Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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Form 10-K

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(Mark One)

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

For the fiscal year ended December 31, 2017

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

for the transition period from                       to                     

Commission file number 001-35746.

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BRYN MAWR BANK CORPORATION

(Exact name of registrant as specified in its charter)

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Pennsylvania	23-2434506
(State of other jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
801 Lancaster Avenue, Bryn Mawr, Pennsylvania	19010
(Address of principal executive offices)	(Zip Code)

(Registrant’s telephone number, including area code) (610) 525-1700

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

 

Title of each class	Name of each exchange on which registered
Common Stock ($1 par value)	The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ☒    No  ☐

Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (& 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by checkmark whether the Registrant is a shell company (as defined by Rule 126-2 of the Exchange Act):

Yes  ☐    No  ☒

The aggregate market value of shares of common stock held by non-affiliates of Registrant (including fiduciary accounts administered by affiliates) was $711,760,477 on June 30, 2017 based on the price at which our common stock was last sold on that date.*

As of February 23, 2018 there were 20,225,269 shares of common stock outstanding.

Documents Incorporated by Reference: Portions of the Definitive Proxy Statement of Registrant to be filed with the Commission pursuant to Regulation 14A with respect to the Registrant’s Annual Meeting of Shareholders to be held on April 19, 2018 (“2018 Proxy Statement”), as indicated in Parts II and III, are incorporated into this Form 10-K by reference.

*	Registrant does not admit by virtue of the foregoing that its officers and directors are “affiliates” as defined in Rule 405.

 

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Form 10-K

 

Bryn Mawr Bank Corporation

 

Index

 

Item No.		Page
	Part I
1.	Business	1
1A.	Risk Factors	11
1B.	Unresolved Staff Comments	20
2.	Properties	21
3.	Legal Proceedings	23
4.	Mine Safety Disclosures	23
	Part II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
6.	Selected Financial Data	26
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)	27
7A.	Quantitative and Qualitative Disclosures about Market Risk	53
8.	Financial Statements and Supplementary Data	53
9.	Change in and Disagreements with Accountants on Accounting and Financial Disclosure	121
9A.	Controls and Procedures	121
9B.	Other Information	122
	Part III
10.	Directors and Executive Officers of the Registrant	122
11.	Executive Compensation	122
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	122
13.	Certain Relationships and Related Transactions	123
14.	Principal Accountant Fees and Services	123
	Part IV
15.	Exhibits and Financial Statement Schedules	123

 

 

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

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

 

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our need for capital;

 

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

 

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

 

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changes in monetary or fiscal policy, or existing statutes, regulatory guidance, legislation or judicial decisions that adversely affect our business, including changes in federal income tax or other tax regulations;

 

	•	changes in the level of non-performing assets and charge-offs;
	•	effectiveness of capital management strategies and activities;

 

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

 

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other changes in accounting requirements or interpretations;

 

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

 

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inflation, securities market and monetary fluctuations;

 

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changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets;

 

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

 

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prepayment speeds, loan originations and credit losses;

 

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changes in the value of our mortgage servicing rights;

 

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

 

•

legislation or other governmental action affecting the financial services industry as a whole, the Corporation, or its subsidiaries individually or collectively, including changes in laws and regulations (including laws and regulations concerning banking, securities and insurance) with which we must comply;

 

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

 

•

our common stock outstanding and common stock price volatility;

 

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

 

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with respect to mergers and acquisitions, our business and the acquired business will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; • following the completion of a merger or acquisition, revenues may be lower than expected and/or expenses may be higher than expected;

 

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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;

 

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material differences in the actual financial results of our merger and acquisition activities compared with expectations, such as with respect to the full realization of anticipated cost savings and revenue enhancements within the expected time frame;

 

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our success in continuing to generate new business in our existing markets, as well as their success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time;

 

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our ability to continue to generate investment results for customers and the ability to continue to develop investment products in a manner that meets customers’ needs;

 

 

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

 

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rapid technological developments and changes;

 

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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;

 

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our ability to continue to introduce competitive new products and services on a timely, cost-effective basis and the mix of those products and services;

 

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our ability to contain costs and expenses;

 

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protection and validity of intellectual property rights;

 

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reliance on large customers;

 

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technological, implementation and cost/financial risks in contracts;

 

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the outcome of pending and future litigation and governmental proceedings;

 

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any extraordinary events (such as natural disasters, acts of terrorism, wars or political conflicts);

 

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ability to retain key employees and members of senior management;

 

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

 

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

 

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

 

	•	the inability of key third-party providers to perform their obligations to us;
	•	other material adverse changes in operations or earnings;
	•	risks related to our recent merger with Royal Bancshares of Pennsylvania, Inc. (“RBPI”), including, but not limited to: reputational risks and the reaction of the former RBPI customers to the transaction; diversion of management time on integration-related issues; integration of the acquired business may take longer than anticipated or cost more than expected; the anticipated benefits of the merger, including any anticipated cost savings or strategic gains may be significantly harder to achieve or take longer than anticipated or fail to be achieved; 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 11 of this Report. All forward-looking statements included in this Report and the documents incorporated by reference herein are based upon the Corporation’s beliefs and assumptions as of the date of this Report. The Corporation assumes no obligation to update any forward-looking statement, whether the result of new information, future events, uncertainties or otherwise, as of any future date. In light of these risks, uncertainties and assumptions, you should not put undue reliance on any forward-looking statements discussed in this Report or incorporated documents.

