BMTC Bryn Mawr Bank Corporation

For Quarter ended March 31, 2019

 

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)

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets - Unaudited

(dollars in thousands)		March 31, 2019				December 31, 2018
Assets
Cash and due from banks		$	13,656			$	14,099
Interest bearing deposits with banks		29,449				34,357
Cash and cash equivalents		43,105				48,456
Investment securities available for sale, at fair value (amortized cost of $562,528 and $745,328 as of March 31, 2019 and December 31, 2018, respectively)		559,983				737,442
Investment securities held to maturity, at amortized cost (fair value of $10,324 and $8,438 as of March 31, 2019 and December 31, 2018, respectively)		10,457				8,684
Investment securities, trading		8,189				7,502
Loans held for sale		2,884				1,749
Portfolio loans and leases, originated		3,032,270				2,885,251
Portfolio loans and leases, acquired		491,244				541,903
Total portfolio loans and leases		3,523,514				3,427,154
Less: Allowance for originated loan and lease losses		(20,519		)		(19,329		)
Less: Allowance for acquired loan and lease losses		(97		)		(97		)
Total allowance for loans and lease losses		(20,616		)		(19,426		)
Net portfolio loans and leases		3,502,898				3,407,728
Premises and equipment, net		67,279				65,648
Operating lease right-of-use assets		43,985				—
Accrued interest receivable		13,123				12,585
Mortgage servicing rights		4,910				5,047
Bank owned life insurance		58,138				57,844
Federal Home Loan Bank stock		10,526				14,530
Goodwill		184,012				184,012
Intangible assets		21,994				23,455
Other investments		16,526				16,526
Other assets		83,984				61,277
Total assets		$	4,631,993			$	4,652,485
Liabilities
Deposits:
Noninterest-bearing		$	882,310			$	901,619
Interest-bearing		2,755,307				2,697,468
Total deposits		3,637,617				3,599,087
Short-term borrowings		124,214				252,367
Long-term FHLB advances		55,407				55,374
Subordinated notes		98,571				98,526
Junior subordinated debentures		21,622				21,580
Operating lease liabilities		48,224				—
Accrued interest payable		8,674				6,652
Other liabilities		62,557				54,195
Total liabilities		4,056,886				4,087,781
Shareholders' equity
Common stock, par value $1; authorized 100,000,000 shares; issued 24,577,248 and 24,545,348 shares as of March 31, 2019 and December 31, 2018, respectively and outstanding of 20,167,729 and 20,163,816 as of March 31, 2019 and December 31, 2018, respectively		24,577				24,545
Paid-in capital in excess of par value		375,655				374,010
Less: Common stock in treasury at cost - 4,409,519 and 4,381,532 shares as of March 31, 2019 and December 31, 2018, respectively		(76,974		)		(75,883		)
Accumulated other comprehensive loss, net of tax		(3,278		)		(7,513		)
Retained earnings		255,813				250,230
Total Bryn Mawr Bank Corporation shareholders' equity		575,793				565,389
Noncontrolling interest		(686		)		(685		)
Total shareholders' equity		575,107				564,704
Total liabilities and shareholders' equity		$	4,631,993			$	4,652,485

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

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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income - Unaudited

	Three Months Ended March 31,
(dollars in thousands, except share and per share data)	2019				2018
Interest income:
Interest and fees on loans and leases	$	44,837			$	40,689
Interest on cash and cash equivalents	132				53
Interest on investment securities:
Taxable	3,450				2,706
Non-taxable	47				84
Dividends	2				2
Total interest income	48,468				43,534
Interest expense:
Interest on deposits	8,097				3,472
Interest on short-term borrowings	943				630
Interest on FHLB advances and other borrowings	278				562
Interest on subordinated notes	1,145				1,143
Interest on junior subordinated debentures	358				288
Total interest expense	10,821				6,095
Net interest income	37,647				37,439
Provision for loan and lease losses	3,736				1,030
Net interest income after provision for loan and lease losses	33,911				36,409
Noninterest income:
Fees for wealth management services	10,392				10,308
Insurance commissions	1,672				1,693
Capital markets revenue	2,219				666
Service charges on deposits	808				713
Loan servicing and other fees	609				686
Net gain on sale of loans	319				518
Net gain on sale of investment securities available for sale	—				7
Net gain (loss) on sale of other real estate owned ("OREO")	(24		)		176
Dividends on FHLB and FRB stock	411				431
Other operating income	2,847				4,338
Total noninterest income	19,253				19,536
Noninterest expenses:
Salaries and wages	20,901				15,982
Employee benefits	4,166				3,708
Occupancy and bank premises	3,252				3,050
Furniture, fixtures, and equipment	2,389				1,898
Advertising	415				461
Amortization of intangible assets	938				879
Due diligence, merger-related and merger integration expenses	—				4,319
Professional fees	1,320				748
Pennsylvania bank shares tax	409				473
Data processing	1,320				1,195
Other operating expenses	4,614				3,317
Total noninterest expenses	39,724				36,030
Income before income taxes	13,440				19,915
Income tax expense	2,764				4,630
Net income	$	10,676			$	15,285
Net (loss) attributable to noncontrolling interest	(1		)		(1		)
Net income attributable to Bryn Mawr Bank Corporation	$	10,677			$	15,286
Basic earnings per common share	$	0.53			$	0.76
Diluted earnings per common share	$	0.53			$	0.75
Dividends paid or accrued per common share	$	0.25			$	0.22
Weighted-average basic shares outstanding	20,168,498				20,202,969
Dilutive shares	103,163				247,525
Adjusted weighted-average diluted shares	20,271,661				20,450,494

 

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

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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income - Unaudited

 

	Three Months Ended March 31,
(dollars in thousands)	2019				2018
Net income attributable to Bryn Mawr Bank Corporation	$	10,677			$	15,286
Other comprehensive income (loss):
Net change in unrealized gains (losses) on investment securities available for sale:
Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $1,121 and $(1,319), respectively	4,219				(4,961		)
Reclassification adjustment for net (gain) on sale realized in net income, net of tax expense of $0 and $1, respectively	—				(6		)
Reclassification adjustment for net (gain) realized on transfer of investment securities available for sale to trading, net of tax expense of $0 and $88, respectively	—				(329		)
Unrealized investment gains (losses), net of tax expense (benefit) of $1,121 and $(1,408), respectively	4,219				(5,296		)
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 $4 and $12, respectively	16				46
Total other comprehensive income (loss)	4,235				(5,250		)
Total comprehensive income	$	14,912			$	10,036

 

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

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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows - Unaudited

	Three Months Ended March 31,
( dollars in thousands)	2019				2018
Operating activities:
Net income attributable to Bryn Mawr Bank Corporation	$	10,677			$	15,286
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	3,736				1,030
Depreciation of fixed assets	1,908				1,493
Amortization of operating lease right-of-use assets	914				—
Net amortization of investment premiums and discounts	543				761
Net gain on sale of investment securities available for sale	—				(7		)
Net gain on sale of loans	(319		)		(518		)
Stock based compensation	1,137				620
Amortization and net impairment of mortgage servicing rights	137				171
Net accretion of fair value adjustments	(1,018		)		(3,004		)
Amortization of intangible assets	938				879
Net loss (gain) on sale of OREO	24				(176		)
Net increase in cash surrender value of bank owned life insurance ("BOLI")	(294		)		(279		)
Other, net	(642		)		(107		)
Loans originated for resale	(10,353		)		(19,534		)
Proceeds from loans sold	9,484				18,265
Provision for deferred income taxes	43				656
Change in income taxes payable/receivable, net	7,067				3,819
Change in accrued interest receivable	(538		)		1,725
Change in accrued interest payable	2,022				1,287
Change in operating lease liabilities	(850		)		—
Change in other assets	(28,612		)		(11,342		)
Change in other liabilities	10,814				(5,987		)
Net cash provided by operating activities	6,818				5,038
Investing activities:
Purchases of investment securities available for sale	(61,225		)		(74,029		)
Purchases of investment securities held to maturity	(1,827		)		—
Proceeds from maturity and paydowns of investment securities available for sale	217,990				218,393
Proceeds from maturity and paydowns of investment securities held to maturity	45				39
Proceeds from sale of investment securities available for sale	—				7
Net change in FHLB stock	4,004				4,584
Proceeds from calls of investment securities	25,500				65
Net change in other investments	—				500
Purchase of customer relationships	(18		)		—
Net portfolio loan and lease originations	(97,976		)		(21,230		)
Purchases of premises and equipment	(3,540		)		(2,063		)
Proceeds from sale of OREO	309				217
Net cash provided by investing activities	83,262				126,483
Financing activities:
Change in deposits	38,752				(57,879		)
Change in short-term borrowings	(128,153		)		(64,161		)
Dividends paid	(5,041		)		(4,523		)
Change in long-term FHLB advances and other borrowings	—				(31,371		)
Payment of contingent consideration for business combinations	(438		)		—
Cash payments to taxing authorities on employees' behalf from shares withheld from stock-based compensation	(34		)		(626		)
Net proceeds from sale of treasury stock for deferred compensation plans	—				171
Repurchase of warrants from U.S. Treasury	—				(1,755		)
Net purchase of treasury stock through publicly announced plans	(1,057		)		—
Proceeds from exercise of stock options	540				992
Net cash used in financing activities	(95,431		)		(159,152		)
Change in cash and cash equivalents	(5,351		)		(27,631		)
Cash and cash equivalents at beginning of period	48,456				60,024
Cash and cash equivalents at end of period	$	43,105			$	32,393
Supplemental cash flow information:
Cash paid during the year for:
Income taxes	$	199			$	146
Interest	$	8,799			$	4,808
Non-cash information:
Change in other comprehensive loss	$	4,235			$	(5,250	)
Change in deferred tax due to change in comprehensive income	$	1,125			$	(1,396	)
Transfer of loans to OREO and repossessed assets	$	—			$	37

 

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

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BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity - Unaudited

	For the Three Months Ended March 31, 2019
(dollars in thousands, except share and per share data)	Shares of Common Stock Issued			Common Stock				Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Loss				Retained Earnings				Noncontrolling Interest				Total Shareholders' Equity
Balance December 31, 2018	24,545,348			$	24,545			$	374,010			$	(75,883	)		$	(7,513	)		$	250,230			$	(685	)		$	564,704
Net income attributable to Bryn Mawr Bank Corporation	—			—				—				—				—				10,677				—				10,677
Net loss attributable to noncontrolling interest	—			—				—				—				—				—				(1		)		(1		)
Dividends paid or accrued, $0.25 per share	—			—				—				—				—				(5,094		)		—				(5,094		)
Other comprehensive income, net of tax expense of $1,125	—			—				—				—				4,235				—				—				4,235
Stock based compensation	—			—				1,137				—				—				—				—				1,137
Net purchase of treasury stock from stock awards for statutory tax withholdings	—			—				—				(34		)		—				—				—				(34		)
Purchase of treasury stock through publicly announced plans	—			—				—				(1,057		)		—				—				—				(1,057		)
Common stock issued:
Common stock issued through share-based awards and options exercises	31,900			32				508				—				—				—				—				540
Balance March 31, 2019	24,577,248			$	24,577			$	375,655			$	(76,974	)		$	(3,278	)		$	255,813			$	(686	)		$	575,107

	For the Three Months Ended March 31, 2018
(dollars in thousands, except share and per share data)	Shares of Common Stock Issued			Common Stock				Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Loss				Retained Earnings				Noncontrolling Interest				Total Shareholders' Equity
Balance December 31, 2017	24,360,049			$	24,360			$	371,486			$	(68,179	)		$	(4,414	)		$	205,549			$	(683	)		$	528,119
Net income attributable to Bryn Mawr Bank Corporation	—			—				—				—				—				15,286				—				15,286
Net loss attributable to noncontrolling interest	—			—				—				—				—				—				(1		)		(1		)
Dividends paid or accrued, $0.22 per share	—			—				—				—				—				(4,495		)		—				(4,495		)
Other comprehensive income, net of tax expense of $1,396	—			—				—				—				(5,250		)		—				—				(5,250		)
Stock based compensation	—			—				620				—				—				—				—				620
Net purchase of treasury stock from stock awards for statutory tax withholdings	—			—				—				(626		)		—				—				—				(626		)
Net treasury stock activity for deferred compensation trusts	—			—				153				18				—				—				—				171
Repurchase of warrants from U.S. Treasury	—			—				(1,853		)		—				—				98				—				(1,755		)
Common stock issued:
Common stock issued through share-based awards and options exercises	78,709			79				913				—				—				—				—				992
Balance March 31, 2018	24,438,758			$	24,439			$	371,319			$	(68,787	)		$	(9,664	)		$	216,438			$	(684	)		$	533,061

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

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  BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – Basis of Presentation

 

The Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of Bryn Mawr Bank Corporation’s ("BMBC," and together with its direct and indirect subsidiaries, the “Corporation”) 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. These Unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto in the Corporation’s Annual Report on Form 10-K for the twelve months ended December 31, 2018 (the “ 2018 Annual Report”).

 

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.

 

Principles of Consolidation

 

The Unaudited Consolidated Financial Statements include the accounts of BMBC and its consolidated subsidiaries; BMBC's primary subsidiary is The Bryn Mawr Trust Company (the “Bank”). In connection with the RBPI Merger (defined in Note 3 – Business Combinations below), the Corporation acquired  two  Delaware trusts, Royal Bancshares Capital Trust I and Royal Bancshares Capital Trust II. These two entities are not consolidated per requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC Topic 810”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current-year presentation.

 

Note 2 – Recent Accounting Pronouncements

 

The following FASB Accounting Standards Updates ("ASUs") are divided into pronouncements which have been adopted by the Corporation since January 1, 2019, and those which are not yet effective and have been evaluated or are currently being evaluated by management as of March 31, 2019 .

 

Adopted Pronouncements:

FASB ASU 2016-02 (Topic 842), “Leases”

 

In February 2016, the FASB established Topic 842, Leases, by issuing ASU 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard became effective for us on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. Management has elected to use the effective date as its date of initial application. Consequently, financial information was not be updated, and the disclosures required under the new standard are not be provided for dates and periods before January 1, 2019.

The new standard provided a number of optional practical expedients in transition. We have elected the ‘package of practical expedients’, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.

This standard had a material effect on our Consolidated Balance Sheet and related disclosures but did not have a material impact on our Consolidated Statement of Income. The additional assets recorded as a result of adoption had a negative impact on the Corporation and Bank capital ratios under current regulatory guidance. On adoption, we had:

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•	recognized operating lease liabilities of approximately $49.1 million , with corresponding ROU assets of the same amount, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases, and

•	derecognized $541 thousand of favorable lease assets, $2.2 million in unfavorable lease liabilities, and $2.5 million in deferred rent, with a corresponding adjustment to the ROU asset for the same amounts.

The new standard also provides practical expedients for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also have elected the practical expedient to not separate lease and non-lease components for all of our leases.

FASB ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”

Issued in June 2018, ASU 2018-07: Compensation - Stock Compensation (Topic 718), “ Improvements to Nonemployee Share-Based Payment Accounting ” expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

The amendments in this update became effective for us January 1, 2019. The adoption did not have an impact on our Consolidated Financial Statements and related disclosures as the Corporation has not historically granted share based payment awards to nonemployees other than to the Corporation’s Board of Directors, who are treated as employees for share-based payment accounting.

 

Pronouncements Not Yet Effective:

 

FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”

 

Issued in June 2016, ASU 2016-13 (Topic 326 -Credit Losses), commonly referenced as the Current Expected Credit Loss (“CECL”), eliminates the Provision for Loan and Lease Losses ("PLLL") and Allowance for Loan and Lease Losses ("ALLL") line items and establishes the Provision for Credit Losses ("PCL") and Allowance for Credit Losses ("ACL") line items.

Under the legacy “Incurred Loss” notion, management presents an ALLL intended to represent “probable and estimable” incurred but not yet realized credit losses on assets in scope. When management deems collection of contractual cashflows for an instrument unlikely, a specific reserve is calculated under ASC 310-10. Management further calculates a general reserve for performing assets under ASC 450-20, using historical loss experience and adjustments for several qualitative factors, including current economic conditions. The “Incurred Loss” standard does not allow for projections beyond the likely ‘emergence period’ of losses, or for forward-looking economic conditions; for example, loss contingencies in 2022 are not currently presented, nor is the presentation adjusted for the likelihood of future economic condition change.

