of $2.0 million as compared to $4.0 million for the same period in 2020. The effective tax rate for the second quarter of 2021 increased to 21.9% as compared to 21.1% for the second quarter of 2020.

Income tax expense for the six months ended June 30, 2021 was $11.1 million, an increase of $10.0 million as compared to $1.1 million for the same period in 2020. Income before income taxes increased $44.6 million for the six months ended June 30, 2021 as compared for the same period in 2020. The effective tax rate for the six months ended June 30, 2021 increased to 22.4% as compared to 21.5% for the same period in 2020. The increase in effective tax rate was primarily due to $371 thousand of discrete tax items related to non-deductible merger-related expenses recognized in the six months ended June 30, 2021.

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BALANCE SHEET ANALYSIS

Total assets of $4.96 billion as of June 30, 2021 decreased $473.3 million from $5.43 billion as of December 31, 2020. The following sections detail the balance sheet changes:

Loans and Leases

The table below compares the portfolio loans and leases outstanding at June 30, 2021 to December 31, 2020:

	June 30, 2021				December 31, 2020				Change
(dollars in thousands)	Balance		Percent of Portfolio		Balance		Percent of Portfolio		Amount		Percent
CRE - nonowner-occupied	$	1,419,626	39.2	%	$	1,435,575	39.6	%	$	(15,949)	(1.1)	%
CRE - owner-occupied	553,464		15.3		578,509		15.9		(25,045)		(4.3)
Home equity lines of credit	151,692		4.2		169,337		4.7		(17,645)		(10.4)
Residential mortgage - 1st liens	579,657		16.0		621,369		17.1		(41,712)		(6.7)
Residential mortgage - jr. liens	25,534		0.7		23,795		0.7		1,739		7.3
Construction	204,358		5.6		161,308		4.4		43,050		26.7
Commercial & Industrial	498,097		13.8		446,438		12.3		51,659		11.6
Consumer	44,814		1.2		39,683		1.1		5,131		12.9
Leases	140,169		3.9		152,397		4.2		(12,228)		(8.0)
Total portfolio loans and leases	3,617,411		100.0	%	3,628,411		100.0	%	(11,000)		(0.3)
Loans held for sale	653				6,000				(5,347)		(89.1)
Total loans and leases	$	3,618,064			$	3,634,411			$	(16,347)	(0.4)	%

Investment Securities

Investment securities available for sale as of June 30, 2021 totaled $728.7 million, a decrease of $446.2 million as compared to $1.17 billion as of December 31, 2020. The decrease was primarily due to the maturing, in January 2021, of $500.0 million of short-term U.S. Treasury securities included on the balance sheet as of December 31, 2020, partially offset by increases of $28.7 million and $23.6 million of mortgage-backed securities and U.S. Government and agency securities, respectively.

Deposits

Deposits of $3.96 billion as of June 30, 2021 decreased $416.5 million from December 31, 2020. The decrease was primarily driven by decreases of $217.1 million, $202.0 million, $60.6 million, and $29.9 million in interest-bearing demand accounts, wholesale non-maturity deposits, retail time deposits, and wholesale time deposits, respectively, offset by increases of $66.8 million, $19.6 million, and $6.7 million in noninterest-bearing deposits, money market accounts, and savings accounts, respectively. The decrease in wholesale non-maturity deposits was primarily due to a decrease of approximately $200.0 million of wholesale deposits in the first quarter of 2021, which was used to partially fund the purchase of $500.0 million of short-term U.S. Treasury securities included on the balance sheet as of December 31, 2020. The decrease in interest-bearing demand deposits was primarily driven by management's active management of excess liquidity in this current interest rate environment.