 

 

PART I

 

ITEM  1.

BUSINESS

 

GENERAL

 

The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the “Corporation”) was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation and its subsidiaries offer a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 37 full-service branches, eight limited-hour retirement community offices, two limited-service branches, six wealth offices and a full-service insurance agency. The Corporation’s branches and offices are located throughout Montgomery, Delaware, Chester, Philadelphia, Berks and Dauphin counties of Pennsylvania, Mercer and Camden counties of New Jersey and New Castle county in Delaware. The Corporation’s common stock trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.

 

The goal of the Corporation is to become the premier community bank and wealth management organization in the greater Philadelphia area. The Corporation’s strategy to achieve this goal includes investing in people and technology to support its growth, leveraging the strength of its brand, targeting high-potential markets for expansion, basing its sales strategy on relationships and concentrating on core product solutions. The Corporation strives to strategically broaden the scope of its product offerings, engaging in inorganic growth by selectively acquiring small to mid-sized banks, insurance brokerages, wealth management companies, and advisory and planning services firms, and lifting out high-performing teams where strategically advantageous.

 

The Corporation operates in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. The Corporation and its subsidiaries are regulated by many agencies, including the Securities and Exchange Commission (“SEC”), the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania and Delaware Departments of Banking.

 

WEBSITE DISCLOSURES

 

The Corporation files with the SEC and makes available, free of charge, through its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with the SEC. These reports can be obtained on the Corporation’s website at www.bmtc.com by following the link, “About BMT,” followed by “Investor Relations.” The information contained on or connected to our website is not incorporated by reference into this Annual Report on Form 10-K. Further copies of these reports are located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov.

 

OPERATIONS

 

•

Bryn Mawr Bank Corporation

 

The Corporation has no active staff as of December 31, 2017. The Corporation is the sole shareholder of the stock of the Bank. Additionally, the Corporation performs several functions including shareholder communications, shareholder recordkeeping, the distribution of dividends and the periodic filing of reports and payment of fees to NASDAQ, the SEC and other regulatory agencies.

 

As of December 31, 2017, the Corporation and its subsidiaries had 623 full-time and 57 part-time employees, totaling 652 full time equivalent staff.

 

ACTIVE SUBSIDIARIES OF THE CORPORATION

 

The Corporation has four active subsidiaries which provide various services as described below. Additionally, the Corporation and the Bank acquired certain subsidiaries in the RBPI Merger that are not included in the below descriptions as they are not integral or significant to our business.

 

•	The Bryn Mawr Trust Company

 

The Bank is engaged in commercial and retail banking business, providing basic banking services, including the acceptance of demand, time and savings deposits and the origination of commercial, real estate and consumer loans and other extensions of credit including leases. The Bank also provides a full range of wealth management services including trust administration and other related fiduciary services, custody services, investment management and advisory services, employee benefit account and IRA administration, estate settlement, tax services, financial planning and brokerage services. The Bank’s employees are included in the Corporation’s employment numbers above.

 

 

The Bank presently operates 37 full-service branches, eight limited-hour retirement community offices, two limited-service branches and four wealth management offices located throughout Montgomery, Delaware, Chester, Philadelphia, Berks, and Dauphin counties of Pennsylvania. See the section titled “COMPETITION” later in this item for additional information.

 

 

•	Lau Associates LLC

 

Lau Associates LLC, a registered investment advisor, is an independent, family wealth office serving high net worth individuals and families, with special expertise in planning intergenerational inherited wealth. Lau Associates LLC employed 13 full time employees as of December 31, 2017, which are included in the Corporation’s employment numbers. Lau Associates LLC is a wholly-owned subsidiary of the Corporation.

 

•	The Bryn Mawr Trust Company of Delaware

 

The Bryn Mawr Trust Company of Delaware (“BMTC-DE”) is a limited-purpose trust company located in Greenville, DE and has the ability to be named and serve as a corporate fiduciary under Delaware law. BMTC-DE employed nine full-time and three part time employees as of December 31, 2017. BMTC-DE employees are included in the Corporation’s employment numbers. Being able to serve as a corporate fiduciary under Delaware law is advantageous as Delaware statutes are widely recognized as being favorable with respect to the creation of tax-advantaged trust structures, LLCs and related wealth transfer vehicles for families and individuals throughout the United States. BMTC-DE is a wholly-owned subsidiary of the Corporation.