In contrast, the future accounting standard requires projection of credit loss over the contract lifetime of the asset, adjusted for prepayment tendencies. Further, management’s specific expectations for the future economic environment must be incorporated in the projection, with loss expectations to revert to the long-run historical mean after such time as management can make or obtain a reasonable and supportable forecast. This valuation reserve will be established in the ACL and maintained through expense (provision) in the PCL. In the event that additional allocation is required to fund the ACL at adoption, investors will see a cumulative-effect (one time) adjustment to retained earnings upon adoption of the new standard. The new CECL standard will become effective for the Corporation for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years.

The Corporation has engaged with a leading vendor to assist in computing and establishing the ACL, and management has completed the data gathering and model selection efforts, with continued effort through 2019 to operationalize the practice for establishing the ACL and preparing its presentation. Significant additional quantitative analysis is included in management’s contemplated measurement regime, 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

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Consolidated Financial Statements. Preliminary evaluations were performed by discounting instrument-level cashflows adjusted for timing (e.g. prepayment) and credit (default and loss) expectations. Management will continue to evaluate other estimation methodologies and disaggregation approaches through the 2019 year.

The Corporation will comply with the new disclosure and presentation requirements enumerated in ASU 2016-13, including presentation of the vintage disclosure organizing certain credit performance data by year of origination/renewal (“policy year”).

Financial statement users should be aware that the ACL is, by design, inherently sensitive to changes in economic outlook, loan and lease portfolio composition, portfolio duration, and other factors. The following factors could lead to a material impact to retained earnings - in either direction - as of the adoption date:

•	Increases / decreases to the time period management deems reasonably and supportably forecastable

•	Inclusion / exclusion of forecast factors

•	Adverse changes to reasonable and supportable forecasts

•	Detectable increases / decreases in the Corporation’s or comparable industry credit loss parameters

•	Deterioration / improvement in the risk profile of the Corporation’s loan and lease portfolio

•	Decreased / increased prepayment behavior or other factors impacting loan and lease portfolio duration

•	Changes in credit risk through the ordinary course of operations, such as launch or expansion of higher risk-bearing products

•	Interest rate fluctuations impacting effective yield on certain instruments.

Management cautions that this list is not exhaustive. Further, management may adjust quantitatively-established allocations based on factors that defy numerical modeling, leading to a material adjustment not due to factors specified above. Moreover, interpretations and clarifications of the guidance through the FASB’s ongoing Transition Resource Group efforts may change management’s estimates of the impact. Finally, the impact of accounting treatment changes for establishing the ACL for purchased assets under future acquisitions may effect a cumulative-effect adjustment to retained earnings that proves material.

Ongoing financial statement behavior will be impacted by the standard, regardless of any cumulative-effect adjustment at adoption. Under our currently-contemplated cashflow projection model, assets will originate with a specific allocation for the contract life of that instrument, adjusted for prepayment behavior and probabilistic credit performance expectations to arrive at an expected cashflow projection. All else being equal, as that continues toward its contract maturity, estimates of lifetime credit loss at the instrument level will decrease. Under steady-state conditions, portfolio-segment-level aggregation of management’s expected loss estimates should be stable or track with portfolio-segment growth (contraction and runoff). When management’s expectations of the likely future economic environment change based on reasonable and supportable forecasts, portfolio allocation may increase (decrease) rapidly between periods. The establishment of the ACL will be more responsive to deteriorating (improving) economic conditions than prior establishment of the ALLL, which is based on historical experience and agnostic to future conditions. In dynamic economic environments, users of financial statements should expect expense (income) in the PCL to be concentrated in fewer quarters than was typical for the PLLL. Users of financial statements should be aware that this accounting treatment does not determine the ultimate, realized loss or recovery for assets in scope; ASU 2016-13 impacts timing and possibly the magnitude of the impact on our financial condition and results of operations in dynamic economic environments.

Criteria for establishment of specific reserves are still under evaluation. Specific reserve impact to instruments meeting the legacy “impairment” criteria are not anticipated to change, though the volume of such credits may change before the adoption date due to deterioration (improvement) of portfolio credit quality. Management is evaluating additional criteria to identify instruments for specific evaluation under the future standard’s broader allowable criteria.

Management does not currently plan to implement an accounting election to recognize changes in the ACL valuation account due to timing (prepayment) behavior as interest income (expense).

FASB ASU 2017-04 (Topic 350), “Intangibles – Goodwill and Others”

 

Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

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FASB ASU 2018-12 (Topic 944), “Targeted Improvements to the Accounting for Long-Duration Contracts”

Issued in August 2018, ASU 2018-12 makes targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. Specifically, the ASU is intended to (1) improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows, (2) simplify and improve the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, (3) simplify the amortization of deferred acquisition costs, and (4) improve the effectiveness of the required disclosures. ASU 2018-12 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application of the amendments is permitted. As an independent insurance agent, the Corporation does not issue insurance contracts. As a result, management does not expect the adoption of this ASU to have an impact on our Consolidated Financial Statements and related disclosures.

FASB ASU 2018-13, "Fair Value Measurement Disclosure Framework"

Issued in August 2018, ASU No. 2018-13 modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption is required on both a prospective and retrospective basis depending on the amendment. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

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

Issued in August 2018, the 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 is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Use of the retrospective method is required. Management does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

FASB ASU 2018-15 (Topic 350), "Intangibles - Goodwill and Other - Internal-Use Software"

Issued in August 2018, ASU No. 2018-15 provides clarity on capitalizing and expensing implementation costs for cloud computing arrangements in a service contract. If an implementation cost is capitalized, the cost should be recognized over the noncancellable term and periodically assessed for impairment. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. Adoption should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. Management is currently evaluating the potential impact of ASU 2018-15 on our Consolidated Financial Statements and related disclosures.

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Note 3 – Business Combinations

Domenick & Associates (“Domenick”)

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

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

(dollars in thousands)
Consideration paid:
Cash paid at closing	$	750
Contingent payment liability (present value)	706
Value of consideration	1,456
Assets acquired:
Cash and due from banks	370
Intangible assets - customer relationships	779
Premises and equipment	1
Other assets	316
Total assets	1,466
Liabilities assumed:
Accounts payable	657
Other liabilities	30
Total liabilities	687
Net assets acquired	779
Goodwill resulting from acquisition of Domenick	$	677

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

Royal Bancshares of Pennsylvania, Inc.

 

On December 15, 2017, the previously announced merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into BMBC (the “Effective Date”), and the merger of Royal Bank America with and into the Bank (collectively, the "RBPI Merger"), pursuant to the Agreement and Plan of Merger, by and between RBPI and BMBC, dated as of January 30, 2017 (the “Agreement”) was completed. In accordance with the Agreement, the aggregate share consideration paid to RBPI shareholders consisted of 3,101,316 shares of BMBC’s common stock. Shareholders of RBPI received 0.1025 shares of BMBC common stock for each share of RBPI Class A common stock and 0.1179 shares of BMBC common stock for each share of RBPI Class B common stock owned as of the Effective Date of the RBPI Merger, with cash-in-lieu of fractional shares totaling $7 thousand . Holders of in-the-money options to purchase RBPI Class A common stock received cash totaling $112 thousand . In addition, 1,368,040 warrants to purchase Class A common stock of RBPI, valued at $1.9 million were converted to 140,224 warrants to purchase BMBC common stock. In accordance with the acquisition method of accounting, assets acquired and liabilities assumed were preliminarily adjusted to their fair values as of the Effective Date. The excess of consideration paid above the fair value of net assets acquired was recorded as goodwill. This goodwill is not amortizable no r is it deductible for income tax purposes.

 

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In connection with the RBPI Merger, the consideration paid and the estimated fair value of identifiable assets acquired and liabilities assumed as of the Effective Date, which include the effects of any measurement period adjustments in accordance with ASC 805-10, are summarized in the following table:

 

(dollars in thousands)
Consideration paid:
Common shares issued (3,101,316)	$	136,768
Cash in lieu of fractional shares	7
Cash-out of certain options	112
Fair value of warrants assumed	1,853
Value of consideration	138,740
Assets acquired:
Cash and due from banks	17,092
Investment securities available for sale	121,587
Loans	566,228
Premises and equipment	8,264
Deferred income taxes	34,823
Bank-owned life insurance	16,550
Core deposit intangible	4,670
Favorable lease asset	566
Other assets	13,611
Total assets	783,391
Liabilities assumed:
Deposits	593,172
FHLB and other long-term borrowings	59,568
Short-term borrowings	15,000
Junior subordinated debentures	21,416
Unfavorable lease liability	322
Other liabilities	31,381
Total liabilities	720,859
Net assets acquired	62,532
Goodwill resulting from acquisition of RBPI	$	76,208

 

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

Due Diligence, Merger-Related and Merger Integration Expenses

 

Due diligence, merger-related and merger integration expenses include consultant costs, investment banker fees, contract breakage fees, retention bonuses for severed employees, salary and wages for redundant staffing involved in the integration of the institutions and bonus accruals for members of the merger integration team. The following table details the costs identified and classified as due diligence, merger-related and merger integration costs for the periods indicated:

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	Three Months Ended March 31,
(dollars in thousands)	2019				2018
Advertising	$	—			$	59
Employee Benefits	—				203
Occupancy and bank premises	—				1,856
Furniture, fixtures, and equipment	—				179
Data processing	—				112
Professional fees	—				747
Salaries and wages	—				346
Other	—				817
Total due diligence, merger-related and merger integration expenses	$	—			$	4,319

Note 4 – Investment Securities

 

The amortized cost and fair value of investment securities available for sale as of March 31, 2019 and December 31, 2018 are as follows:

 

As of March 31, 2019

(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	188,079				103				(1,436		)		186,746
Obligations of state and political subdivisions	8,644				5				(11		)		8,638
Mortgage-backed securities	323,610				1,365				(2,062		)		322,913
Collateralized mortgage obligations	40,995				182				(691		)		40,486
Other investment securities	1,100				—				—				1,100
Total	$	562,528			$	1,655			$	(4,200	)		$	559,983

 

As of December 31, 2018

(dollars in thousands)	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Treasury securities	$	200,026			$	—			$	(13	)		$	200,013
Obligations of the U.S. government and agencies	198,604				107				(2,856		)		195,855
Obligations of state and political subdivisions	11,372				3				(43		)		11,332
Mortgage-backed securities	294,076				554				(4,740		)		289,890
Collateralized mortgage obligations	40,150				141				(1,039		)		39,252
Other investment securities	1,100				—				—				1,100
Total	$	745,328			$	805			$	(8,691	)		$	737,442

 

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The following tables present the aggregate amount of gross unrealized losses as of March 31, 2019 and December 31, 2018 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 March 31, 2019

	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	$	—			$	—			$	141,114			$	(1,436	)		$	141,114			$	(1,436	)
Obligations of state and political subdivisions	—				—				3,200				(11		)		3,200				(11		)
Mortgage-backed securities	18,237				(183		)		193,339				(1,879		)		211,576				(2,062		)
Collateralized mortgage obligations	—				—				25,944				(691		)		25,944				(691		)
Total	$	18,237			$	(183	)		$	363,597			$	(4,017	)		$	381,834			$	(4,200	)

 

As of December 31, 2018

	Less than 12 Months								12 Months or Longer								Total
(dollars in thousands)	Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
U.S. Treasury securities	$	199,912			$	(13	)		$	—			$	—			$	199,912			$	(13	)
Obligations of the U.S. government and agencies	12,916				(62		)		140,506				(2,794		)		153,422				(2,856		)
Obligations of state and political subdivisions	—				—				3,989				(43		)		3,989				(43		)
Mortgage-backed securities	43,276				(352		)		195,697				(4,388		)		238,973				(4,740		)
Collateralized mortgage obligations	540				(1		)		27,077				(1,038		)		27,617				(1,039		)
Total	$	256,644			$	(428	)		$	367,269			$	(8,263	)		$	623,913			$	(8,691	)

 

Management evaluates the Corporation’s investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. The investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state and local municipalities and other issuers. All fixed income investment securities in the Corporation’s investment portfolio are rated as investment-grade or higher. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, interest rates and the bond rating of each security. The unrealized losses presented in the tables above are temporary in nature and are primarily related to market interest rates rather than the underlying credit quality of the issuers or collateral. Management does not believe that these unrealized losses are other-than-temporary. Management does not have the intent to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely than not that it will not have to sell these securities prior to their maturity or the recovery of their cost bases.

 

As of March 31, 2019 and December 31, 2018 , securities having a fair value of $120.4 million and $123.5 million , respectively, were specifically pledged as collateral for public funds, trust deposits, the Federal Reserve Board discount window program, Federal Home Loan Bank ("FHLB") borrowings and other purposes. Advances by the FHLB are collateralized by a blanket lien on non-pledged, mortgage-related loans as part of the Corporation’s borrowing agreement with the FHLB as well as certain securities individually pledged by the Corporation.

 

The amortized cost and fair value of available for sale investment and mortgage-related securities available for sale as of March 31, 2019 and December 31, 2018 , 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.

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	March 31, 2019								December 31, 2018
(dollars in thousands)	Amortized Cost				Fair Value				Amortized Cost				Fair Value
Investment securities:
Due in one year or less	$	9,055			$	9,041			$	209,129			$	209,099
Due after one year through five years	166,223				165,027				180,657				177,972
Due after five years through ten years	10,098				10,126				7,258				7,268
Due after ten years	12,547				12,390				14,058				13,961
Subtotal	197,923				196,584				411,102				408,300
Mortgage-related securities (1)	364,605				363,399				334,226				329,142
Total	$	562,528			$	559,983			$	745,328			$	737,442

 

(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 March 31, 2019 and December 31, 2018 are as follows:

 

As of March 31, 2019

(dollars in thousands)	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Mortgage-backed securities	$	10,457			$	10			$	(143	)		$	10,324

 

As of December 31, 2018

(dollars in thousands)	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Mortgage-backed securities	$	8,684			$	—			$	(246	)		$	8,438

 

The following tables present the aggregate amount of gross unrealized losses as of March 31, 2019 and December 31, 2018 on held to maturity securities classified according to the amount of time those securities have been in a continuous unrealized loss position:

 

As of March 31, 2019

	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	$	1,814			$	(13	)		$	7,187			$	(130	)		$	9,001			$	(143	)

 

As of December 31, 2018

	Less than 12 Months								12 Months or Longer								Total
(dollars in thousands)	Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Mortgage-backed securities	$	1,315			$	(4	)		$	7,123			$	(242	)		$	8,438			$	(246	)

 

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The amortized cost and fair value of held to maturity investment securities as of March 31, 2019 and December 31, 2018 , by contractual maturity, are shown below:

	March 31, 2019								December 31, 2018
(dollars in thousands)	Amortized Cost				Fair Value				Amortized Cost				Fair Value
Mortgage-backed securities (1)	$	10,457			$	10,324			$	8,684			$	8,438

 

(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 March 31, 2019 and December 31, 2018 , the Corporation’s investment securities held in trading accounts totaled $8.2 million and $7.5 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 a rabbi trust account 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.