Deposits as of June 30, 2021 and December 31, 2020 were as follows:

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	June 30, 2021				December 31, 2020				Change
(dollars in thousands)	Balance		Percent of Deposits		Balance		Percent of Deposits		Amount		Percent
Interest-bearing demand	$	668,664	16.9	%	$	885,802	20.2	%	$	(217,138)	(24.5)	%
Money market	1,183,252		29.9		1,163,620		26.6		19,632		1.7
Savings	289,108		7.3		282,406		6.5		6,702		2.4
Retail time deposits	270,926		6.8		331,527		7.6		(60,601)		(18.3)
Wholesale non-maturity deposits	73,011		1.8		275,011		6.3		(202,000)		(73.5)
Wholesale time deposits	6,141		0.2		36,045		0.8		(29,904)		(83.0)
Interest-bearing deposits	2,491,102		62.9		2,974,411		68.0		(483,309)		(16.2)
Noninterest-bearing deposits	1,468,643		37.1		1,401,843		32.0		66,800		4.8
Total deposits	$	3,959,745	100.0	%	$	4,376,254	100.0	%	$	(416,509)	(9.5)	%

Borrowings

Borrowings as of June 30, 2021 and December 31, 2020 were as follows:

	June 30, 2021				December 31, 2020				Change
(dollars in thousands)	Balance		Percent of Borrowings		Balance		Percent of Borrowings		Amount		Percent
Short-term borrowings	$	21,553	11.8	%	$	72,161	31.0	%	$	(50,608)	(70.1)	%
Long-term FHLB advances	39,976		21.9		39,906		17.1		70		0.2
Subordinated notes	98,973		54.2		98,883		42.5		90		0.1
Junior subordinated debentures	22,030		12.1		21,935		9.4		95		0.4
Total borrowed funds	$	182,532	100.0	%	$	232,885	100.0	%	$	(50,353)	(21.6)	%

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Capital

Consolidated shareholders' equity of the Corporation was $644.0 million, or 13.0% of total assets, as of June 30, 2021, as compared to $622.3 million, or 11.5% of total assets, as of December 31, 2020. The following table presents BMBC’s and the Bank’s regulatory capital ratios and the minimum capital requirements for the Bank to be considered “Well Capitalized” by regulators as of June 30, 2021 and December 31, 2020:

	Actual				Minimum to be Well Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio
June 30, 2021
Total capital to risk weighted assets:
BMBC	$	596,717	15.79	%	$	377,809	10.00	%
Bank	506,120		13.41		377,431		10.00
Tier I capital to risk weighted assets:
BMBC	469,352		12.42		302,247		8.00
Bank	471,728		12.50		301,945		8.00
Common equity Tier I risk weighted assets:
BMBC	448,103		11.86		245,576		6.50
Bank	471,728		12.50		245,330		6.50
Tier I leverage ratio (Tier I capital to total quarterly average assets):
BMBC	469,351		9.91		236,843		5.00
Bank	471,728		9.96		236,700		5.00
December 31, 2020
Total capital to risk weighted assets:
BMBC	583,057		15.55		375,045		10.00
Bank	477,792		12.75		374,758		10.00
Tier I capital to risk weighted assets:
BMBC	444,640		11.86		300,036		8.00
Bank	432,258		11.53		299,807		8.00
Common equity Tier I risk weighted assets:
BMBC	423,475		11.29		243,779		6.50
Bank	432,258		11.53		243,593		6.50
Tier I leverage ratio (Tier I capital to total quarterly average assets):
BMBC	444,640		9.04		246,002		5.00
Bank	432,258		8.79		245,837		5.00

In September 2020, the U.S. banking agencies issued a final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. This final rule is consistent with the interim final rule issued by the U.S. banking agencies in March 2020. The June 30, 2021 and December 31, 2020 ratios reflect the Corporation's election of the five-year transition provision.

Liquidity

BMBC’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 FRB, maintaining a highly liquid investment portfolio, and issuing wholesale certificates of deposit as its secondary sources.

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Unused availability is detailed on the following table:

(dollars in millions)	Available Funds as of June 30, 2021		Percent of Total Borrowing Capacity		Available Funds as of December 31, 2020		Percent of Total Borrowing Capacity		Dollar Change		Percent Change
FHLB of Pittsburgh	$	1,726.5	97.7	%	$	1,696.9	95.9	%	$	29.6	1.7	%
FRB of Philadelphia	118.9		100.0		127.7		100.0		(8.8)		(6.9)
Fed Funds Lines (six banks)	74.0		100.0		74.0		100.0		—		—
Total	$	1,919.4	98.0		$	1,898.6	96.3		$	20.8	1.1

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

The Corporation has an agreement with Insured Network Deposits to provide up to $175 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 $73.0 million in balances as of June 30, 2021 under this program.