 

•	BMT Investment Advisers

 

BMT Investment Advisers (“BMTIA”), a Delaware statutory trust and wholly-owned subsidiary of the Corporation, was established in May 2017. BMTIA is a SEC registered investment adviser which serves as investment adviser to BMT Investment Funds, a Delaware statutory trust. There is an Investment Advisory Agreement between BMT Investment Advisers and BMT Investment Funds, on behalf of the BMT Multi-Cap Fund. The BMT-Multi-Cap Fund is a broadly diversified mutual fund focused on equity investments. BMT Investment Advisers had no employees as of December 31, 2017.

 

 

ACTIVE SUBSIDIARIES OF THE BANK

 

The Bank has three active subsidiaries providing various services as described below:

 

●	KCMI Capital, Inc.

 

KCMI Capital, Inc. (“KCMI”) is a wholly-owned subsidiary of the Bank, located in Media, Pennsylvania, which was established on October 1, 2015. KCMI specializes in providing non-traditional commercial mortgage loans to small businesses throughout the United States. As of December 31, 2017, KCMI employed eight full-time employees which are included in the Corporation’s employment numbers above.

 

•

BMT Insurance Advisors, Inc. f/k/a Powers Craft Parker and Beard, Inc.

 

BMT Insurance Advisors, Inc. (“BMT Insurance Advisors”), formerly known as Powers Craft Parker and Beard, Inc. (“PCPB”) is a wholly-owned subsidiary of the Bank, headquartered in Rosemont, Pennsylvania. BMT Insurance Advisors is a full-service insurance agency, through which the Bank offers insurance and related products and services to its customer base. This includes casualty, property and allied insurance lines, as well as life insurance, annuities, medical insurance and accident and health insurance for groups and individuals.

 

As of December 31, 2017, BMT Insurance Advisors employed 31 full-time employees, of whom 28 are licensed insurance agents, along with one part-time employee, who is also a licensed insurance agent. BMT Insurance Advisors employees are included in the Corporation’s employment numbers above.

 

•

Bryn Mawr Equipment Finance, Inc.

 

Bryn Mawr Equipment Finance, Inc. (“BMEF”), a wholly-owned subsidiary of the Bank, is a Delaware corporation registered to do business in Pennsylvania. BMEF is a small-ticket equipment financing company servicing customers nationwide from its Montgomery County, Pennsylvania location. BMEF had ten employees as of December 31, 2017. BMEF employees are included in the Corporation’s employment numbers above.

 

 

BUSINESS COMBINATIONS

 

The Corporation and its subsidiaries engaged in the following business combinations since January 1, 2013:

 

●	Royal Bancshares of Pennsylvania, Inc.

 

On December 15, 2017, the merger of Royal Bancshares of Pennsylvania, Inc. (“RBPI”) with and into the Corporation (the “RPBI Merger”), and the merger of Royal Bank America with and into the Bank, were completed. Consideration totaled $138.6 million, comprised of 3,098,754 shares of the Corporation’s common stock, the assumption of 140,224 warrants to purchase Corporation common stock, valued at $1.9 million, $112 thousand for the cash-out of certain options and $7 thousand cash in lieu of fractional shares. The RBPI Merger initially added $570.4 million of loans, $121.6 million of investments, $593.2 million of deposits, twelve new branches and a loan production office. The acquisition of RBPI expanded the Corporation’s footprint within Montgomery, Chester, Berks and Philadelphia Counties in Pennsylvania as well as Camden and Mercer Counties in New Jersey.

 

●	Harry R. Hirshorn & Company, Inc.

 

On May 24, 2017, the Bank acquired Harry R. Hirshorn & Company, Inc. (“Hirshorn”), an insurance agency headquartered in the Chestnut Hill section of Philadelphia. Consideration totaled $7.5 million, of which $5.8 million was paid at closing, with three contingent cash payments, not to exceed $575 thousand each, to be payable on each of May 24, 2018, May 24, 2019, and May 24, 2020, subject to the attainment of certain targets during the related periods. The acquisition of Hirshorn expanded the Bank’s footprint into this desirable northwest corner of Philadelphia. Immediately after acquisition, Hirshorn was merged into PCPB.

 

 

●	Robert J. McAllister Agency, Inc.

 

On April 1, 2015, the acquisition of Robert J. McAllister, Inc. (“RJM”), an insurance brokerage headquartered in Rosemont, Pennsylvania, was completed. Consideration totaled $1.0 million, of which $500 thousand was paid at closing, two contingent payments of $85 thousand (out of a maximum of $100 thousand) and $100 thousand were paid during the second quarters of 2016 and 2017, respectively and three remaining contingent cash payments, not to exceed $100 thousand each, will be payable on each of March 31, 2018, March 31, 2019 and March 31, 2020, subject to the attainment of certain revenue targets during the related periods. Shortly after acquisition, RJM was merged into PCPB.

 

●	Continental Bank Holdings, Inc.