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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 table below details portfolio loans and leases as of the dates indicated:

 

	March 31, 2019												December 31, 2018
(dollars in thousands)	Originated				Acquired				Total Loans and Leases				Originated				Acquired				Total Loans and Leases
Loans held for sale	$	2,884			$	—			$	2,884			$	1,749			$	—			$	1,749
Real Estate Loans:
Commercial mortgage	$	1,436,611			$	310,084			$	1,746,695			$	1,327,822			$	329,614			$	1,657,436
Home equity lines and loans	180,075				24,716				204,791				181,506				25,845				207,351
Residential mortgage	423,638				78,741				502,379				411,022				83,333				494,355
Construction	157,572				2,189				159,761				174,592				6,486				181,078
Total real estate loans	$	2,197,896			$	415,730			$	2,613,626			$	2,094,942			$	445,278			$	2,540,220
Commercial and industrial	651,204				54,497				705,701				624,643				70,941				695,584
Consumer	45,229				2,592				47,821				44,099				2,715				46,814
Leases	137,941				18,425				156,366				121,567				22,969				144,536
Total portfolio loans and leases	$	3,032,270			$	491,244			$	3,523,514			$	2,885,251			$	541,903			$	3,427,154
Total loans and leases	$	3,035,154			$	491,244			$	3,526,398			$	2,887,000			$	541,903			$	3,428,903
Loans with fixed rates	$	1,252,613			$	288,679			$	1,541,292			$	1,204,070			$	323,604			$	1,527,674
Loans with adjustable or floating rates	1,782,541				202,565				1,985,106				1,682,930				218,299				1,901,229
Total loans and leases	$	3,035,154			$	491,244			$	3,526,398			$	2,887,000			$	541,903			$	3,428,903
Net deferred loan origination fees included in the above loan table	$	750			$	—			$	750			$	2,226			$	—			$	2,226

 

B. Components of the net investment in leases are detailed as follows:

 

	March 31, 2019												December 31, 2018
(dollars in thousands)	Originated				Acquired				Total Leases				Originated				Acquired				Total Leases
Minimum lease payments receivable	$	153,559			$	20,244			$	173,803			$	135,313			$	25,372			$	160,685
Unearned lease income	(21,737		)		(2,270		)		(24,007		)		(19,388		)		(3,005		)		(22,393		)
Initial direct costs and deferred fees	6,119				451				6,570				5,642				602				6,244
Total Leases	$	137,941			$	18,425			$	156,366			$	121,567			$	22,969			$	144,536

 

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C. Non-Performing Loans and Leases  

 

	March 31, 2019												December 31, 2018
(dollars in thousands)	Originated				Acquired				Total Loans and Leases				Originated				Acquired				Total Loans and Leases
Commercial mortgage	$	3,458			$	2,100			$	5,558			$	435			$	2,133			$	2,568
Home equity lines and loans	6,878				26				6,904				3,590				26				3,616
Residential mortgage	2,293				570				2,863				2,813				639				3,452
Commercial and industrial	2,657				308				2,965				1,786				315				2,101
Consumer	36				44				80				45				63				108
Leases	429				484				913				392				583				975
Total non-performing loans and leases	$	15,751			$	3,532			$	19,283			$	9,061			$	3,759			$	12,820

 

D. Purchased Credit-Impaired Loans

 

The outstanding principal balance and related carrying amount of purchased credit-impaired loans, for which the Corporation applies ASC 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality , to account for the interest earned, as of the dates indicated, are as follows:

(dollars in thousands)	March 31, 2019				December 31, 2018
Outstanding principal balance	$	15,845			$	17,904
Carrying amount	$	11,553			$	12,304

 

The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Corporation applies ASC 310-30, for the three months ended March 31, 2019 : 

(dollars in thousands)	Accretable Discount
Balance, December 31, 2018	$	2,697
Accretion	(247		)
Reclassifications from nonaccretable difference	76
Additions/adjustments	—
Disposals	(108		)
Balance, March 31, 2019	$	2,418

 

E. Age Analysis of Past Due Loans and Leases

 

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

	Accruing Loans and Leases
As of March 31, 2019	30 – 59 Days Past Due				60 – 89 Days Past Due				Over 89 Days Past Due				Total Past Due				Current				Total Accruing Loans and Leases				Nonaccrual Loans and Leases				Total Loans and Leases
(dollars in thousands)
Commercial mortgage	$	1,106			$	—			$	—			$	1,106			$	1,740,031			$	1,741,137			$	5,558			$	1,746,695
Home equity lines and loans	376				144				—				520				197,367				197,887				6,904				204,791
Residential mortgage	2,357				320				—				2,677				496,839				499,516				2,863				502,379
Construction	—				—				—				—				159,761				159,761				—				159,761
Commercial and industrial	749				15				—				764				701,972				702,736				2,965				705,701
Consumer	64				64				—				128				47,613				47,741				80				47,821
Leases	971				265				—				1,236				154,217				155,453				913				156,366
Total portfolio loans and leases	$	5,623			$	808			$	—			$	6,431			$	3,497,800			$	3,504,231			$	19,283			$	3,523,514

  

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	Accruing Loans and Leases
As of December 31, 2018	30 – 59 Days Past Due				60 – 89 Days Past Due				Over 89 Days Past Due				Total Past Due				Current (1)				Total Accruing Loans and Leases				Nonaccrual Loans and Leases				Total Loans and Leases
(dollars in thousands)
Commercial mortgage	$	821			$	251			$	—			$	1,072			$	1,653,796			$	1,654,868			$	2,568			$	1,657,436
Home equity lines and loans	92				—				—				92				203,643				203,735				3,616				207,351
Residential mortgage	2,330				218				—				2,548				488,355				490,903				3,452				494,355
Construction	—				—				—				—				181,078				181,078				—				181,078
Commercial and industrial	280				332				—				612				692,871				693,483				2,101				695,584
Consumer	35				5				—				40				46,666				46,706				108				46,814
Leases	641				460				—				1,101				142,460				143,561				975				144,536
Total portfolio loans and leases	$	4,199			$	1,266			$	—			$	5,465			$	3,408,869			$	3,414,334			$	12,820			$	3,427,154

 

(1) Included as “current” are $3.2 million of loans and leases as of December 31, 2018 which were classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.

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

	Accruing Loans and Leases
As of March 31, 2019	30 – 59 Days Past Due				60 – 89 Days Past Due				Over 89 Days Past Due				Total Past Due				Current				Total Accruing Loans and Leases				Nonaccrual Loans and Leases				Total Loans and Leases
(dollars in thousands)
Commercial mortgage	$	1,106			$	—			$	—			$	1,106			$	1,432,047			$	1,433,153			$	3,458			$	1,436,611
Home equity lines and loans	231				144				—				375				172,822				173,197				6,878				180,075
Residential mortgage	1,735				233				—				1,968				419,377				421,345				2,293				423,638
Construction	—				—				—				—				157,572				157,572				—				157,572
Commercial and industrial	520				15				—				535				648,012				648,547				2,657				651,204
Consumer	25				64				—				89				45,104				45,193				36				45,229
Leases	695				206				—				901				136,611				137,512				429				137,941
Total originated portfolio loans and leases	$	4,312			$	662			$	—			$	4,974			$	3,011,545			$	3,016,519			$	15,751			$	3,032,270

 

	Accruing Loans and Leases
As of December 31, 2018	30 – 59 Days Past Due				60 – 89 Days Past Due				Over 89 Days Past Due				Total Past Due				Current (1)				Total Accruing Loans and Leases				Nonaccrual Loans and Leases				Total Loans and Leases
(dollars in thousands)
Commercial mortgage	$	816			$	251			$	—			$	1,067			$	1,326,320			$	1,327,387			$	435			$	1,327,822
Home equity lines and loans	25				—				—				25				177,891				177,916				3,590				181,506
Residential mortgage	1,545				—				—				1,545				406,664				408,209				2,813				411,022
Construction	—				—				—				—				174,592				174,592				—				174,592
Commercial and industrial	280				332				—				612				622,245				622,857				1,786				624,643
Consumer	35				5				—				40				44,014				44,054				45				44,099
Leases	350				233				—				583				120,592				121,175				392				121,567
Total originated portfolio loans and leases	$	3,051			$	821			$	—			$	3,872			$	2,872,318			$	2,876,190			$	9,061			$	2,885,251

 

(1) Included as “current” are $2.0 million of loans and leases as of December 31, 2018 which were classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.

 

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

	Accruing Loans and Leases
As of March 31, 2019	30 – 59 Days Past Due				60 – 89 Days Past Due				Over 89 Days Past Due				Total Past Due				Current				Total Accruing Loans and Leases				Nonaccrual Loans and Leases				Total Loans and Leases
(dollars in thousands)
Commercial mortgage	$	—			$	—			$	—			$	—			$	307,984			$	307,984			$	2,100			$	310,084
Home equity lines and loans	145				—				—				145				24,545				24,690				26				24,716
Residential mortgage	622				87				—				709				77,462				78,171				570				78,741
Construction	—				—				—				—				2,189				2,189				—				2,189
Commercial and industrial	229				—				—				229				53,960				54,189				308				54,497
Consumer	39				—				—				39				2,509				2,548				44				2,592
Leases	276				59				—				335				17,606				17,941				484				18,425
Total acquired portfolio loans and leases	$	1,311			$	146			$	—			$	1,457			$	486,255			$	487,712			$	3,532			$	491,244

 

	Accruing Loans and Leases
As of December 31, 2018	30 – 59 Days Past Due				60 – 89 Days Past Due				Over 89 Days Past Due				Total Past Due				Current (1)				Total Accruing Loans and Leases				Nonaccrual Loans and Leases				Total Loans and Leases
(dollars in thousands)
Commercial mortgage	$	5			$	—			$	—			$	5			$	327,476			$	327,481			$	2,133			$	329,614
Home equity lines and loans	67				—				—				67				25,752				25,819				26				25,845
Residential mortgage	785				218				—				1,003				81,691				82,694				639				83,333
Construction	—				—				—				—				6,486				6,486				—				6,486
Commercial and industrial	—				—				—				—				70,626				70,626				315				70,941
Consumer	—				—				—				—				2,652				2,652				63				2,715
Leases	291				227				—				518				21,868				22,386				583				22,969
Total acquired portfolio loans and leases	$	1,148			$	445			$	—			$	1,593			$	536,551			$	538,144			$	3,759			$	541,903

 

(1) Included as “current” are $1.2 million of loans and leases as of December 31, 2018 which were classified as administratively delinquent. An administratively delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. Management does not consider these loans to be delinquent.

 

F. Allowance for Loan and Lease Losses (the “Allowance”)

 

The following tables detail the roll-forward of the Allowance for the three months ended March 31, 2019 and 2018 :

(dollars in thousands)	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Unallocated				Total
Balance, December 31, 2018	$	7,567			$	1,003			$	1,813			$	1,485			$	5,461			$	229			$	1,868			$	—			$	19,426
Charge-offs	(1,388		)		(47		)		(331		)		—				(405		)		(105		)		(568		)		—				(2,844		)
Recoveries	15				1				1				1				15				11				254				—				298
Provision for loan and lease losses	2,047				81				408				(300		)		817				193				490				—				3,736
Balance, March 31, 2019	$	8,241			$	1,038			$	1,891			$	1,186			$	5,888			$	328			$	2,044			$	—			$	20,616

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(dollars in thousands)	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Unallocated				Total
Balance, December 31, 2017	$	7,550			$	1,086			$	1,926			$	937			$	5,038			$	246			$	742			$	—			$	17,525
Charge-offs	—				(25		)		—				—				(283		)		(49		)		(596		)		—				(953		)
Recoveries	3				—				—				1				—				1				55				—				60
Provision for loan and lease losses	(379		)		(16		)		(28		)		(94		)		606				93				848				—				1,030
Balance, March 31, 2018	$	7,174			$	1,045			$	1,898			$	844			$	5,361			$	291			$	1,049			$	—			$	17,662

 

The following tables detail the allocation of the Allowance for all portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2019 and December 31, 2018 :

As of March 31, 2019	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Unallocated				Total
(dollars in thousands)
Allowance on loans and leases:
Individually evaluated for impairment	$	—			$	149			$	259			$	—			$	160			$	37			$	—			$	—			$	605
Collectively evaluated for impairment	8,241				889				1,632				1,186				5,728				291				2,044				—				20,011
Purchased credit-impaired (1)	—				—				—				—				—				—				—				—				—
Total	$	8,241			$	1,038			$	1,891			$	1,186			$	5,888			$	328			$	2,044			$	—			$	20,616

 

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

As of December 31, 2018	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Unallocated				Total
(dollars in thousands)
Allowance on loans and leases:
Individually evaluated for impairment	$	—			$	162			$	272			$	—			$	—			$	28			$	—			$	—			$	462
Collectively evaluated for impairment	7,567				841				1,541				1,485				5,461				201				1,868				—				18,964
Purchased credit-impaired (1)	—				—				—				—				—				—				—				—				—
Total	$	7,567			$	1,003			$	1,813			$	1,485			$	5,461			$	229			$	1,868			$	—			$	19,426

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

 

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The following tables detail the carrying value for all portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2019 and December 31, 2018 :

As of March 31, 2019	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Carrying value of loans and leases:
Individually evaluated for impairment	$	5,558			$	8,291			$	6,106			$	—			$	3,358			$	106			$	—			$	23,419
Collectively evaluated for impairment	1,731,170				195,986				496,271				159,761				701,293				47,715				156,366				3,488,562
Purchased credit-impaired (1)	9,967				514				2				—				1,050				—				—				11,533
Total	$	1,746,695			$	204,791			$	502,379			$	159,761			$	705,701			$	47,821			$	156,366			$	3,523,514

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

 

As of December 31, 2018	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Carrying value of loans and leases:
Individually evaluated for impairment	$	7,008			$	4,998			$	6,608			$	—			$	2,629			$	134			$	—			$	21,377
Collectively evaluated for impairment	1,642,117				201,841				487,747				178,673				691,879				46,680				144,536				3,393,473
Purchased credit-impaired (1)	8,311				512				—				2,405				1,076				—				—				12,304
Total	$	1,657,436			$	207,351			$	494,355			$	181,078			$	695,584			$	46,814			$	144,536			$	3,427,154

 

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

 

 

The following tables detail the allocation of the Allowance for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2019 and December 31, 2018 :

As of March 31, 2019	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Allowance on loans and leases:
Individually evaluated for impairment	$	—			$	149			$	170			$	—			$	160			$	37			$	—			$	516
Collectively evaluated for impairment	8,241				889				1,632				1,186				5,728				291				2,036				20,003
Total	$	8,241			$	1,038			$	1,802			$	1,186			$	5,888			$	328			$	2,036			$	20,519

 

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As of December 31, 2018	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Allowance on loans and leases:
Individually evaluated for impairment	$	—			$	162			$	175			$	—			$	—			$	28			$	—			$	365
Collectively evaluated for impairment	7,567				841				1,541				1,485				5,461				201				1,868				18,964
Total	$	7,567			$	1,003			$	1,716			$	1,485			$	5,461			$	229			$	1,868			$	19,329

 

The following tables detail the carrying value for originated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2019 and December 31, 2018 :

As of March 31, 2019	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Carrying value of loans and leases:
Individually evaluated for impairment	$	3,458			$	8,265			$	4,719			$	—			$	3,050			$	62			$	—			$	19,554
Collectively evaluated for impairment	1,433,153				171,810				418,919				157,572				648,154				45,167				137,941				3,012,716
Total	$	1,436,611			$	180,075			$	423,638			$	157,572			$	651,204			$	45,229			$	137,941			$	3,032,270

 

As of December 31, 2018	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Carrying value of loans and leases:
Individually evaluated for impairment	$	4,874			$	4,972			$	5,106			$	—			$	2,314			$	71			$	—			$	17,337
Collectively evaluated for impairment	1,322,948				176,534				405,916				174,592				622,329				44,028				121,567				2,867,914
Total	$	1,327,822			$	181,506			$	411,022			$	174,592			$	624,643			$	44,099			$	121,567			$	2,885,251

 

The following tables detail the allocation of the Allowance for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2019 and December 31, 2018 :

As of March 31, 2019	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Allowance on loans and leases:
Individually evaluated for impairment	$	—			$	—			$	89			$	—			$	—			$	—			$	—			$	89
Collectively evaluated for impairment	—				—				—				—				—				—				8				8
Purchased credit-impaired (1)	—				—				—				—				—				—				—				—
Total	$	—			$	—			$	89			$	—			$	—			$	—			$	8			$	97

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

 

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As of December 31, 2018	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Allowance on loans and leases:
Individually evaluated for impairment	$	—			$	—			$	97			$	—			$	—			$	—			$	—			$	97
Collectively evaluated for impairment	—				—				—				—				—				—				—				—
Purchased credit-impaired (1)	—				—				—				—				—				—				—				—
Total	$	—			$	—			$	97			$	—			$	—			$	—			$	—			$	97

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

 

The following tables detail the carrying value for acquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2019 and December 31, 2018 :

As of March 31, 2019	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Carrying value of loans and leases:
Individually evaluated for impairment	$	2,100			$	26			$	1,387			$	—			$	308			$	44			$	—			$	3,865
Collectively evaluated for impairment	298,017				24,176				77,352				2,189				53,139				2,548				18,425				475,846
Purchased credit-impaired (1)	9,967				514				2				—				1,050				—				—				11,533
Total	$	310,084			$	24,716			$	78,741			$	2,189			$	54,497			$	2,592			$	18,425			$	491,244

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

 

As of December 31, 2018	Commercial Mortgage				Home Equity Lines and Loans				Residential Mortgage				Construction				Commercial and Industrial				Consumer				Leases				Total
(dollars in thousands)
Carrying value of loans and leases:
Individually evaluated for impairment	$	2,134			$	26			$	1,502			$	—			$	315			$	63			$	—			$	4,040
Collectively evaluated for impairment	319,169				25,307				81,831				4,081				69,550				2,652				22,969				525,559
Purchased credit-impaired (1)	8,311				512				—				2,405				1,076				—				—				12,304
Total	$	329,614			$	25,845			$	83,333			$	6,486			$	70,941			$	2,715			$	22,969			$	541,903

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

 

As part of the process of determining the Allowance for the different segments of the loan and lease portfolio, management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as external loan reviewers. The result of these reviews is reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

 

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•	Pass – Loans considered satisfactory with no indications of deterioration.