Management continually evaluates its borrowing capacity and sources of liquidity. Management currently believes that it has sufficient capacity to fund expected short- and long-term earning asset growth with wholesale sources, along with deposit growth from its internal branch and wealth products.

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 23 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Wealth Management segment recorded a pre-tax segment profit (“PTSP”) of $6.6 million and $12.0 million for the three and six months ended June 30, 2021, as compared to a PTSP of $1.7 million and $5.8 million for the same periods in 2020. Fees for wealth management services increased $5.0 million and $6.6 million for the three and six months ended June 30, 2021 as compared to the same periods in 2020. The increase in fees for wealth management services was driven by the lack of non-recurring costs associated with the wind-down of BMT Investment Advisers, which had a $2.2 million impact on fees for wealth management services in the second quarter of 2020, as well as the $3.62 billion increase in wealth assets under management, administration, supervision and brokerage between June 30, 2021 and June 30, 2020. Insurance commissions decreased $54 thousand and $123 thousand for the three and six months ended June 30, 2021 as compared to the same periods in 2020. Effective January 1, 2020, the business of Lau Associates LLC was transitioned into the Wealth Management Division of the Bank, also reported in the Wealth Management segment.

The Banking segment recorded a PTSP of $20.8 million and $37.5 million for the three and six months ended June 30, 2021, as compared to a PTSP of $17.3 million for the three months ended June 30, 2020 and a pre-tax segment loss of $860 thousand for the six months ended June 30, 2020. The increases in PTSP were primarily driven by decreases of $10.0 million and $50.6 million in provision for credit losses for the three and six months ended June 30, 2021 as compared to the same periods in 2020. The difference in provision for credit losses between the two periods was driven by changes in the current and forward-looking economic impacts of the COVID-19 pandemic included in the estimation of expected credit losses on loans and leases as of June 30, 2021 as compared to June 30, 2020. The effect of the decreases in provision for credit losses on PTSP was partially offset by decreases of $2.1 million and $3.7 million in net interest income for the three and six months ended June 30, 2021 as compared to the same periods in 2020, as well as decreases of $4.6 million and $4.6 million in noninterest income for the three and six months ended June 30, 2021 as compared to the same periods in 2020.

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, 2021 were $999.9 million, as compared to $924.5 million at December 31, 2020.

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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 granting loan facilities to customers. The Bank’s obligation under standby letters of credit at June 30, 2021 amounted to $19.9 million, as compared to $21.1 million at December 31, 2020.

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, 2021:

(dollars in thousands)	Total		Less Than 1 Year		1 - 3 Years		3 - 5 Years		More Than 5 Years
Deposits without a stated maturity	$	3,682,678	$	3,682,678	$	—	$	—	$	—
Wholesale and retail time deposit	277,067		229,926		34,533		11,622		986
Short-term borrowings	21,553		21,553		—		—		—
Long-term FHLB Advances	39,976		39,976		—		—		—
Subordinated Notes	100,000		—		—		30,000		70,000
Junior subordinated debentures	25,800		—		—		—		25,800
Operating lease liabilities	50,493		2,161		8,132		7,652		32,548
Purchase obligations	17,612		4,625		5,724		3,888		3,375
Total	$	4,215,179	$	3,980,919	$	48,389	$	53,162	$	132,709

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.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risks

See the discussion of quantitative and qualitative disclosures about market risks in the Corporation’s 2020 Annual Report, as updated by the disclosure in “Management’s Discussion and Analysis of Results of Operations – Impact of COVID-19,” “–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

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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, 2021.

There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Corporation’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.

PART II OTHER INFORMATION.

ITEM 1. Legal Proceedings.

The information required by this Item is set forth in the “Legal Matters” discussion in Note 22 “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.

On April 21, 2021, a purported BMBC shareholder filed a lawsuit against BMBC, the members of the BMBC board of directors, and WSFS in the United States District Court for the District of Delaware, captioned Stein v. Bryn Mawr Corp., et al. (Case No. 1:99-mc-09999-UNA) (the “Stein Action”). The plaintiff generally alleges that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by disclosing materially incomplete and misleading information concerning the merger and related matters to BMBC shareholders. The plaintiff seeks injunctive relief, rescissory and compensatory damages and an award of attorneys’ fees and expenses.