 

On January 1, 2015, the merger of Continental Bank Holdings, Inc. (“CBH”) with and into the Corporation (the “CBH Merger”), and the merger of Continental Bank with and into the Bank, were completed. Consideration totaled $125.1 million, comprised of 3,878,304 shares of the Corporation’s common stock, the assumption of options to purchase Corporation common stock valued at $2.3 million, $1.3 million for the cash-out of certain warrants, and $2 thousand cash in lieu of fractional shares. The CBH Merger initially added $424.7 million of loans, $181.8 million of investments, $481.7 million of deposits and ten new branches. The acquisition of CBH enabled the Corporation to expand its footprint within Montgomery County, Pennsylvania.

 

●	BMT Insurance Advisors, Inc. f/k/a Powers Craft Parker and Beard, Inc.

 

On October 1, 2014, the acquisition of PCPB, an insurance brokerage headquartered in Rosemont, Pennsylvania, was completed. The consideration paid by the Corporation was $7.0 million, of which $5.4 million was paid at closing and three contingent payments, of $542 thousand each, which were paid during the fourth quarters of 2015, 2016 and 2017. The addition enabled the Corporation to offer a full range of insurance products to both individual and business clients. As described above, the subsequent acquisitions of RJM and Hirshorn were merged into PCPB, which was recently renamed BMT Insurance Advisors. The resulting combined entity, operating from two locations, under the name BMT Insurance Advisors, has enhanced the Bank’s ability to offer comprehensive insurance solutions to both individual and business clients.

 

SOURCES OF THE CORPORATION’S REVENUE

 

Continuing Operations

 

See Note 28, “Segment Information,” in the Notes to the Consolidated Financial Statements located in this Annual Report on Form 10-K for additional information. The Corporation had no discontinued operations in 2015, 2016 or 2017.

 

FINANCIAL INFORMATION ABOUT SEGMENTS

 

The financial information concerning the Corporation’s business segments is incorporated by reference to this Annual Report on Form 10-K in the section captioned Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Note 28, “Segment Information,” in the Notes to Consolidated Financial Statements.

 

DESCRIPTION OF BUSINESS AND COMPETITION

 

The Corporation and its subsidiaries, including the Bank, compete for deposits, loans, wealth management and insurance services in Delaware, Montgomery, Chester, Philadelphia, Berks, and Dauphin counties in Pennsylvania, Mercer and Camden counties in New Jersey, and New Castle County in Delaware. The Corporation has a significant presence in the Philadelphia suburbs along the Route 30 corridor, also known as the “Main Line”. The Corporation has 37 full-service branches, eight limited-hour retirement community offices, two limited-service branches, one insurance agency (operating from two locations) and six wealth management offices.

 

The markets in which the Corporation competes are highly competitive. The Corporation’s direct competition in attracting business is mainly from commercial banks, investment management companies, savings and loan associations, trust companies and insurance agencies. The Corporation also competes with credit unions, on-line banking enterprises, consumer finance companies, mortgage companies, insurance companies, stock brokerage companies, investment advisory companies and other entities providing one or more of the services and products offered by the Corporation.

 

The Corporation is able to compete with the other firms because of its consistent level of customer service, excellent reputation, professional expertise, comprehensive product line, and its competitive rates and fees. However, there are several negative factors which can hinder the Corporation’s ability to compete with larger institutions such as its limited number of locations, smaller advertising and technology budgets, and a general inability to scale its operating platform, due to its size.

 

Mergers, acquisitions and organic growth through subsidiaries have contributed significantly to the growth and expansion of the Corporation. The acquisition of Lau Associates LLC in July 2008 and the formation of BMTC-DE allowed the Corporation to establish a presence in the State of Delaware, where it competes for wealth management business. The November 2012 acquisition of certain loan and deposit accounts and a branch location from First Bank of Delaware enabled the Corporation to further expand its banking segment in the greater Wilmington, Delaware area.

 

 

The Corporation’s first significant bank acquisition, the July 2010 merger with First Keystone Financial, Inc. expanded the Corporation’s footprint significantly into Delaware County, Pennsylvania. This was followed by the January 2015 merger with CBH and the December 2017 merger with RBPI. These bank mergers further expanded the Corporation’s reach well into the surrounding counties in Pennsylvania, including five branches within the City of Philadelphia, and also expanded the Bank’s footprint into southern and central New Jersey.

 

The acquisition the Private Wealth Management Group of the Hershey Trust Company (“PWMG”) in May 2011 enabled the Bank’s Wealth Management Division to extend into central Pennsylvania by continuing to operate the former PWMG offices located in Hershey, Pennsylvania. The May 2012 acquisition of the Davidson Trust Company allowed the Corporation to further expand its range of services and bring deeper market penetration in our core market area.

 

The October 2014 acquisition of PCPB, April 2015 acquisition of RJM, and the May 2017 acquisition of Hirshorn enabled the Bank to expand its range of insurance solutions to both individuals as well as business clients. The Hirshorn transaction, in particular, established a key location in the desirable northwest corner of Philadelphia, affording the Bank greater opportunity to provide insurance and other financial solutions to both existing and potential clients.