•	Special mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

•

Substandard - Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

•	Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

In addition, for the remaining segments of the loan and lease portfolio, which include residential mortgage, home equity lines and loans, consumer, and leases, the credit quality indicator used to determine this component of the Allowance is based on performance status.

 

The following tables detail the carrying value of all portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of March 31, 2019 and December 31, 2018 :

		Credit Risk Profile by Internally Assigned Grade - All Loans and Leases
As of March 31, 2019
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial mortgage		$	1,714,426			$	10,571			$	21,292			$	406			$	1,746,695
Home equity loans and lines		197,373				—				7,418				—				204,791
Residential		499,339				—				3,040				—				502,379
Construction		152,120				937				6,704				—				159,761
Commercial & Industrial		691,708				2,581				11,412				—				705,701
Consumer		47,195				—				626				—				47,821
Leases		155,453				—				913				—				156,366
Total		$	3,457,614			$	14,089			$	51,405			$	406			$	3,523,514

		Credit Risk Profile by Internally Assigned Grade - All Loans and Leases
As of December 31, 2018
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial mortgage		$	1,635,068			$	631			$	20,639			$	1,098			$	1,657,436
Home equity loans and lines		203,037				—				4,314				—				207,351
Residential		490,789				—				3,566				—				494,355
Construction		171,353				938				8,787				—				181,078
Commercial & Industrial		684,444				2,737				8,402				1				695,584
Consumer		46,588				—				226				—				46,814
Leases		143,561				—				975				—				144,536
Total		$	3,374,840			$	4,306			$	46,909			$	1,099			$	3,427,154

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The following tables detail the carrying value of originated portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of March 31, 2019 and December 31, 2018 :

		Credit Risk Profile by Internally Assigned Grade - Originated Loans and Leases
As of March 31, 2019
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial mortgage		$	1,428,214			$	4,325			$	4,072			$	—			$	1,436,611
Home equity loans and lines		173,197				—				6,878				—				180,075
Residential		421,168				—				2,470				—				423,638
Construction		149,931				937				6,704				—				157,572
Commercial & Industrial		639,463				2,352				9,389				—				651,204
Consumer		44,647				—				582				—				45,229
Leases		137,513				—				428				—				137,941
Total		$	2,994,133			$	7,614			$	30,523			$	—			$	3,032,270

		Credit Risk Profile by Internally Assigned Grade - Originated Loans and Leases
As of December 31, 2018
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial mortgage		$	1,321,973			$	631			$	5,218			$	—			$	1,327,822
Home equity loans and lines		177,916				—				3,590				—				181,506
Residential		408,095				—				2,927				—				411,022
Construction		167,272				938				6,382				—				174,592
Commercial & Industrial		615,817				2,511				6,314				1				624,643
Consumer		43,936				—				163				—				44,099
Leases		121,175				—				392				—				121,567
Total		$	2,856,184			$	4,080			$	24,986			$	1			$	2,885,251

The following tables detail the carrying value of acquired portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of March 31, 2019 and December 31, 2018 :

		Credit Risk Profile by Internally Assigned Grade - Acquired Loans and Leases
As of March 31, 2019
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial mortgage		$	286,212			$	6,246			$	17,220			$	406			$	310,084
Home equity loans and lines		24,176				—				540				—				24,716
Residential		78,171				—				570				—				78,741
Construction		2,189				—				—				—				2,189
Commercial & Industrial		52,245				229				2,023				—				54,497
Consumer		2,548				—				44				—				2,592
Leases		17,940				—				485				—				18,425
Total		$	463,481			$	6,475			$	20,882			$	406			$	491,244

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		Credit Risk Profile by Internally Assigned Grade - Acquired Loans and Leases
As of December 31, 2018
(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Commercial mortgage		$	313,095			$	—			$	15,421			$	1,098			$	329,614
Home equity loans and lines		25,121				—				724				—				25,845
Residential		82,694				—				639				—				83,333
Construction		4,081				—				2,405				—				6,486
Commercial & Industrial		68,627				226				2,088				—				70,941
Consumer		2,652				—				63				—				2,715
Leases		22,386				—				583				—				22,969
Total		$	518,656			$	226			$	21,923			$	1,098			$	541,903

G. Troubled Debt Restructurings (“TDRs”)

 

The restructuring of a loan is considered a “troubled debt restructuring” if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

 

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

 

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

(dollars in thousands)	March 31, 2019				December 31, 2018
TDRs included in nonperforming loans and leases	$	4,057			$	1,217
TDRs in compliance with modified terms	5,149				9,745
Total TDRs	$	9,206			$	10,962

 

The following table presents information regarding loan and lease modifications categorized as TDRs for the three months ended March 31, 2019 :

	For the Three Months Ended March 31, 2019
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Home equity loans and lines	—		$	—			$	—
Residential mortgages	—		—				—
Leases	2		38				38
Total	2		$	38			$	38

 

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The following table presents information regarding the types of loan and lease modifications made for the three months ended March 31, 2019 :

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

H. Impaired Loans

 

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized for the  three months ended March 31, 2019 and 2018 (purchased credit-impaired loans are not included in the tables):

As of and for the Three Months Ended March 31, 2019	Recorded Investment (2)				Contractual Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized				Cash-Basis Interest Income Recognized
(dollars in thousands)
Impaired loans with related allowance:
Home equity lines and loans	$	1,178			$	1,178			$	149			$	1,182			$	10			$	—
Residential mortgage	1,917				1,917				259				1,921				23				—
Commercial and industrial	334				339				160				335				—				—
Consumer	59				59				37				59				—				—
Total	$	3,488			$	3,493			$	605			$	3,497			$	33			$	—
Impaired loans without related allowance (1) :
Commercial mortgage	$	5,558			$	7,191			$	—			$	6,982			$	—			$	—
Home equity lines and loans	7,113				7,167				—				7,180				2				—
Residential mortgage	4,191				4,294				—				4,239				21				—
Commercial and industrial	3,023				3,653				—				3,030				5				—
Consumer	47				62				—				47				—				—
Total	$	19,932			$	22,367			$	—			$	21,478			$	28			$	—
Grand total	$	23,420			$	25,860			$	605			$	24,975			$	61			$	—

 

(1) The table above does not include the recorded investment of $1.0 million of impaired leases without a related Allowance.

 

(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.

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As of and for the Three Months Ended March 31, 2018	Recorded Investment (2)				Contractual Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized				Cash-Basis Interest Income Recognized
(dollars in thousands)
Impaired loans with related allowance:
Home equity lines and loans	$	574			$	574			$	19			$	575			$	6			$	—
Residential mortgage	1,796				1,796				224				1,801				21				—
Commercial and industrial	54				110				40				97				—				—
Consumer	27				27				4				27				—				—
Total	$	2,451			$	2,507			$	287			$	2,500			$	27			$	—
Impaired loans without related allowance (1) :
Commercial mortgage	$	1,394			$	1,483			$	—			$	1,394			$	23			$	—
Home equity lines and loans	2,052				2,114				—				2,094				2				—
Residential mortgage	3,554				3,758				—				154				—				—
Commercial and industrial	2,700				3,498				—				2,872				5				—
Total	$	9,700			$	10,853			$	—			$	6,514			$	30			$	—
Grand total	$	12,151			$	13,360			$	287			$	9,014			$	57			$	—

 

(1) The table above does not include the recorded investment of $510 thousand of impaired leases without a related Allowance.

 

(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.

(dollars in thousands)	Recorded Investment (2)				Principal Balance				Related Allowance
As of December 31, 2018
Impaired loans with related allowance:
Home equity lines and loans	$	1,280			$	1,280			$	162
Residential mortgage	1,966				1,966				272
Consumer	50				50				28
Total	$	3,296			$	3,296			$	462
Impaired loans without related allowance (1) :
Commercial mortgage	$	7,007			$	7,264			$	—
Home equity lines and loans	3,718				3,724				—
Residential mortgage	4,641				4,728				—
Commercial and industrial	2,629				3,803				—
Consumer	83				86
Total	$	18,078			$	19,605			$	—
Grand total	$	21,374			$	22,901			$	462

 

(1) The table above does not include the recorded investment of $1.2 million of impaired leases without a related Allowance.

 

(2) Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.

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I. Loan Mark

 

Loans acquired in mergers and acquisitions are recorded at fair value as of the date of the transaction. This adjustment to the acquired principal amount is referred to as the “Loan Mark.” With the exception of purchased credit impaired loans, for which the Loan Mark is accounted under ASC 310-30, the Loan Mark is amortized or accreted as an adjustment to yield over the lives of the loans.

 

The following tables detail, for acquired loans , the outstanding principal, remaining Loan Mark, and recorded investment, by portfolio segment, as of the dates indicated:

	As of March 31, 2019
(dollars in thousands)	Outstanding Principal				Remaining Loan Mark				Recorded Investment
Commercial mortgage	$	318,488			$	(8,404	)		$	310,084
Home equity lines and loans	26,981				(2,265		)		24,716
Residential mortgage	81,372				(2,631		)		78,741
Construction	2,190				(1		)		2,189
Commercial and industrial	56,400				(1,903		)		54,497
Consumer	2,680				(88		)		2,592
Leases	18,974				(549		)		18,425
Total	$	507,085			$	(15,841	)		$	491,244

 

	As of December 31, 2018
(dollars in thousands)	Outstanding Principal				Remaining Loan Mark				Recorded Investment
Commercial mortgage	$	339,241			$	(9,627	)		$	329,614
Home equity lines and loans	28,212				(2,367		)		25,845
Residential mortgage	86,111				(2,778		)		83,333
Construction	6,780				(294		)		6,486
Commercial and industrial	72,948				(2,007		)		70,941
Consumer	2,828				(113		)		2,715
Leases	23,695				(726		)		22,969
Total	$	559,815			$	(17,912	)		$	541,903

 

Note 6 – Mortgage Servicing Rights

 

The following table summarizes the Corporation’s activity related to mortgage servicing rights (“MSRs”) for the three months ended March 31, 2019 and 2018 :

	Three Months Ended March 31,
(dollars in thousands)	2019				2018
Balance, beginning of period	$	5,047			$	5,861
Additions	—				16
Amortization	(120		)		(221		)
(Impairment) / Recovery	(17		)		50
Balance, end of period	$	4,910			$	5,706
Fair value	$	5,754			$	6,791
Residential mortgage loans serviced for others	$	564,884			$	634,970

 

As of March 31, 2019 , and December 31, 2018 , 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:

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(dollars in thousands)	March 31, 2019				December 31, 2018
Fair value amount of MSRs	$	5,754			$	6,277
Weighted average life (in years)	6.3				6.7
Prepayment speeds (constant prepayment rate) (1)	10.2		%		9.1		%
Impact on fair value:
10% adverse change	$	(161	)		$	(124	)
20% adverse change	$	(324	)		$	(257	)
Discount rate	9.55		%		9.55		%
Impact on fair value:
10% adverse change	$	(207	)		$	(234	)
20% adverse change	$	(400	)		$	(451	)

 

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

At March 31, 2019 and December 31, 2018 the fair value of the MSRs was $5.8 million and $6.3 million , respectively. The fair value of the MSRs for these dates was determined using values obtained from a third party which utilizes a valuation model which calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate is used to determine the present value of future net servicing income. Another key assumption in the model is the required rate of return the market would expect for an asset with similar risk. These assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change. Management reviews, annually, the process utilized by its independent third-party valuation experts.

 

These assumptions and sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which could magnify or counteract the sensitivities.

Note 7 – Goodwill and 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 three months ended March 31, 2019 :

(dollars in thousands)	Balance December 31, 2018				Additions				Adjustments				Amortization				Balance March 31, 2019				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	$	5,906			$	—			$	—			$	(327	)		$	5,579			10 years
Customer relationships	13,607				18				—				(438		)		13,187				10 to 20 years
Non-compete agreements	1,101				—				—				(48		)		1,053				5 to 10 years
Trade name	2,149				—				—				(125		)		2,024				3 to 5 years
Domain name	151				—				—				—				151				Indefinite
Favorable lease assets	541				—				(541		)		—				—
Total Intangible Assets	$	23,455			$	18			$	(541	)		$	(938	)		$	21,994
Total Goodwill and Intangible Assets	$	207,467			$	18			$	(541	)		$	(938	)		$	206,006

 

Management conducted its annual impairment tests for goodwill and indefinite-lived intangible assets as of October 31, 2018 using generally accepted valuation methods. Management determined that no impairment of goodwill or indefinite-lived

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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 five months ended March 31, 2019 , 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:

	March 31, 2019				December 31, 2018
(dollars in thousands)
Interest-bearing demand	$	664,683			$	664,749
Money market	961,348				862,644
Savings	265,613				247,081
Retail time deposits	531,522				542,702
Wholesale non-maturity deposits	47,744				55,031
Wholesale time deposits	284,397				325,261
Total interest-bearing deposits	$	2,755,307			$	2,697,468
Noninterest-bearing deposits	882,310				901,619
Total deposits	$	3,637,617			$	3,599,087

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

 

A. Short-term borrowings  

 

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

 

A summary of short-term borrowings is as follows:

(dollars in thousands)	March 31, 2019				December 31, 2018
Repurchase agreements (1)  – commercial customers	$	11,304			$	22,717
Short-term FHLB advances	104,910				229,650
Overnight federal funds	8,000				—
Total short-term borrowings	$	124,214			$	252,367

(1) Overnight repurchase agreements with no expiration date

 

The following table sets forth information concerning short-term borrowings:

	Three Months Ended March 31,
(dollars in thousands)	2019				2018
Balance at period-end	$	124,214			$	173,704
Maximum amount outstanding at any month end	$	184,257			$	173,704
Average balance outstanding during the period	$	179,754			$	172,532
Weighted-average interest rate:
As of the period-end	2.47		%		1.76		%
Paid during the period	2.43		%		1.48		%

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 March 31, 2019 and December 31, 2018 , the Corporation had $55.4 million and $55.4 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)	March 31, 2019				December 31, 2018
Within one year	$	33,105			$	28,105
Over one year through five years	22,302				27,269
Total	$	55,407			$	55,374

 

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			March 31, 2019				December 31, 2018
Bullet maturity – fixed rate	5/20/2019		8/24/2021		1.76	%		1.40	%		2.13	%		$	55,407			$	55,374

 

(1) Maturity range, weighted average rate and coupon rate range refers to March 31, 2019 balances.

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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 $10.5 million at March 31, 2019 , and $14.5 million at December 31, 2018 . The carrying amount of the FHLB stock approximates its redemption value.

 

The level of required investment in FHLB stock is based on the balance of outstanding borrowings the Corporation has from the FHLB.  Although FHLB stock is a financial instrument that represents an equity interest in the FHLB, it does not have a readily determinable fair value. FHLB stock is generally viewed as a long-term investment. Accordingly, when evaluating FHLB stock for impairment, its value should be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

The Corporation had a maximum borrowing capacity with the FHLB of $1.56 billion as of March 31, 2019 of which the unused capacity was $1.40 billion . In addition, there were $71.0 million in the overnight federal funds line available and $145.5 million of Federal Reserve Discount Window capacity.

 

Note 10 – Subordinated Notes

 

On December 13, 2017, 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 net proceeds of both offerings increased Tier II regulatory capital at BMBC.

 

The following tables detail the subordinated notes, including debt issuance costs, as of March 31, 2019 , and December 31, 2018 :

	March 31, 2019							December 31, 2018
(dollars in thousands)	Balance				Rate (1)(2)			Balance				Rate (1)(2)
Subordinated notes – due 2027	$	68,916			4.25	%		$	68,885			4.25	%
Subordinated notes – due 2025	29,655				4.75	%		29,641				4.75	%
Total subordinated notes	$	98,571						$	98,526

 

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

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Note 11 – Junior Subordinated Debentures

 

In connection with the RBPI Merger, BMBC 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 the Corporation assumed as a result of the RBPI Merger, junior subordinated debentures to the Trusts of $10.7 million each, totaling $21.4 million representing the Corporation’s maximum exposure to loss. The junior subordinated debentures incur interest at a coupon rate of 4.76% as of March 31, 2019 . The rate resets quarterly based on 3-month LIBOR plus 2.15% .