On April 27, 2021, another purported BMBC shareholder filed a lawsuit against BMBC, the members of the BMBC board of directors, and WSFS in the United States District Court for the District of Delaware, captioned Artis v. Bryn Mawr Corp., et al. (Case No. 1:21-cv-00588-UNA) (the “Artis Action”). The plaintiff generally alleges that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by disclosing materially incomplete and misleading information concerning the merger and related matters to BMBC shareholders. The plaintiff seeks injunctive relief, declaratory relief, rescissory damages and an award of attorneys’ and experts’ fees and expenses.

Management believes that the lawsuits described above are without merit and that neither lawsuit, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Corporation.

ITEM 1A. Risk Factors

In addition to the other information set forth below and elsewhere in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our 2020 Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, including our joint proxy statement/prospectus that was filed on May 6, 2021 pursuant to Rule 424(b)(3), which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

The outcomes of lawsuits filed by shareholders of BMBC against BMBC, its board of directors and WSFS in April 2021 are uncertain and could result in significant costs, management distraction, and/or a delay of or injunction against the Merger.

The outcomes of the Stein Action and the Artis Action, as well as other similar litigation that has been brought against WSFS and its directors by purported WSFS shareholders, are uncertain and could result in significant costs to BMBC and/or WSFS, including costs associated with the indemnification of BMBC’s directors and officers. Other plaintiffs may also file lawsuits against BMBC, WSFS and/or their directors and officers in connection with the merger. The defense or settlement of any lawsuits or claims relating to the merger may have an adverse effect on the business, financial condition and results of operations of WSFS, BMBC and/or the combined company.

If the actions remain unresolved, they could prevent or delay the completion of the mergers. One of the conditions to the consummation of the mergers is the absence of any law or order (whether temporary, preliminary or permanent) by any court or regulatory authority of competent jurisdiction prohibiting, restricting or making illegal the consummation of the transactions contemplated by the merger agreement (including the mergers). Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a regulatory authority issues an order or other directive prohibiting, restricting or making illegal the consummation of the transactions

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contemplated by the merger agreement (including the mergers), then such injunctive or other relief may prevent the mergers from becoming effective in a timely manner or at all.

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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 2021:

Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)	Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs
April 1, 2021 – April 30, 2021	—	$	—	—	629,244
May 1, 2021 – May 31, 2021	—	$	—	—	629,244
June 1, 2021 – June 30, 2021	1,101	$	46.16	—	629,244
Total	1,101	$	31.80	—

(1)1,101 shares were purchased by the Corporation’s deferred compensation plans through open market transactions.

(2)On April 18, 2019, BMBC announced a stock repurchase program (the “2019 Program”) pursuant to which the Corporation may repurchase up to 1,000,000 shares of BMBC's common stock. Under the 2019 Program, the Corporation may repurchase BMBC's common stock at any price, but the aggregate purchase price is not to exceed $45 million. No shares were repurchased during the three months ended June 30, 2021. As of June 30, 2021, the maximum number of shares remaining authorized for repurchase under the 2019 Program was 629,244, at an aggregate purchase price not to exceed $32.2 million.

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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
2.1	Agreement and Plan of Merger, dated March 9, 2021, by and between WSFS Financial Corporation and Bryn Mawr Bank Corporation, incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed on March 10, 2021**
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
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 Inline XBRL	Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL Document
101.SCH Inline XBRL	Taxonomy Extension Schema Document, filed herewith
101.CAL Inline XBRL	Taxonomy Extension Calculation Linkbase Document, filed herewith
101.DEF Inline XBRL	Taxonomy Extension Definition Linkbase Document, filed herewith
101.LAB Inline XBRL	Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE Inline XBRL	Taxonomy Extension Presentation Linkbase Document, filed herewith
104	The cover page of Bryn Mawr Bank Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL (contained in Exhibit 101)
*Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with one (*) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.
**Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished.

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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 6, 2021	By:	/s/ Francis J. Leto
		Francis J. Leto
		Chief Executive Officer
		(Principal Executive Officer)
Date: August 6, 2021	By:	/s/ Michael W. Harrington
		Michael W. Harrington
		Chief Financial Officer
		(Principal Financial Officer)

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