 

In October 2015, KCMI was established which enabled the Corporation to compete, on a national level, for a specialized lending market that focuses on non-traditional small business borrowers with well-established businesses. In addition to KCMI, BMEF, which specializes in equipment leases for small- and mid-sized businesses, also competes on a national scale.

 

In May 2017, BMTIA was established. BMTIA is a SEC registered investment adviser which serves as investment adviser to BMT Investment Funds, a Delaware statutory trust. There is an Investment Advisory Agreement between BMT Investment Advisers and BMT Investment Funds, on behalf of the BMT Multi-Cap Fund. The BMT-Multi-Cap Fund is a broadly diversified mutual fund focused on equity investments which the Corporation’s wealth management division is able to offer as an investment choice to its client base.

 

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

 

The geographic information required by Item 101(d) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended, is impracticable for the Corporation to calculate; however, the Corporation does not believe that a material amount of revenues in any of the last three years was attributable to customers outside of the United States, nor does it believe that a material amount of its long-lived assets, in any of the past three years, was located outside of the United States.

 

SUPERVISION AND REGULATION

 

The Corporation and its subsidiaries, including the Bank, are subject to extensive regulation under both federal and state law. To the extent that the following information describes statutory provisions and regulations which apply to the Corporation and its subsidiaries, it is qualified in its entirety by reference to those statutory provisions and regulations:

 

•

Bank Holding Company Regulation

 

The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the “Act”). The Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. The Corporation and its non-bank subsidiaries are subject to the supervision of the Federal Reserve Board and the Corporation is required to file, with the Federal Reserve Board, an annual report and such additional information as the Federal Reserve Board may require pursuant to the Act and the regulations which implement the Act. The Federal Reserve Board also conducts inspections of the Corporation and each of its non-banking subsidiaries.

 

The Act requires each bank holding company to obtain prior approval by the Federal Reserve Board before it may acquire (i) direct or indirect ownership or control of more than 5% of the voting shares of any company, including another bank holding company or a bank, unless it already owns a majority of such voting shares, or (ii) all, or substantially all, of the assets of any company.

 

The Act also prohibits a bank holding company from engaging in, or from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or to managing or controlling banks as to be appropriate. The Federal Reserve Board has, by regulation, determined that certain activities are so closely related to banking or to managing or controlling banks, so as to permit bank holding companies, such as the Corporation, and its subsidiaries formed for such purposes, to engage in such activities, subject to obtaining the Federal Reserve Board’s approval in certain cases.

 

 

Under the Act, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension or provision of credit, lease or sale of property or furnishing any service to a customer on the condition that the customer provide additional credit or service to the bank, to its bank holding company or any other subsidiaries of its bank holding company or on the condition that the customer refrain from obtaining credit or service from a competitor of its bank holding company. Further, the Bank, as a subsidiary bank of a bank holding company, such as the Corporation, is subject to certain restrictions on any extensions of credit it provides to the Corporation or any of its non-bank subsidiaries, investments in the stock or securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower.

 

In addition, the Federal Reserve Board may issue cease-and-desist orders against bank holding companies and non-bank subsidiaries to stop actions believed to present a serious threat to a subsidiary bank. The Federal Reserve Board also regulates certain debt obligations and changes in control of bank holding companies.

 

Under the Federal Deposit Insurance Act, as amended by the Dodd-Frank Act, a bank holding company is required to serve as a source of financial strength to each of its subsidiary banks and to commit resources, including capital funds during periods of financial stress, to support each such bank. Consistent with this “source of strength” requirement for subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the company’s capital needs, asset quality and overall financial condition.

 

Federal law also grants to federal banking agencies the power to issue cease and desist orders when a depository institution or a bank holding company or an officer or director thereof is engaged in or is about to engage in unsafe and unsound practices. The Federal Reserve Board may require a bank holding company, such as the Corporation, to discontinue certain of its activities or activities of its other subsidiaries, other than the Bank, or divest itself of such subsidiaries if such activities cause serious risk to the Bank and are inconsistent with the Bank Holding Company Act or other applicable federal banking laws.

 

•

Federal Reserve Board and Pennsylvania Department of Banking and Securities Regulation

 

The Corporation’s Pennsylvania state chartered bank, The Bryn Mawr Trust Company, is regulated and supervised by the Pennsylvania Department of Banking and Securities (the “Department of Banking”) and subject to regulation by The Federal Reserve Board and the FDIC. The Department of Banking and the Federal Reserve Board regularly examine the Bank’s reserves, loans, investments, management practices and other aspects of its operations and the Bank must furnish periodic reports to these agencies. The Bank is a member of the Federal Reserve System.

 

The Bank’s operations are subject to certain requirements and restrictions under federal and state laws, including requirements to maintain reserves against deposits, limitations on the interest rates that may be paid on certain types of deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. These regulations and laws are intended primarily for the protection of the Bank’s depositors and customers rather than holders of the Corporation’s stock.