 

Each of Trust I and Trust II issued an aggregate principal amount of $12.5 million of capital securities initially bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to an unaffiliated investment vehicle and an aggregate principal amount of $387 thousand of common securities bearing fixed and/or fixed/floating interest rates corresponding to the debt securities held by each trust to the Corporation. As a result of the RBPI Merger, the Corporation has fully and unconditionally guaranteed all of the obligations of the Trusts, including any distributions and payments on liquidation or redemption of the capital securities.

 

The rights of holders of common securities of the Trusts are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities. The capital and common securities of the Trusts are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each. Unless earlier dissolved, the Trusts will dissolve on December 15, 2034. The junior subordinated debentures are the sole assets of Trusts, mature on December 15, 2034, and may be called at par by the Corporation any time after December 15, 2009. The Corporation records its investments in the Trusts’ common securities of $387 thousand each as investments in unconsolidated entities and records dividend income upon declaration by Trust I and Trust II.

Note 12 – Operating Leases

On January 1, 2019, the Company adopted ASU 2016-02 (Topic 842), “Leases”, as further explained in Note 2, Recent Accounting Pronouncements.

The Corporation’s operating leases consist of various retail branch locations and corporate offices. As of March 31, 2019 , the Corporation’s leases have remaining lease terms ranging from nine months to 23 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 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 March 31, 2019 the Corporation’s ROU assets and related lease liabilities were $44.0 million and $48.2 million , respectively.

The components of lease expense were as follows:

	Three Months Ended March 31, 2019
(dollars in thousands)
Operating lease expense	$	1,330
Short term lease expense	15
Variable lease expense	418
Sublease income	(9		)
Total lease expense	$	1,754

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Supplemental cash flow information related to leases was as follows:

	Three Months Ended March 31, 2019
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,266
ROU assets obtained in exchange for lease liabilities	$	44,899

Maturities of operating lease liabilities under FASB ASC 842 "Leases" as of March 31, 2019 are as follows:

	March 31, 2019
(dollars in thousands)
2019	$	3,904
2020	4,700
2021	4,478
2022	4,203
2023	4,051
2024 and thereafter	41,845
Total lease payments	$	63,181
Less: imputed interest	14,957
Present value of operating lease liabilities	$	48,224

As of March 31, 2019 , the weighted-average remaining lease term, including extension options that the Corporation is reasonably certain will be exercised, for all operating leases is 14.65 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 March 31, 2019 is 3.55% .

As of March 31, 2019 , the Corporation had not entered into any material leases that have not yet commenced.

Future minimum cash rent commitments from various operating leases under FASB ASC 840 "Leases" as of December 31, 2018 are as follows:

(dollars in thousands)	December 31, 2018
2019	$	5,211
2020	4,700
2021	4,478
2022	4,203
2023	4,051
2024 and thereafter	41,845
Total	$	64,488

Note 13 – Derivative Instruments and Hedging Activities

 

Derivative financial instruments involve, to varying degrees, interest rate, market and credit risk. Management manages these risks as part of its asset and liability management process and through credit policies and procedures. Management seeks to minimize counterparty credit risk by establishing credit limits and collateral agreements and utilizes certain derivative financial instruments to enhance its ability to manage interest rate risk that exists as part of its ongoing business operations. The derivative transactions entered into by the Corporation are an economic hedge of a derivative offerings to Bank customers. The Corporation does not use derivative financial instruments for trading purposes.

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Customer Derivatives – Interest Rate Swaps . The Corporation enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’ variable-rate loans into fixed-rate loans. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge its exposure on the variable and fixed components of the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. As of March 31, 2019 , 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 March 31, 2019 , there were no fair value adjustments related to credit quality.

Risk Participation Agreements . The Corporation may enter into a risk participation agreement (“RPA”) with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA sold.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation may purchase an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA purchased.”

The following tables detail the derivative instruments as of March 31, 2019 and December 31, 2018 :

	Asset Derivatives								Liability Derivatives
(dollars in thousands)	Notional Amount				Fair Value				Notional Amount				Fair Value
Derivatives not designated as hedging instruments
As of March 31, 2019:
Customer derivatives – interest rate swaps	$	452,558			$	23,405			$	452,558			$	23,404
FX forwards	3,754				7				—				—
RPAs sold	—				—				848				2
RPAs purchased	35,141				87				—				—
Total derivatives	$	491,453			$	23,499			$	453,406			$	23,406
As of December 31, 2018:
Customer derivatives – interest rate swaps	$	369,623			$	12,550			$	369,623			$	12,549
RPAs sold	—				—				854				2
RPAs purchased	35,305				71				—				—
Total derivatives	$	404,928			$	12,621			$	370,477			$	12,551

 

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 March 31, 2019 and December 31, 2018 was $24.5 million  and $8.8 million , respectively. The amount of collateral posted with third parties is deemed to be sufficient to collateralize both the fair market value change as well as any additional amounts that may be required as a result of a change in the specified credit measures. The aggregate fair value of all derivative financial instruments in a liability position with credit measure contingencies and entered into with third parties was $23.1 million and $11.5 million as of March 31, 2019 and December 31, 2018 , respectively.

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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 2014.

The Corporation’s policy is to record interest and penalties on uncertain tax positions as income tax expense. No interest or penalties were accrued for the three months ended March 31, 2019 or 2018 .

Note 15 – Shareholders’ Equity

 

Dividend

 

On April 18, 2019, BMBC’s Board of Directors declared a regular quarterly dividend of $0.25 per share payable June 1, 2019 to shareholders of record as of May 1, 2019. During the first quarter of 2019, the Corporation paid or accrued, as applicable, a regular quarterly dividend of $0.25 per share. This dividend totaled $5.1 million , based on outstanding shares and restricted stock units as of February 1, 2019 of 20,381,859 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”). The Shelf Registration Statement allows 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 may sell these securities using the prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, from time to time, in one or more offerings.

In addition, 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 months ended March 31, 2019 , 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 months ended March 31, 2019 . No other sales of equity securities were executed under the Shelf Registration Statement during the three months ended March 31, 2019 .

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, BMBC also issues shares through the exercise of stock options and the vesting of RSUs and PSUs. During the three months ended March 31, 2019 , 29,600 shares were issued pursuant to the exercise of stock options, increasing shareholders’ equity by $540 thousand . 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 $1.1 million for the three months ended March 31, 2019 .

 

Stock Repurchases

 

On August 6, 2015, BMBC announced a stock repurchase program (the “2015 Program”) under which the Corporation may repurchase up to 1,200,000 shares of BMBC’s common stock, at an aggregate purchase price not to exceed $40 million . During the three months ended March 31, 2019 , 12,702 shares were repurchased under the 2015 Program. As of March 31, 2019 , the maximum number of shares remaining authorized for repurchase under the 2015 Program was 27,314 . In addition to the 2015 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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On April 18, 2019, BMBC announced a new stock repurchase program (the "2019 Program") under 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 will become effective upon the completion of BMBC’s existing 2015 Program.

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Note 16 – Accumulated Other Comprehensive (Loss) Income

The following table details the components of accumulated other comprehensive (loss) income for the three months ended March 31, 2019 and 2018 :

(dollars in thousands)	Net Change in Unrealized Gains on Available-for- Sale Investment Securities				Net Change in Unfunded Pension Liability				Accumulated Other Comprehensive Loss
Balance, December 31, 2018	$	(6,229	)		$	(1,284	)		$	(7,513	)
Other comprehensive income	4,219				16				4,235
Balance, March 31, 2019	$	(2,010	)		$	(1,268	)		$	(3,278	)
Balance, December 31, 2017	$	(2,861	)		$	(1,553	)		$	(4,414	)
Other comprehensive (loss) income	(5,296		)		46				(5,250		)
Balance, March 31, 2018	$	(8,157	)		$	(1,507	)		$	(9,664	)

The following table details the amounts reclassified from each component of accumulated other comprehensive loss to each component’s applicable income statement line, for the three months ended March 31, 2019 and 2018 :

		Amount Reclassified from Accumulated Other Comprehensive Loss
Description of Accumulated Other Comprehensive Loss Component		Three Months Ended March 31,								Affected Income Statement Category
		2019				2018
Net unrealized gain on investment securities available for sale:
Realization of gain on sale of investment securities available for sale		$	—			$	(7	)		Net gain on sale of available for sale investment securities
Realization of gain on transfer of investment securities available for sale to trading		—				(417		)		Other operating income
Total		$	—			$	(424	)
Income tax effect		—				89				Income tax expense
Net of income tax		$	—			$	(335	)		Net income
Unfunded pension liability:
Amortization of net loss included in net periodic pension costs (1)		$	11			$	25			Other operating expenses
Income tax effect		(2		)		(5		)		Income tax expense
Net of income tax		$	9			$	20			Net income

(1) Accumulated other comprehensive 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.

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	Three Months Ended March 31,
(dollars in thousands except share and per share data)	2019				2018
Numerator:
Net income available to common shareholders	$	10,677			$	15,286
Denominator for basic earnings per share –  weighted average shares outstanding	20,168,498				20,202,969
Effect of dilutive common shares	103,163				247,525
Denominator for diluted earnings per share –  adjusted weighted average shares outstanding	20,271,661				20,450,494
Basic earnings per share	$	0.53			$	0.76
Diluted earnings per share	$	0.53			$	0.75
Antidilutive shares excluded from computation of average dilutive earnings per share	63,765				870

 

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 months ended March 31, 2019 and 2018 .  Items outside the scope of ASC 606 are noted as such.

 

	Three Months Ended March 31, 2019												Three Months Ended March 31, 2018
(dollars in thousands)	Banking				Wealth Management				Consolidated				Banking				Wealth Management				Consolidated
Fees for wealth management services	$	—			$	10,392			$	10,392			$	—			$	10,308			$	10,308
Insurance commissions	—				1,672				1,672				—				1,693				1,693
Capital markets revenue (1)	2,219				—				2,219				666				—				666
Service charges on deposit accounts	808				—				808				713				—				713
Loan servicing and other fees (1)	609				—				609				686				—				686
Net gain on sale of loans (1)	319				—				319				518				—				518
Net gain on sale of investment securities available for sale (1)	—				—				—				7				—				7
Net (loss) / gain on sale of other real estate owned	(24		)		—				(24		)		176				—				176
Dividends on FHLB and FRB stock (1)	411				—				411				431				—				431
Other operating income (2)	2,826				21				2,847				4,294				44				4,338
Total noninterest income	$	7,168			$	12,085			$	19,253			$	7,491			$	12,045			$	19,536

 

(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 $512 thousand and $521 thousand for the three months ended March 31, 2019 and 2018 , 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

 

The following table provides information about options outstanding for the three months ended March 31, 2019 :

	Shares			Weighted Average Exercise Price				Weighted Average Grant Date Fair Value
Options outstanding, December 31, 2018	50,601			$	18.28			$	4.68
Forfeited	—			—				—
Expired	—			—				—
Exercised	(29,600	)		$	18.25			$	4.48
Options outstanding, March 31, 2019	21,001			$	18.32			$	4.95

As of  March 31, 2019 there were  no unvested options.

 

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

	Three Months Ended March 31,
(dollars in thousands)	2019				2018
Proceeds from exercise of stock options	$	540			$	992
Related tax benefit recognized	137				210
Net proceeds of options exercised	$	677			$	1,202
Intrinsic value of options exercised	$	652			$	999

 

The following table provides information about options outstanding and exercisable at March 31, 2019 :

(dollars in thousands, except share data and exercise price)	Outstanding				Exercisable
Number of shares	21,001				21,001
Weighted average exercise price	$	18.32			$	18.32
Aggregate intrinsic value	$	374			$	374
Weighted average remaining contractual term in years	0.5				0.5

 

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 months ended March 31, 2019 , the Corporation recognized $476 thousand of expense related to the Corporation’s RSUs. As of March 31, 2019 , there was $3.1 million of unrecognized compensation cost related to RSUs. This cost will be recognized over a weighted average period of 2.5 years.

During the first quarter of 2019, the Corporation adopted a voluntary Years of Service Incentive Program (the “Incentive Program”) which offers certain benefits to eligible employees who meet the Incentive Program requirements and voluntarily exit from service with the Corporation, the Bank or one of their subsidiaries. As part of the Incentive Program, the Corporation elected to remove the service requirement as an RSU vesting condition for employees who held RSUs and chose to participate in the Incentive Program. As a result, 3,494 RSUs were modified which resulted in $112 thousand of incremental expense recognized during the three months ended March 31, 2019.

 

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The following table details the RSUs for the three months ended March 31, 2019 :

	Three Months Ended March 31, 2019
	Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance	76,746			$	39.71
Granted	36,690			$	34.75
Vested	(2,300	)		$	31.68
Forfeited	(3,501	)		$	41.13
Ending balance	107,635			$	38.14

 

PSUs

 

For the three months ended March 31, 2019 , the Corporation recognized $661 thousand of expense related to the Corporation's PSUs. As of March 31, 2019 , there was $3.5 million of unrecognized compensation cost related to PSUs. This cost will be recognized over a weighted average period of 2.2 years.

 

As part of the Incentive Program, the Corporation elected to remove the service requirement as a PSU vesting condition for employees who held PSUs and chose to participate in the Incentive Program. As a result, 8,208 PSUs were modified which resulted in $250 thousand of incremental expense recognized during the three months ended March 31, 2019.

The following table details the PSUs for the three months ended March 31, 2019 :

	Three Months Ended March 31, 2019
	Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance	121,656			$	36.82
Granted	46,395			$	33.00
Vested	—			$	—
Forfeited	(8,254	)		$	39.28
Ending balance	159,797			$	35.58

 

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.

 

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The following tables present the Corporation’s assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 :

As of March 31, 2019
(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	186,746				—				186,746				—
Obligations of state & political subdivisions	8,638				—				8,638				—
Mortgage-backed securities	322,913				—				322,913				—
Collateralized mortgage obligations	40,486				—				40,486				—
Other investment securities	1,100				—				1,100				—
Total investment securities available for sale	$	559,983			$	100			$	559,883			$	—
Investment securities trading:
Mutual funds	$	8,189			$	8,189			$	—			$	—
Derivatives:
Interest rate swaps	$	23,405			$	—			$	23,405			$	—
RPAs purchased	87				—				87				—
FX forwards	7				—				7				—
Total derivatives	$	23,499			$	—			$	23,499			$	—
Total recurring fair value measurements	$	591,671			$	8,289			$	583,382			$	—

 

As of December 31, 2018
(dollars in thousands)	Total				Level 1				Level 2				Level 3
Investment securities available for sale:
U.S. Treasury securities	$	200,013			$	200,013			$	—			$	—
Obligations of U.S. government & agencies	195,855				—				195,855				—
Obligations of state & political subdivisions	11,332				—				11,332				—
Mortgage-backed securities	289,890				—				289,890				—
Collateralized mortgage obligations	39,252				—				39,252				—
Other investment securities	1,100				—				1,100				—
Total investment securities available for sale	$	737,442			$	200,013			$	537,429			$	—
Investment securities trading:
Mutual funds	$	7,502			$	7,502			$	—			$	—
Derivatives:
Interest rate swaps	$	12,550			$	—			$	12,550			$	—
RPAs purchased	71				—				71				—
Total derivatives	$	12,621			$	—			$	12,621			$	—
Total recurring fair value measurements	$	757,565			$	207,515			$	550,050			$	—

 

There have been no transfers between levels during the three months ended March 31, 2019 .

   

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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.

 

Impaired Loans

 

Management evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50% . Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by the Corporation. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

 

The Corporation has an appraisal policy in which an appraisal is obtained for a commercial loan at the point at which the loan either becomes nonperforming or is downgraded to a substandard or worse classification. For consumer loans, management obtains updated appraisals when a loan becomes 90 days past due or when it receives other information that may indicate possible impairment. Based on the appraisals obtained by the Corporation, a partial or full charge-off may be necessary. 

 

Other Real Estate Owned ("OREO")

 

OREO consists of properties acquired as a result of foreclosures and deeds in-lieu-of foreclosure. Properties classified as OREO are reported at the lower of cost or fair value less cost to sell, and are classified as Level 3 in the fair value hierarchy.