 

The regulations of the Department of Banking restrict the amount of dividends that can be paid to the Corporation by the Bank. Payment of dividends is restricted to the amount of the Bank’s 2018 net income plus its net retained earnings for the previous two years. As of January 1, 2018, this amount was $38.5 million. However, the amount of dividends paid by the Bank cannot reduce capital levels below levels that would cause the Bank to be less than adequately capitalized. The payment of dividends by the Bank to the Corporation is the source on which the Corporation currently depends to pay dividends to its shareholders.

 

As a bank incorporated under and subject to Pennsylvania banking laws and insured by the FDIC, the Bank must obtain the prior approval of the Department of Banking and the Federal Reserve Board before establishing a new branch banking office. Depending on the type of bank or financial institution, a merger of the Bank with another institution is subject to the prior approval of one or more of the following: the Department of Banking, the FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency and any other regulatory agencies having primary supervisory authority over any other party to the merger. An approval of a merger by the appropriate bank regulatory agency would depend upon several factors, including whether the merged institution is a federally insured state bank, a member of the Federal Reserve System, or a national bank. Additionally, any new branch expansion or merger must comply with branching restrictions provided by state law. The Pennsylvania Banking Code permits Pennsylvania banks to establish branches anywhere in the state.

 

On October 24, 2012, Pennsylvania enacted three new laws known as the “Banking Law Modernization Package,” all of which became effective on December 24, 2012. The intended goal of the new law, which applies to the Bank, is to modernize Pennsylvania’s banking laws and to reduce regulatory burden at the state level where possible, given the increased regulatory demands at the federal level as described below.

 

 

The law also permits banks as well as the Department of Banking to disclose formal enforcement actions initiated by the Department of Banking, clarifies that the Department of Banking has examination and enforcement authority over subsidiaries as well as affiliates of regulated banks and bolsters the Department of Banking’s enforcement authority over its regulated institutions by clarifying its ability to remove directors, officers and employees from institutions for violations of laws or orders or for any unsafe or unsound practice or breach of fiduciary duty. Changes to existing law also allow the Department of Banking to assess civil money penalties of up to $25,000 per violation.

 

The new law also sets a new standard of care for bank officers and directors, applying the same standard that exists for non-banking corporations in Pennsylvania. The standard is one of performing duties in good faith, in a manner reasonably believed to be in the best interests of the institutions and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. Directors may rely in good faith on information, opinions and reports provided by officers, employees, attorneys, accountants, or committees of the board, and an officer may not be held liable simply because he or she served as an officer of the institution.

 

•

Deposit Insurance Assessments

 

The deposits of the Bank are insured by the FDIC up to the limits set forth under applicable law and are subject to deposit insurance premium assessments. The FDIC imposes a risk based deposit premium assessment system, under which the amount of FDIC assessments paid by an individual insured depository institution, such as the Bank, is based on the level of risk incurred in its activities.

 

In addition to deposit insurance assessments, banks are subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. The FDIC sets the Financing Corporation assessment rate every quarter. The Financing Corporation assessment for the fourth quarter of 2017 was an annualized rate of .64 basis points. Payments of the FICO assessment during the twelve months ended December 31, 2017 totaled $165 thousand. Included in our FICO assessment paid in 2017 was $8 thousand related to RBPI as a result of the RBPI Merger.

 

•   Government Monetary Policies

 

The monetary and fiscal policies of the Federal Reserve Board and the other regulatory agencies have had, and will probably continue to have, an important impact on the operating results of the Bank through their power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The monetary policies of the Federal Reserve Board may have a major effect upon the levels of the Bank’s loans, investments and deposits through the Federal Reserve Board’s open market operations in United States government securities, through its regulation of, among other things, the discount rate on borrowing of depository institutions, and the reserve requirements against depository institution deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

 

The earnings of the Bank and, therefore, of the Corporation are affected by domestic economic conditions, particularly those conditions in the trade area as well as the monetary and fiscal policies of the United States government and its agencies.

 

•

Safety and Soundness

 

The Federal Reserve Board also has authority to prohibit a bank holding company from engaging in any activity or transaction deemed by the Federal Reserve Board to be an unsafe or unsound practice. The payment of dividends could, depending upon the financial condition of the Bank or Corporation, be such an unsafe or unsound practice and the regulatory agencies have indicated their view that it generally would be an unsafe and unsound practice to pay dividends except out of current operating earnings. The ability of the Bank to pay dividends in the future is presently and could be further influenced, among other things, by applicable capital guidelines discussed below or by bank regulatory and supervisory policies. The ability of the Bank to make funds available to the Corporation is also subject to restrictions imposed by federal law. The amount of other payments by the Bank to the Corporation is subject to review by regulatory authorities having appropriate authority over the Bank or Corporation and to certain legal limitations.

 

•

Capital Adequacy

 

Federal and state banking laws impose on banks certain minimum requirements for capital adequacy. Federal banking agencies have issued certain “risk-based capital” guidelines, and certain “leverage” requirements on member banks such as the Bank. By policy statement, the Banking Department also imposes those requirements on the Bank. Banking regulators have authority to require higher minimum capital ratios for an individual bank or bank holding company in view of its circumstances.

 

Minimum Capital Ratios: The risk-based guidelines require all banks to maintain three “risk-weighted assets” ratios. The first is a minimum ratio of total capital (“Tier I” and “Tier II” capital) to risk-weighted assets equal to 8.00%; the second is a minimum ratio of “Tier I” capital to risk-weighted assets equal to 6.00%; and the third is a minimum ratio of “Common Equity Tier I” capital to risk-weighted assets equal to 4.5%. Assets are assigned to five risk categories, with higher levels of capital being required for the categories perceived as representing greater risk. In making the calculation, certain intangible assets must be deducted from the capital base. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.

 

 

The risk-based capital rules also account for interest rate risk. Institutions with interest rate risk exposure above a normal level would be required to hold extra capital in proportion to that risk. A bank’s exposure to declines in the economic value of its capital due to changes in interest rates is a factor that the banking agencies will consider in evaluating a bank’s capital adequacy. The rule does not codify an explicit minimum capital charge for interest rate risk. Management currently monitors and manages its assets and liabilities for interest rate risk, and believes its interest rate risk practices are prudent and are in-line with industry standards. Management is not aware of any new or proposed rules or standards relating to interest rate risk that would materially adversely affect our operations.

 

The “leverage” ratio rules require banks which are rated the highest in the composite areas of capital, asset quality, management, earnings, liquidity and sensitivity to market risk to maintain a ratio of “Tier I” capital to “adjusted total assets” (equal to the bank’s average total assets as stated in its most recent quarterly Call Report filed with its primary federal banking regulator, minus end-of-quarter intangible assets that are deducted from Tier I capital) of not less than 4.00%.

 

For purposes of the capital requirements, “Tier I” or “core” capital is defined to include common stockholders’ equity and certain noncumulative perpetual preferred stock and related surplus. “Tier II” or “qualifying supplementary” capital is defined to include a bank’s allowance for loan and lease losses up to 1.25% of risk-weighted assets, plus certain types of preferred stock and related surplus, certain “hybrid capital instruments” and certain term subordinated debt instruments. “Common Equity Tier I” capital is defined as the sum of common stock instruments and related surplus net of treasury stock, retained earnings, accumulated other comprehensive income, and qualifying minority interests.

 

In addition to the capital requirements discussed above, banks are required to maintain a “capital conservation buffer” above the regulatory minimum capital requirements, which must consist entirely of common equity Tier I capital.

 

The capital conservation buffer was being phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. All of the U.S. banking regulators have delayed the last phase of the capital rules’ transition provisions relating to certain deductions from capital and limitations on the recognition of minority interests. The final rule, released on November 21, 2017, effectively freezes the currently applicable phase-in of the transition provisions for these capital requirements until separate rulemaking is finalized.

 

Institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if their capital levels fall below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

The Bank’s and the Corporation’s regulators have the power to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier I capital to take into account the macro-financial environment and periods of excessive credit growth. However, this buffer is only applicable to “advanced approach banks” ( i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Corporation and the Bank. The capital requirement rules, which were finalized in July 2013 implement revisions and clarifications consistent with Basel III regarding the various components of Tier I capital, including common equity, unrealized gains and losses, as well as certain instruments that no longer qualify as Tier I capital, some of which are being phased out over time. However, small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) will be able to permanently include non-qualifying instruments that were issued and included in Tier I or Tier II capital prior to May 19, 2010 in additional Tier I or Tier II capital until they redeem such instruments or until the instruments mature.

 

In addition, smaller banking institutions (less than $250 billion in consolidated assets) were granted an opportunity to make a one-time election to opt out of including most elements of accumulated other comprehensive income in regulatory capital. Importantly, the opt-out excludes from regulatory capital not only unrealized gains and losses on available-for-sale debt securities, but also accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit postretirement plans. The Corporation elected to opt-out, and indicated its election on the Call Report filed after January 1, 2015.

 

●

Prompt Corrective Action

 

 Federal banking law mandates certain “prompt corrective actions,” which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a Federally regulated depository institution falls. Regulations have been adopted by the Federal bank regulatory agencies setting forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution that is not adequately capitalized.

 

 

Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following capital level requirements in order to qualify as “well capitalized:”

 

(i)

a new common equity Tier I capital ratio of 6.5%;

(ii)

a Tier I capital ratio of 8% (increased from 6%);

(iii)

a total capital ratio of 10% (unchanged from current rules); and

(iv)

a Tier I leverage ratio of 5% (increased from 4%).

 

An undercapitalized institution is required to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on the payment of dividends, a limitation on asset growth and expansion, and in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person”. Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership. The Bank is currently regarded as “well capitalized” for regulatory capital purposes. See Note 25 in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding the Bank’s and Corporation’s regulatory capital ratios.