 

Mortgage Servicing Rights

 

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 March 31, 2019 and December 31, 2018 :

As of March 31, 2019
(dollars in thousands)	Total				Level 1				Level 2				Level 3
MSRs	$	5,754			$	—			$	—			$	5,754
Impaired loans and leases	23,815				—				—				23,815
OREO	84				—				—				84
Total non-recurring fair value measurements	$	29,653			$	—			$	—			$	29,653

 

As of December 31, 2018
(dollars in thousands)	Total				Level 1				Level 2				Level 3
MSRs	$	6,277			$	—			$	—			$	6,277
Impaired loans and leases	22,112				—				—				22,112
OREO	417				—				—				417
Total non-recurring fair value measurements	$	28,806			$	—			$	—			$	28,806

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During the three months ended March 31, 2019 , an increase of $143 thousand was recorded in the Allowance as a result of adjusting the carrying value and estimated fair value of the impaired loans in the above tables.

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Note 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:

			As of March 31, 2019								As of December 31, 2018
(dollars in thousands)	Fair Value Hierarchy Level (1)		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents	Level 1		$	43,105			$	43,105			$	48,456			$	48,456
Investment securities - available for sale	See Note 19		559,983				559,983				737,442				737,442
Investment securities - trading	See Note 19		8,189				8,189				7,502				7,502
Investment securities – held to maturity	Level 2		10,457				10,324				8,684				8,438
Loans held for sale	Level 2		2,884				2,884				1,749				1,749
Net portfolio loans and leases	Level 3		3,502,898				3,473,442				3,407,728				3,414,921
MSRs	Level 3		4,910				5,754				5,047				6,277
Interest rate swaps	Level 2		23,405				23,405				12,550				12,550
FX forwards	Level 2		7				7				—				—
RPAs purchased	Level 2		87				87				71				71
Other assets	Level 3		40,175				40,175				43,641				43,641
Total financial assets			$	4,196,100			$	4,167,355			$	4,272,870			$	4,281,047
Financial liabilities:
Deposits	Level 2		$	3,637,617			$	3,634,820			$	3,599,087			$	3,594,123
Short-term borrowings	Level 2		124,214				124,214				252,367				252,367
Long-term FHLB advances	Level 2		55,407				55,120				55,374				54,803
Subordinated notes	Level 2		98,571				99,472				98,526				100,120
Junior subordinated debentures	Level 2		21,622				26,427				21,580				31,176
Interest rate swaps	Level 2		23,404				23,404				12,549				12,549
RPAs sold	Level 2		2				2				2				2
Other liabilities	Level 3		47,824				47,824				60,847				60,847
Total financial liabilities			$	4,008,661			$	4,011,283			$	4,100,332			$	4,105,987

 

(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  March 31, 2019 and December 31, 2018  were  $823.8 million and $867.2 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  March 31, 2019 and December 31, 2018 were  $27.4 million and $21.2 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.  Subsequent to the end of the first quarter of 2019, on May 1, 2019, the Court rendered a decision against Crusader.  Crusader is vigorously exploring its strategic options including post-trial motions and potential appeal of this matter.   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 were no such repurchases for the three months ended March 31, 2019.

Concentrations of Credit Risk

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

Note 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 and Lau Associates are included in the Wealth Management segment of the Corporation since they have similar economic characteristics, products and services to those of the Wealth Management Division of the Corporation. BMT Investment Advisers, formed in May 2017, which serves as investment adviser to BMT Investment Funds, a Delaware statutory trust, is also reported under the Wealth Management segment. In addition, the Wealth Management Division oversees all insurance services of the Corporation, which are conducted through the Bank’s insurance subsidiary, BMT Insurance Advisors, Inc., and are reported in the Wealth Management segment.

 

The accounting policies of the Corporation are applied by segment in the following tables. The segments are presented on a pre-tax basis.

 

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The following tables detail the Corporation’s segments for the three months ended March 31, 2019 and 2018 :

	Three Months Ended March 31, 2019												Three Months Ended March 31, 2018
(dollars in thousands)	Banking				Wealth Management				Consolidated				Banking				Wealth Management				Consolidated
Net interest income	$	37,645			$	2			$	37,647			$	37,438			$	1			$	37,439
Provision for loan and lease losses	3,736				—				3,736				1,030				—				1,030
Net interest income after loan loss provision	33,909				2				33,911				36,408				1				36,409
Noninterest income:
Fees for wealth management services	—				10,392				10,392				—				10,308				10,308
Insurance commissions	—				1,672				1,672				—				1,693				1,693
Capital markets revenue	2,219				—				2,219				666				—				666
Service charges on deposit accounts	808				—				808				713				—				713
Loan servicing and other fees	609				—				609				686				—				686
Net gain on sale of loans	319				—				319				518				—				518
Net gain on sale of investment securities available for sale	—				—				—				7				—				7
Net gain on sale of OREO	(24		)		—				(24		)		176				—				176
Other operating income	3,237				21				3,258				4,725				44				4,769
Total noninterest income	7,168				12,085				19,253				7,491				12,045				19,536
Noninterest expenses:
Salaries & wages	15,775				5,126				20,901				11,156				4,826				15,982
Employee benefits	3,172				994				4,166				2,676				1,032				3,708
Occupancy and bank premises	2,732				520				3,252				2,576				474				3,050
Amortization of intangible assets	327				611				938				398				481				879
Professional fees	1,163				157				1,320				729				19				748
Other operating expenses	7,269				1,878				9,147				10,431				1,232				11,663
Total noninterest expenses	30,438				9,286				39,724				27,966				8,064				36,030
Segment profit	10,639				2,801				13,440				15,933				3,982				19,915
Intersegment (revenues) expenses (1)	(123		)		123				—				(149		)		149				—
Pre-tax segment profit after eliminations	$	10,516			$	2,924			$	13,440			$	15,784			$	4,131			$	19,915
% of segment pre-tax profit after eliminations	78.2		%		21.8		%		100.0		%		79.3		%		20.7		%		100.0		%
Segment assets (dollars in millions)	$	4,577.7			$	54.3			$	4,632.0			$	4,248.4			$	52.0			$	4,300.4

 

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

Wealth Management Segment Information

(dollars in millions)	March 31, 2019				December 31, 2018
Assets under management, administration, supervision and brokerage	$	14,736.5			$	13,429.5

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

 

The following is the Corporation’s discussion and analysis of the significant changes in the financial condition, results of operations, capital resources and liquidity presented in the accompanying Unaudited Consolidated Financial Statements. Current performance does not guarantee, and may not be indicative of, similar performance in the future.

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

 

Certain of the statements contained in this report and the documents incorporated by reference herein may constitute forward-looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). As such, they are only predictions and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Bryn Mawr Bank Corporation (the “Corporation”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include statements with respect to the Corporation’s financial goals, business plans, business prospects, credit quality, credit risk, reserve adequacy, liquidity, origination and sale of residential mortgage loans, mortgage servicing rights, the effect of changes in accounting standards, and market and pricing trends loss. The words “may,” “would,” “could,” “will,” “likely,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “forecast,” “project,” “believe” and similar expressions are intended to identify statements that constitute forward-looking statements. The Corporation’s actual results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors, including without limitation:

 

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

•	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;

•	changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

•	other changes in accounting requirements or interpretations;

•	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;

•	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;

•

results of examinations by the Federal Reserve Board of the Corporation or its subsidiaries, including the possibility that such regulator may, among other things, require us to increase our allowance for loan losses or to write down assets, or restrict our ability to: engage in new products or services; engage in future mergers or acquisitions; open new branches; pay future dividends; or otherwise take action, or refrain from taking action, in order to correct

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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;

•

risks related to our mergers and acquisitions, including, but not limited to: reputational risks; client and customer retention risks; diversion of management’s time for integration-related issues; integration may take longer than anticipated or cost more than expected; anticipated benefits of the merger or acquisition, including any anticipated cost savings or strategic gains, may take longer or be significantly harder to achieve, or may not be realized;

•	deposit attrition, operating costs, customer loss and business disruption following a merger or acquisition, including, without limitation, difficulties in maintaining relationships with employees, customers, and/or suppliers may be greater than expected;

•	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;

•	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, acts of terrorism, wars or political conflicts);

•	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 12 of the 2018 Annual Report. All forward-looking statements included in this Report and the documents incorporated by reference herein are based upon the Corporation’s beliefs and assumptions as of the date of this Report. The Corporation assumes no obligation to update any forward-looking statement, whether the result of new

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information, future events, uncertainties or otherwise, as of any future date. In light of these risks, uncertainties and assumptions, you should not put undue reliance on any forward-looking statements discussed in this Report or incorporated documents.

 

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", together with its direct and indirect 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 leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 43 banking locations, six wealth management offices and two insurance and risk management locations in the following counties: Montgomery, Chester, Delaware, Philadelphia, and Dauphin Counties in 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 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 with U.S. generally accepted accounting principles (“GAAP”). All inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous year’s financial statements to the current year’s presentation. In preparing the Consolidated Financial Statements, the Corporation is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. However, there are uncertainties inherent in making these estimates and actual results could differ from these estimates. The Corporation has identified certain areas that require estimates and assumptions, which include the allowance for loan and lease losses (the "Allowance"), the valuation of goodwill and intangible assets, the fair value of investment securities, the fair value of derivative financial instruments, and the valuation of mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation. The Corporation’s derivative financial instruments are not exchange-traded and therefore are valued utilizing models that use as their basis readily observable market parameters, specifically the London Interbank Offered Rate (“LIBOR”) swap curve, and are classified within Level 2 of the valuation hierarchy. In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

These critical accounting policies, along with other significant accounting policies, are presented in Footnote 1 – Summary of Significant Accounting Policies, in the Notes to the audited Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018 (the " 2018 Annual Report").

 

Recent Acquisitions and Expansions

 

On May 1, 2018, BMT Insurance Advisors, Inc. acquired Domenick & Associates, a full-service insurance agency established in 1993 and headquartered in Philadelphia. Domenick & Associates has a specialty niche with nonprofit and social service organizations which aligns well with our banking and wealth management solutions in these specialty service areas. This acquisition furthers our objective of pursuing strategic growth opportunities to enhance, broaden, and diversify our revenue streams.

On December 15, 2017 (the "Effective Date"), the merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into BMBC (collectively, the “RBPI Merger”), and the merger of Royal Bank America with and into the Bank, were completed. Consideration totaled $138.7 million, comprised of 3,101,316 shares of BMBC’s common stock, the assumption of 140,224 warrants to purchase BMBC common stock, valued at $1.9 million, $112 thousand for the cash-out of certain options and $7 thousand cash in lieu of fractional shares. Including the effects of any measurement period adjustments in accordance with ASC 805-10, the RBPI Merger initially added $ 566.2 million of loans, $ 121.6 million of investments, $ 593.2 million of deposits,

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twelve new branches and a loan production office. The acquisition of RBPI expanded the Corporation’s footprint within Montgomery, Chester, Berks and Philadelphia Counties in Pennsylvania as well as Camden and Mercer Counties in New Jersey.

 

In addition to the RBPI Merger, the Bank has continued to execute on its strategies of diversification and acquiring and/or establishing specialty offices in strategically targeted areas where management believes there to be a high demand for the Bank’s products and services. On May 24, 2017, the Bank completed its acquisition of Hirshorn Boothby, a full-service insurance agency established in 1931 and headquartered in the Chestnut Hill section of Philadelphia. Hirshorn Boothby was immediately merged into the Bank’s existing insurance subsidiary, BMT Insurance Advisors, Inc., formerly known as Powers Craft Parker and Beard, Inc., expanding the footprint of this growing segment.

 

On May 12, 2017, the Corporation established a wealth management-focused office in Princeton, New Jersey which complements the already-established presence in central New Jersey that was acquired in the RBPI Merger.

 

Beginning in the second quarter of 2017, the Bank’s Capital Markets department commenced operations focusing on providing risk management services to address the needs of its commercial customer base. These capital markets capabilities enable the Bank to offer hedging tools for qualified commercial customers through the use of interest rate swaps and options designed to mitigate the interest rate risk on variable rate loans. This interest rate hedging offering allows the Bank to participate and lead in larger and longer-dated credits without incurring additional interest rate risk. Additional services will focus on assisting qualified customers in hedging their foreign exchange risk and meeting their trade finance needs through enhanced international services capabilities.

Executive Overview 

 

The following items highlight the Corporation’s results of operations for the three months ended March 31, 2019 , as compared to the same period in 2018 , and the changes in its financial condition as of March 31, 2019 as compared to December 31, 2018 . 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 for the three months ended March 31, 2019 was $10.7 million , a decrease of $4.6 million as compared to $15.3 million for the same period in 2018 . Diluted earnings per share was $0.53 for the three months ended March 31, 2019 as compared to $0.75 for the same period in 2018 .

•	Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended March 31, 2019 were 7.57% and 0.95%, respectively, as compared to ROE and ROA of 11.78% and 1.46% respectively, for the same period in 2018 .

•	Tax-equivalent net interest income increased $256 thousand, or 0.7%, to $37.8 million for the three months ended March 31, 2019 , as compared to $37.5 million for the same period in 2018 .

•	Provision for loan and lease losses (the “Provision”) of $3.7 million for the three months ended March 31, 2019 was an increase of $2.7 million from the $1.0 million Provision recorded for the same period in 2018 .

•	Noninterest income of $19.3 million for the three months ended March 31, 2019 decreased $283 thousand as compared to $19.5 million for the same period in 2018 .

•	Fees for wealth management services and capital markets revenue of $10.4 million and $2.2 million , respectively, for the three months ended March 31, 2019 increased $84 thousand and $1.6 million , respectively, as compared to the same period in 2018 . Insurance commissions of $1.7 million for the three months ended March 31, 2019 decreased $21 thousand as compared to the same period in 2018 .

•	Noninterest expense of $39.7 million for the three months ended March 31, 2019 increased $3.7 million , from $36.0 million for the same period in 2018 .

Changes in Financial Condition

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•	Total assets of $4.63 billion as of March 31, 2019 decreased $20.5 million from $4.65 billion as of December 31, 2018 .

•	Total shareholders’ equity of $575.1 million as of March 31, 2019 increased $10.4 million from $564.7 million as of December 31, 2018 .

•	Total portfolio loans and leases as of March 31, 2019 were $3.52 billion , an increase of $96.4 million from $3.43 billion as of December 31, 2018 .

•	Total non-performing loans and leases of $19.3 million represented 0.55% of portfolio loans and leases as of March 31, 2019 as compared to $12.8 million , or 0.37% of portfolio loans and leases as of December 31, 2018 .

•	The $20.6 million Allowance, as of March 31, 2019 , represented 0.59% of portfolio loans and leases, as compared to $19.4 million or 0.57% of portfolio loans and leases as of December 31, 2018 .

•	Total deposits of $3.64 billion as of March 31, 2019 increased $38.5 million from $3.60 billion as of December 31, 2018 .

•	Wealth assets under management, administration, supervision and brokerage as of March 31, 2019 were $14.74 billion , an increase of $1.31 billion from $13.43 billion December 31, 2018 .

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Key Performance Ratios

 

Key financial performance ratios for the three months ended March 31, 2019 and 2018 are shown in the table below:

	Three Months Ended March 31,
	2019				2018
Return on average equity	7.57		%		11.78		%
Return on average assets	0.95		%		1.46		%
Tax-equivalent net interest margin	3.75		%		3.94		%
Basic earnings per share	$	0.53			$	0.76
Diluted earnings per share	$	0.53			$	0.75
Dividends paid or accrued per share	$	0.25			$	0.22
Dividends paid or accrued per share to net income per basic common share	47.2		%		28.9		%

 

The following table presents certain key period-end balances and ratios as of March 31, 2019 and December 31, 2018 :

(dollars in millions, except per share amounts)	March 31, 2019				December 31, 2018
Book value per share	$	28.52			$	28.01
Allowance as a percentage of portfolio loans and leases	0.59		%		0.57		%
Tier I capital to risk weighted assets	10.72		%		10.92		%
Loan to deposit ratio	96.9		%		95.2		%
Wealth assets under management, administration, supervision and brokerage	$	14,736.5			$	13,429.5
Portfolio loans and leases	$	3,523.5			$	3,427.2
Total assets	$	4,632.0			$	4,652.5
Total shareholders’ equity	$	575.1			$	564.7

 

The following sections discuss, in greater detail, the Corporation’s results of operations for the three months ended March 31, 2019 , as compared to the same period in 2018 , and the changes in its financial condition as of March 31, 2019 as compared to December 31, 2018 .

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Recent Developments

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.  Crusader is vigorously exploring its strategic options including post-trial motions and potential appeal of this matter.  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.

Components of Net Income

 

Net income is comprised of five major elements:

•	Net Interest Income , or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;

•	Provision for Loan and Lease Losses , or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;

•	Noninterest Income, which is made up primarily of wealth management revenue, capital markets revenue, gains and losses from the sale of residential mortgage loans, gains and losses from the sale of available for sale investment securities and other fees from loan and deposit services;

•	Noninterest Expense , which consists primarily of salaries and employee benefits, occupancy, intangible asset amortization, professional fees, due diligence, merger-related and merger integration expenses, and other operating expenses; and

•	Income Tax Expense, which includes state and federal jurisdictions.

TAX-EQUIVALENT NET INTEREST INCOME

 

Net interest income is the primary source of the Corporation’s revenue. The below tables present a summary, for the three and three months ended March 31, 2019 and 2018 , 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 March 31, 2019 Compared to the Same Period in 2018

For the three months ended March 31, 2019 , tax-equivalent net interest income increased $256 thousand, or 0.7%, to $37.8 million , as compared to $37.5 million for the same period in 2018 . Tax-equivalent interest income and fees on loans and leases increased $4.2 million for the three months ended March 31, 2019 as compared to the same period in 2018 . The increase in tax-equivalent interest and fees on loans and leases was primarily related to the $186.5 million increase in average loans to $3.48 billion for the three months ended March 31, 2019 from $3.29 billion for the three months ended March 31, 2018 coupled with a 22 basis point increase on the yield on loans and leases over the same period. Tax-equivalent interest income on available for sale investment securities increased by $699 thousand for the three months ended March 31, 2019 as compared to the same period in 2018 . Average available for sale investment securities increased by $34.3 million for the first quarter of 2019 as compared to the first quarter of 2018 coupled with a 38 basis point increase in the yield on available for sale investment securities over the same period.

Partially offsetting the effect on net interest income associated with the increase in average loans and leases and available for sale investment securities was a $4.6 million increase in interest expense on deposits for the three months ended March 31, 2019 as compared to the same period in 2018 . Average interest-bearing deposits increased by $238.7 million, coupled with a 65 basis point increase in rate paid for the first quarter of 2019 as compared to the first quarter of 2018 . The increase in interest expense on deposits was primarily related to the competitive dynamics in the markets in which we operate and certain promotional interest rates offered during the first quarter of 2019 .

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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.

 

	For the Three Months Ended March 31,
	2019												2018
(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	$	32,742			$	132			1.64	%			$	38,044			$	53			0.56	%
Investment securities - available for sale:
Taxable	543,687				3,419				2.55	%			498,718				2,675				2.18	%
Tax-exempt (4)	9,795				55				2.28	%			20,501				100				1.98	%
Total investment securities – available for sale	553,482				3,474				2.63	%			519,219				2,775				2.17	%
Investment securities – held to maturity	8,804				11				0.51	%			7,913				12				0.62	%
Investment securities – trading	7,629				22				1.17	%			8,339				21				1.02	%
Loans and leases (1)(2)(3)(4)	3,477,739				44,958				5.24	%			3,291,212				40,754				5.02	%
Total interest-earning assets	4,080,396				48,597				4.83	%			3,864,727				43,615				4.58	%
Cash and due from banks	14,414												10,698
Allowance for loan and lease losses	(19,887		)										(17,628		)
Other assets	470,206												388,383
Total assets	$	4,545,129											$	4,246,180
Liabilities:
Savings, NOW, and market rate accounts	$	1,798,103			$	3,764			0.85	%			$	1,676,733			$	1,479			0.36	%
Wholesale deposits	342,696				2,012				2.38	%			231,289				733				1.29	%
Retail time deposits	533,395				2,321				1.76	%			527,469				1,260				0.97	%
Total interest-bearing deposits	2,674,194				8,097				1.23	%			2,435,491				3,472				0.58	%
Short-term borrowings	157,652				943				2.43	%			172,534				630				1.48	%
Long-term FHLB advances	55,385				278				2.04	%			123,920				562				1.84	%
Subordinated notes	98,542				1,145				4.71	%			98,430				1,143				4.71	%
Junior subordinated debt	21,595				358				6.72	%			21,430				288				5.45	%
Total interest-bearing liabilities	3,007,368				10,821				1.46	%			2,851,805				6,095				0.87	%
Noninterest-bearing deposits	871,726												835,476
Other liabilities	93,949												32,465
Total noninterest-bearing liabilities	965,675												867,941
Total liabilities	3,973,043												3,719,746
Shareholders’ equity	572,086												526,434
Total liabilities and shareholders’ equity	$	4,545,129											$	4,246,180
Net interest spread									3.37	%											3.71	%
Effect of noninterest-bearing sources									0.38	%											0.23	%
Net interest income/margin on earning assets (4)					$	37,776			3.75	%							$	37,520			3.94	%
Tax-equivalent adjustment (4)					$	129			0.01	%							$	81			0.01	%

 

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(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 $285 thousand and $278 thousand for the three months ended March 31, 2019 and 2018 , respectively.

(4)	Tax rate used for tax-equivalent calculations is 21% for 2019 and 2018 .

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 months ended March 31, 2019 as compared to the same period in 2018 , 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.

	2019 Compared to 2018
(dollars in thousands)	Three Months Ended March 31,
increase/(decrease)	Volume				Rate				Total
Interest Income:
Interest-bearing deposits with banks	$	(49	)		$	128			$	79
Investment securities - taxable	243				501				744
Investment securities -nontaxable	(91		)		46				(45		)
Loans and leases	2,314				1,890				4,204
Total interest income	2,417				2,565				4,982
Interest expense:
Savings, NOW and market rate accounts	108				2,177				2,285
Wholesale deposits	355				924				1,279
Retail time deposits	14				1,047				1,061
Short-term borrowings	(344		)		657				313
Long-term FHLB advances	(465		)		181				(284		)
Subordinated notes	2				—				2
Junior subordinated debt	2				68				70
Total interest expense	(328		)		5,054				4,726
Interest differential	$	2,745			$	(2,489	)		$	256

(1) The tax rate used in the calculation of the tax-equivalent income is 21% for 2019 and 2018 .

 

Tax-Equivalent Net Interest Margin

 

The tax-equivalent net interest margin of 3.75% for the three months ended March 31, 2019 was a 19 basis point decrease from 3.94% for the same period in 2018 .

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
1st Quarter 2019		4.83%		1.46%		3.37%		0.38%		3.75%
4th Quarter 2018		4.74%		1.30%		3.44%		0.35%		3.79%
3rd Quarter 2018		4.54%		1.16%		3.38%		0.31%		3.69%
2nd Quarter 2018		4.57%		1.02%		3.55%		0.26%		3.81%
1st Quarter 2018		4.58%		0.87%		3.71%		0.23%		3.94%

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Interest Rate Sensitivity 

 

Management actively manages the Corporation’s interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income 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”).

Management utilizes several tools to measure the effect of interest rate risk on net interest income. These methods include gap analysis, market value of portfolio equity analysis, and net interest income simulations under various scenarios. The results of these analyses are compared to limits established by the Corporation’s ALCO policies and make adjustments as appropriate if the results are outside the established limits.

The 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 March 31, 2019							Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2018
	Amount				Percentage			Amount				Percentage
+300 basis points	$	7,243			4.90	%		$	5,644			3.74	%
+200 basis points	$	4,840			3.28	%		$	3,734			2.47	%
+100 basis points	$	2,451			1.66	%		$	1,860			1.23	%
-100 basis points	$	(6,774	)		(4.58	)%		$	(6,546	)		(4.34	)%

 

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of March 31, 2019 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 more asset sensitive in a rising-rate environment as of March 31, 2019 than it was as of December 31, 2018 . The increase in sensitivity is related to an increase in variable rate loans that increase with the index. The change in the 100 basis point decrease in rate is related to variable rate loans that do not have a floor and floor rates on deposits.

The interest rate simulation is an estimate based on assumptions, which are derived from past behavior of customers, along with expectations of future behavior relative to interest rate changes. In today’s economic environment and 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 March 31, 2019 :

(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	$	29.5			$	—			$	—			$	—			$	—			$	29.5
Investment securities (1)	28.5				62.2				340.6				147.3				—				578.6
Loans and leases (2)	1,441.2				381.4				1,345.4				358.3				—				3,526.3
Allowance	—				—				—				—				(20.6		)		(20.6		)
Cash and due from banks	—				—				—				—				13.6				13.6
Operating lease right-of-use assets	0.8				2.3				10.7				30.2				—				44.0
Other assets	—				—				—				—				460.5				460.5
Total assets	1,500.0				445.9				1,696.7				535.8				453.5				4,631.9
Liabilities and shareholders’ equity:
Demand, noninterest-bearing	24.8				74.5				258.6				524.4				—				882.3
Savings, NOW and market rate	85.0				255.0				758.3				793.4				—				1,891.7
Time deposits	90.6				303.0				136.1				1.8				—				531.5
Wholesale non-maturity deposits	47.7				—				—				—				—				47.7
Wholesale time deposits	226.9				57.5				—				—				—				284.4
Short-term borrowings	124.2				—				—				—				—				124.2
Long-term FHLB advances	7.5				25.7				22.2				—				—				55.4
Subordinated notes	—				—				98.6				—				—				98.6
Junior subordinated debentures	21.6				—				—				—				—				21.6
Operating lease liabilities	0.9				2.6				11.7				33.0				—				48.2
Other liabilities	—				—				—				—				71.2				71.2
Shareholders’ equity	20.5				61.6				328.6				164.4				—				575.1
Total liabilities and shareholders’ equity	649.7				779.9				1,614.1				1,517.0				71.2				4,631.9
Interest-earning assets	1,499.2				443.6				1,686.0				505.6				—				4,134.4
Interest-bearing liabilities	603.5				641.2				1,015.2				795.2				—				3,055.1
Difference between interest-earning assets and interest-bearing liabilities	895.7				(197.6		)		670.8				(289.6		)		—				1,079.3
Cumulative difference between interest earning assets and interest-bearing liabilities	$	895.7			$	698.1			$	1,368.9			$	1,079.3			$	—			$	1,079.3
Cumulative earning assets as a % of cumulative interest-bearing liabilities	248		%		156		%		161		%		135		%

(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, 2018 .

PROVISION FOR LOAN AND LEASE LOSSES

 

For the three months ended March 31, 2019 , the Corporation recorded a Provision of $3.7 million which was a $2.7 million increase as compared to the same period in 2018 . During the first quarter of 2019, portfolio loans and leases increased by $96.4 million. Net charge-offs for the first quarter of 2019 were $2.5 million as compared to $893 thousand for the same period in 2018 . The increase in net charge-offs was largely related to the partial charge-off of a commercial mortgage loan to a borrower experiencing financial difficulty whose loan was modified to a TDR during the fourth quarter of 2018. A subsequent impairment analysis, based on updated appraisals, indicated that a charge-off of $1.5 million was necessary.

Asset Quality and Analysis of Credit Risk

 

As of March 31, 2019 , total nonperforming loans and leases increased by $6.5 million to $19.3 million , representing 0.55% of portfolio loans and leases, as compared to $12.8 million , or 0.37% of portfolio loans and leases as of December 31, 2018 . The increase in nonperforming loans and leases was related to the addition of $9.1 million of new nonperforming loans and leases during the three months ended March 31, 2019 , partially offset by pay-offs and pay-downs of $1.4 million, charge-offs of $821 thousand, and upgrades to performing status of $392 thousand of loans and leases classified as nonperforming as of December 31, 2018 . The majority of the $9.1 million of new nonperforming loans and leases was related to the addition of a $3.0 million commercial mortgage loan which had been modified to a TDR during the fourth quarter, as discussed in the Provision for Loan and Lease Losses section above, and a $4.0 million home equity line of credit. All nonperforming loans are evaluated for impairment and charged-off to net realizable value, when necessary. There were no additions to OREO as the result of foreclosures during the three months ended March 31, 2019 .

As of March 31, 2019 , the Allowance of $20.6 million represented 0.59% of portfolio loans and leases, an increase of 2 basis points from December 31, 2018 . The Allowance on originated (non-acquired) portfolio loans, as a percentage of originated (non-acquired) portfolio loans, was 0.68% as of March 31, 2019 as compared to 0.67% as of December 31, 2018 . Loans acquired in mergers are recorded at fair value as of the date of acquisition. This fair value estimate takes into account an estimate of the expected lifetime losses of the acquired loans. As such, an acquired loan will not generally become subject to additional Allowance unless it becomes impaired.

As of March 31, 2019 , the Corporation had $9.2 million of TDRs, of which $5.1 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2018 , the Corporation had $11.0 million of TDRs, of which $9.7 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. The decrease in TDRs during the three months ended March 31, 2019 was primarily the result of $1.7 million of charge-offs, to net realizable value, of loans previously designated as TDRs.

As of March 31, 2019 , the Corporation had a recorded investment of $24.4 million of impaired loans and leases which included $9.2 million of TDRs. Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases. Impaired loans and leases as of December 31, 2018 totaled $22.6 million which included $11.0 million of TDRs. Refer to Note 5H in the Notes to Unaudited Consolidated Financial Statements for more information regarding the Corporation’s impaired loans and leases.

 

Management continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. Management believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.

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Nonperforming Assets and Related Ratios

Nonperforming assets and related ratios as of March 31, 2019 and December 31, 2018 were as follows:

(dollars in thousands)	March 31, 2019				December 31, 2018
Nonperforming Assets:
Nonperforming loans and leases	$	19,283			$	12,820
Other real estate owned	84				417
Total nonperforming assets	$	19,367			$	13,237
Troubled Debt Restructurings:
TDRs included in non-performing loans	$	4,057			$	1,217
TDRs in compliance with modified terms	5,149				9,745
Total TDRs	$	9,206			$	10,962
Loan and Lease quality indicators:
Allowance for loan and lease losses to nonperforming loans and leases	106.9		%		151.5		%
Nonperforming loans and leases to total portfolio loans and leases	0.55		%		0.37		%
Allowance for loan and lease losses to total portfolio loans and leases	0.59		%		0.57		%
Nonperforming assets to total loans and leases and OREO	0.55		%		0.39		%
Nonperforming assets to total assets	0.42		%		0.28		%
Total portfolio loans and leases	$	3,523,514			$	3,427,154
Allowance for loan and lease losses	$	20,616			$	19,426

NONINTEREST INCOME

 

Three Months Ended March 31, 2019 Compared to the Same Period in 2018

 

Noninterest income of $19.3 million for the three months ended March 31, 2019 decreased $283 thousand as compared to $19.5 million for the same period in 2018 . The decrease was primarily due to a $2.2 million decrease in recoveries of purchase accounting fair value marks resulting from pay-offs of previously acquired credit-impaired loans for the three months ended March 31, 2019 as compared to the same period in 2018 . Partially offsetting the decrease in noninterest income was an increase of $1.6 million in capital markets revenue which was primarily due to increased volume of capital market transactions, and an increase of $397 thousand in gain on trading investments.

The following table provides details of other operating income for the three months ended March 31, 2019 and 2018 :

	Three Months Ended March 31,
(dollars in thousands)	2019				2018
Visa debit card income	$	419			$	387
BOLI income	294				278
Commissions and fees	355				255
Safe deposit box rentals	84				91
Other investment income	36				22
Rental income	9				43
Gain on trading investments	732				335
Recovery of purchase accounting fair value loan mark	12				2,294
Miscellaneous other income	906				633
Other operating income	$	2,847			$	4,338

 

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

	As of or for the Three Months Ended March 31,
(dollars in thousands)	2019				2018
Mortgage originations	$	34,441			$	26,055
Mortgage loans sold:
Servicing retained	$	—			$	1,850
Servicing released	9,218				15,956
Total mortgage loans sold	$	9,218			$	17,806
Percentage of originated mortgage loans sold	26.8		%		68.3		%
Servicing retained %	—		%		10.4		%
Servicing released %	100.0		%		89.6		%
Residential mortgage loans serviced for others	$	564,884			$	634,970
Mortgage servicing rights	$	4,910			$	5,706
Gain on sale of mortgage loans	$	261			$	345
Loan servicing and other fees	$	609			$	686
Amortization of MSRs	$	120			$	221
(Impairment) / Recovery of MSRs	$	(17	)		$	50

 

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.

 

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	March 31, 2019				December 31, 2018				September 30, 2018				June 30, 2018				March 31, 2018
Market value	$	6,232,651			$	5,764,189			$	6,032,831			$	5,779,774			$	5,693,146
Fixed fee	8,503,861				7,665,355				7,880,433				7,624,949				7,453,780
Total	$	14,736,512			$	13,429,544			$	13,913,264			$	13,404,723			$	13,146,926

	Percentage of Wealth Assets as of:
Fee Basis	March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018
Market value	42.3	%		42.9	%		43.4	%		43.1	%		43.3	%
Fixed fee	57.7	%		57.1	%		56.6	%		56.9	%		56.7	%
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:

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(dollars in thousands)	For the Three Months Ended:
Fee Basis	March 31, 2019				December 31, 2018				September 30, 2018				June 30, 2018				March 31, 2018
Market value	$	7,618			$	7,801			$	7,841			$	7,620			$	7,880
Fixed fee	2,774				3,217				2,501				3,038				2,428
Total	$	10,392			$	11,018			$	10,342			$	10,658			$	10,308

	Percentage of Fees for Wealth Management for the Three Months Ended:
Fee Basis	March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			March 31, 2018
Market value	73.3	%		70.8	%		75.8	%		71.5	%		76.4	%
Fixed fee	26.7	%		29.2	%		24.2	%		28.5	%		23.6	%
Total	100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Customer Derivatives

 

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

NONINTEREST EXPENSE

Three Months Ended March 31, 2019 Compared to the Same Period in 2018

 

Noninterest expense for the three months ended March 31, 2019 increased $3.7 million , to $39.7 million , as compared to the same period in 2018 . Contributing to the $3.7 million increase were increases of $4.9 million, $1.2 million, $572 thousand, $491 thousand, and $458 thousand in salaries and wages, other operating expenses, professional fees, furniture, fixtures and equipment expenses, and employee benefits, respectively.

During the first quarter of 2019, the Corporation adopted a voluntary Years of Service Incentive Program (the “Incentive Program”) which offers certain benefits to eligible employees who meet the Incentive Program requirements and voluntarily exit from service with the Corporation, the Bank or one of their subsidiaries. The increases in salaries and wages and employee benefits were largely driven by a pre-tax, non-recurring, charge of $4.5 million related to the Incentive Program recognized during the first quarter of 2019. Partially offsetting these increases in noninterest expense was a decrease of $4.3 million in due diligence, merger-related and merger integration expenses for the three months ended March 31, 2019 as compared to the same period in 2018 .

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The following table provides details of other operating expenses for the three months ended March 31, 2019 and 2018 :

	Three Months Ended March 31,
(dollars in thousands)	2019				2018
Contributions	$	344			$	188
Deferred compensation expense	543				81
Director fees	145				161
Dues and subscriptions	295				257
FDIC insurance	401				200
Impairment of OREO and other repossessed assets	—				—
Insurance	214				227
Loan processing	252				24
Miscellaneous other expenses	869				809
MSR amortization and impairment	137				171
Other taxes	90				13
Outsourced services	65				66
Wealth custodian fees	118				123
Postage	202				163
Stationary and supplies	136				152
Telephone and data lines	424				405
Temporary help and recruiting	206				99
Travel and entertainment	173				178
Other operating expenses	$	4,614			$	3,317

INCOME TAXES

 

Income before income taxes decreased $6.5 million for the three months ended March 31, 2019 as compared for the same period in 2018 , which resulted in a reduction of income tax expense of $1.9 million for the three months ended March 31, 2019 as compared for the same period in 2018 . The effective tax rate for the three months ended March 31, 2019 decreased to 20.6% from 23.2% for the same period in 2018 . The decrease in the effective tax rate was primarily due to the re-measurement of certain deferred tax assets from the RBPI merger in the three months ended March 31, 2018 which resulted in $590 thousand of income tax expense.

Income tax expense for the three months ended March 31, 2019 included a net discrete tax benefit of $114 thousand as compared to a net discrete tax expense of $229 thousand for the same period in 2018 . These discrete items were the result of excess tax benefits from stock-based compensation as well as the income tax expense discussed above related to the deferred tax asset re-measurement.

BALANCE SHEET ANALYSIS

 

Total assets of $4.63 billion as of March 31, 2019 decreased $20.5 million from $4.65 billion as of December 31, 2018 . The following sections detail the balance sheet changes:

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Loans and Leases

 

The table below compares the portfolio loans and leases outstanding at March 31, 2019 to December 31, 2018 :

	March 31, 2019							December 31, 2018							Change
(dollars in thousands)	Balance				Percent of Portfolio			Balance				Percent of Portfolio			Amount				Percent
Commercial mortgage	$	1,746,695			49.6	%		$	1,657,436			48.4	%		$	89,259			5.4	%
Home equity lines & loans	204,791				5.8	%		207,351				6.1	%		(2,560		)		(1.2	)%
Residential mortgage	502,379				14.3	%		494,355				14.4	%		8,024				1.6	%
Construction	159,761				4.5	%		181,078				5.3	%		(21,317		)		(11.8	)%
Commercial and industrial	705,701				20.0	%		695,584				20.3	%		10,117				1.5	%
Consumer	47,821				1.4	%		46,814				1.4	%		1,007				2.2	%
Leases	156,366				4.4	%		144,536				4.2	%		11,830				8.2	%
Total portfolio loans and leases	3,523,514				100.0	%		3,427,154				100.0	%		96,360				2.8	%
Loans held for sale	2,884							1,749							1,135				64.9	%
Total loans and leases	$	3,526,398						$	3,428,903						$	97,495			2.8	%

Investment Securities

Investment securities available for sale as of March 31, 2019 totaled $560.0 million , as compared to $737.4 million as of December 31, 2018 . The decrease was primarily related to the maturing, in January 2019, of $200.0 million of short-term U.S. Treasury securities.

Deposits

 

Deposits as of March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019							December 31, 2018							Change
(dollars in thousands)	Balance				Percent of Deposits			Balance				Percent of Deposits			Amount				Percent
Interest-bearing demand	$	664,683			18.3	%		$	664,749			18.5	%		$	(66	)		—	%
Money market	961,348				26.4	%		862,644				24.0	%		98,704				11.4	%
Savings	265,613				7.3	%		247,081				6.9	%		18,532				7.5	%
Retail time deposits	531,522				14.6	%		542,702				15.1	%		(11,180		)		(2.1	)%
Wholesale non-maturity deposits	47,744				1.3	%		55,031				1.5	%		(7,287		)		(13.2	)%
Wholesale time deposits	284,397				7.8	%		325,261				9.0	%		(40,864		)		(12.6	)%
Interest-bearing deposits	2,755,307				75.7	%		2,697,468				74.9	%		57,839				2.1	%
Noninterest-bearing deposits	882,310				24.3	%		901,619				25.1	%		(19,309		)		(2.1	)%
Total deposits	$	3,637,617			100.0	%		$	3,599,087			100.0	%		$	38,530			1.1	%

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Borrowings

 

Borrowings as of March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019							December 31, 2018							Change
(dollars in thousands)	Balance				Percent of Borrowings			Balance				Percent of Borrowings			Amount				Percent
Short-term borrowings	$	124,214			41.4	%		$	252,367			59.0	%		$	(128,153	)		(50.8	)%
Long-term FHLB advances	55,407				18.5	%		55,374				12.9	%		33				0.1	%
Subordinated notes	98,571				32.9	%		98,526				23.0	%		45				—	%
Junior subordinated debentures	21,622				7.2	%		21,580				5.0	%		42				0.2	%
Total borrowed funds	$	299,814			100.0	%		$	427,847			100.0	%		$	(128,033	)		(29.9	)%

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Capital

 

Consolidated shareholders' equity of the Corporation was $575.1 million , or 12.4% of total assets, as of March 31, 2019 , as compared to $564.7 million , or 12.1% of total assets, as of December 31, 2018 . The following table presents BMBC’s and Bank’s regulatory capital ratios and the minimum capital requirements to be considered “Well Capitalized” by regulators as of March 31, 2019 and December 31, 2018 :

	Actual							Minimum to be Well Capitalized
(dollars in thousands)	Amount				Ratio			Amount				Ratio
March 31, 2019
Total capital to risk weighted assets:
BMBC	$	509,527			14.00	%		$	364,042			10.00	%
Bank	$	431,976			11.87	%		$	363,783			10.00	%
Tier I capital to risk weighted assets:
BMBC	$	390,189			10.72	%		$	291,234			8.00	%
Bank	$	411,209			11.30	%		$	291,026			8.00	%
Common equity Tier I risk weighted assets:
BMBC	$	369,253			10.14	%		$	236,627			6.50	%
Bank	$	411,209			11.30	%		$	236,459			6.50	%
Tier I leverage ratio (Tier I capital to total quarterly average assets):
BMBC	$	390,189			8.99	%		$	217,116			5.00	%
Bank	$	411,209			9.48	%		$	216,909			5.00	%
December 31, 2018
Total capital to risk weighted assets:
BMBC	$	500,375			14.30	%		$	349,918			10.00	%
Bank	$	419,136			11.99	%		$	349,692			10.00	%
Tier I capital to risk weighted assets:
BMBC	$	382,151			10.92	%		$	279,934			8.00	%
Bank	$	399,438			11.42	%		$	279,754			8.00	%
Common equity Tier I risk weighted assets:
BMBC	$	361,256			10.32	%		$	227,446			6.50	%
Bank	$	399,438			11.42	%		$	227,300			6.50	%
Tier I leverage ratio (Tier I capital to total quarterly average assets):
BMBC	$	382,151			9.06	%		$	210,830			5.00	%
Bank	$	399,438			9.48	%		$	216,615			5.00	%

 

The capital ratios for the Bank and BMBC, as of March 31, 2019 , as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” All regulatory capital ratios decreased from their December 31, 2018 levels primarily due to the adoption of ASU 2016-02 (Topic 842), “Leases”, which resulted in $44.0 million of operating lease right-of-use assets being risk weighted at 100% as of March 31, 2019 .

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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 Federal Reserve Bank, maintaining a highly liquid investment portfolio, and purchasing and issuing wholesale certificates of deposit as its secondary sources.

 

Unused availability is detailed on the following table:

(dollars in millions)	Available Funds as of March 31, 2019				Percent of Total Borrowing Capacity			Available Funds as of December 31, 2018				Percent of Total Borrowing Capacity			Dollar Change				Percent Change
Federal Home Loan Bank of Pittsburgh	$	1,397.5			89.7	%		$	1,245.4			74.4	%		$	152.1			12.2	%
Federal Reserve Bank of Philadelphia	145.5				100.0	%		140.4				100.0	%		5.1				3.6	%
Fed Funds Lines (seven banks)	71.0				89.9	%		79.0				100.0	%		(8.0		)		(10.1	)%
Total	$	1,614.0			90.5	%		$	1,464.8			77.6	%		$	149.2			10.2	%

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 IND to provide up to $55 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 $47.7 million in balances as of March 31, 2019 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 $2.9 million for the three months ended March 31, 2019 , as compared to PTSP of $4.1 million for the same period in 2018 . The Wealth Management segment provided 21.8% of the Corporation’s pre-tax profit for the three months ended March 31, 2019 , as compared to 20.7% for the same period in 2018 . For the three months ended March 31, 2019 , both fees for wealth management services and insurance commissions were relatively unchanged as compared to the same period in 2018 .

 

The Banking segment recorded a PTSP of $10.5 million for the three months ended March 31, 2019 , as compared to PTSP of $15.8 million for the same period in 2018 . The Banking segment provided 78.2% of the Corporation’s pre-tax profit for the three months ended March 31, 2019 , as compared to 79.3% for the same period in 2018 .

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 March 31, 2019 were $823.8 million , as compared to $867.2 million at December 31, 2018 .

 

Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is

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similar to that involved in granting loan facilities to customers. The Bank’s obligation under standby letters of credit at March 31, 2019 amounted to $27.4 million , as compared to $21.2 million at December 31, 2018 .

 

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 March 31, 2019 :

(dollars in thousands)	Total				Within 1 Year				2 - 3 Years				4 - 5 Years				After 5 Years
Deposits without a stated maturity	$	2,821,698			$	2,821,698			$	—			$	—			$	—
Wholesale and retail time deposit	815,919				677,867				126,756				10,474				822
Short-term borrowings	124,214				124,214				—				—				—
Long-term FHLB Advances	55,407				33,105				22,302				—				—
Subordinated Notes	100,000				—				—				—				100,000
Junior subordinated debentures	25,800				—				—				—				25,800
Operating lease liabilities	63,181				5,074				9,095				8,180				40,832
Purchase obligations	11,104				7,236				3,868				—				—
Total	$	4,017,323			$	3,669,194			$	162,021			$	18,654			$	167,454

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 2018  Annual Report, as updated by the disclosure in “Management’s Discussion and Analysis of Results of Operations – Interest Rate Sensitivity,” “– Summary of Interest Rate Simulation,” “Customer Derivatives” and “– Gap Analysis” in this quarterly report on Form 10-Q.

ITEM 4 . Controls and Procedures

 

As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer, Francis J. Leto, and Chief Financial Officer, Michael W. Harrington, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief

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Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2019 .

 

There were no changes in the Corporation’s internal controls over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II OTHER INFORMATION.

 

ITEM 1 . Legal Proceedings.

 

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

 

ITEM 1A . Risk Factors

None.

 

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ITEM 2 . Unregistered Sales of Equity Securities and Use of Proceeds

 

Share Repurchase ⁽³⁾  

 

The following table presents the shares repurchased by the Corporation during the first quarter of 2019:

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
January 1, 2019 – January 31, 2019	—			$	—			—			40,016
February 1, 2019 – February 28, 2019	3,605			$	37.95			3,222			36,794
March 1, 2019 – March 31, 2019	9,962			$	39.35			9,480			27,314
Total	13,567			$	38.98			12,702

(1)	Includes shares purchased to cover statutory tax withholding requirements on vested stock awards for certain officers of BMBC or Bank as follows: 383 shares on February 7, 2019; and 482 shares on March 1, 2019.

(2)

On August 6, 2015, BMBC announced a stock repurchase program (the “2015 Program”) under which the Corporation may repurchase up to 1,200,000 shares of BMBC's common stock, at an aggregate purchase price not to exceed $40 million. There is no expiration date on the 2015 Program and the Corporation has no plans for an early termination of the 2015 Program. All share repurchases under the 2015 Program were accomplished in open market transactions. As of March 31, 2019, the maximum number of shares remaining authorized for repurchase under the 2015 Program was 27,314 .

(3)

On April 18, 2019, BMBC announced a new stock repurchase program (the "2019 Program") under 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 will become effective upon the completion of BMBC's existing 2015 Program.

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ITEM 3 . Defaults Upon Senior Securities

None.

 

ITEM 4 . Mine Safety Disclosures.

Not applicable.

 

ITEM 5 . Other Information

None.

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ITEM 6 . Exhibits

 

Exhibit No.		Description and References
3.1		Amended and Restated By-Laws, effective November 20, 2007, incorporated by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007
3.2		Amended and Restated Articles of Incorporation, effective November 21, 2007, incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007
10.1		2019 Standard Form of Restricted Stock Unit Agreement for Executives (Service/Performance Based) Subject to the 2010 Long Term Incentive Plan, filed herewith
10.2		2019 Standard Form of Restricted Stock Unit Agreement for Directors (Service/Performance Based) Subject to the 2010 Long Term Incentive Plan, filed herewith
10.3		2019 Voluntary Years of Service Incentive Program - Executive Tier - Plan Document, filed herewith
10.4		2019 Voluntary Years of Service Incentive Program - Executive Tier - Form of Separation Agreement, filed herewith
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
101.INS XBRL		Instance Document, filed herewith
101.SCH XBRL		Taxonomy Extension Schema Document, filed herewith
101.CAL XBRL		Taxonomy Extension Calculation Linkbase Document, filed herewith
101.DEF XBRL		Taxonomy Extension Definition Linkbase Document, filed herewith
101.LAB XBRL		Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE XBRL		Taxonomy Extension Presentation Linkbase Document, filed herewith

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

			BRYN MAWR BANK CORPORATION
Date: May 8, 2019			By:	/s/ Francis J. Leto
				Francis J. Leto
				Chief Executive Officer
				(Principal Executive Officer)
Date: May 8, 2019			By:	/s/ Michael W. Harrington
				Michael W. Harrington
				Chief Financial Officer
				(Principal Financial Officer)

 

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