 

•

Gramm-Leach-Bliley Act

 

The Gramm-Leach-Bliley Act (“GLB Act”) repealed provisions of the Glass-Steagall Act, which prohibited commercial banks and securities firms from affiliating with each other and engaging in each other’s businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated.

 

The GLB Act amended the Glass-Steagall Act to allow new “financial holding companies” (“FHC”) to offer banking, insurance, securities and other financial products to consumers. Specifically, the GLB Act amends section 4 of the Act in order to provide for a framework for the engagement in new financial activities. A bank holding company may elect to become a financial holding company if all its subsidiary depository institutions are well-capitalized and well-managed. If these requirements are met, a bank holding company may file a certification to that effect with the Federal Reserve Board and declare that it elects to become a FHC. After the certification and declaration is filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the Federal Reserve Board to be financial in nature or incidental to such financial activity. Bank holding companies may engage in financial activities without prior notice to the Federal Reserve Board if those activities qualify under the new list in section 4(k) of the Act. However, notice must be given to the Federal Reserve Board, within 30 days after the FHC has commenced one or more of the financial activities. The Corporation has not elected to become an FHC at this time.

 

Under the GLB Act, a bank subject to various requirements is permitted to engage through “financial subsidiaries” in certain financial activities permissible for affiliates of FHC’s. However, to be able to engage in such activities a bank must continue to be “well-capitalized” and well-managed and receive at least a “satisfactory” rating in its most recent Community Reinvestment Act examination.

 

•

Community Reinvestment Act

 

The Community Reinvestment Act requires banks to help serve the credit needs of their communities, including providing credit to low and moderate income individuals and areas. Should the Bank fail to serve adequately the communities it serves, potential penalties may include regulatory denials to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions.

 

•

Privacy of Consumer Financial Information

 

The GLB Act also contains a provision designed to protect the privacy of each consumer’s financial information in a financial institution. Pursuant to the requirements of the GLB Act, the Consumer Financial Protection Bureau has promulgated final regulations intended to better protect the privacy of a consumer’s financial information maintained in financial institutions. The regulations are designed to prevent financial institutions, such as the Bank, from disclosing a consumer’s nonpublic personal information to third parties that are not affiliated with the financial institution.

 

However, financial institutions can share a customer’s personal information or information about business and corporations with their affiliated companies. The regulations also provide that financial institutions can disclose nonpublic personal information to nonaffiliated third parties for marketing purposes but the financial institution must provide a description of its privacy policies to the consumers and give the consumers an opportunity to opt-out of such disclosure and, thus, prevent disclosure by the financial institution of the consumer’s nonpublic personal information to nonaffiliated third parties.

 

 

These privacy regulations will affect how consumer’s information is transmitted through diversified financial companies and conveyed to outside vendors. Management does not believe the privacy regulations will have a material adverse impact on its operations in the near term.

 

•

Consumer Protection Rules – Sale of Insurance Products

 

In addition, as mandated by the GLB Act, the regulators have published consumer protection rules which apply to the retail sales practices, solicitation, advertising or offers of insurance products, including annuities, by depository institutions such as banks and their subsidiaries.

 

The rules provide that before the sale of insurance or annuity products can be completed, disclosures must be made that state (i) such insurance products are not deposits or other obligations of or guaranteed by the FDIC or any other agency of the United States, the Bank or its affiliates; and (ii) in the case of an insurance product that involves an investment risk, including an annuity, that there is an investment risk involved with the product, including a possible loss of value.

 

The rules also provide that the Bank may not condition an extension of credit on the consumer’s purchase of an insurance product or annuity from the Bank or its affiliates or on the consumer’s agreement not to obtain or a prohibition on the consumer obtaining an insurance product or annuity from an unaffiliated entity.

 

The rules also require formal acknowledgement from the consumer that such disclosures have been received. In addition, to the extent practical, the Bank must keep insurance and annuity sales activities physically separate from the areas where retail banking transactions are routinely accepted from the general public.

 

•

Sarbanes-Oxley Act

 

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) addresses, among other matters, increased disclosures; audit committees; certification of financial statements by the principal executive officer and the principal financial officer; evaluation by management of our disclosure controls and procedures and our internal control over financial reporting; auditor reports on our internal control over financial reporting; forfeiture of bonuses and profits made by directors and senior officers in the twelve (12) month period covered by restated financial statements; a prohibition on insider trading during Corporation stock blackout periods; disclosure of off-balance sheet transactions; a prohibition applicable to companies, other than federally insured financial institutions, on personal loans to their directors and officers; expedited filing of reports concerning stock transactions by a company’s directors and executive officers; the formation of a public accounting oversight board; auditor independence; and increased criminal penalties for violation of certain securities laws.

 

•

USA PATRIOT Act of 2001

 

The USA PATRIOT Act of 2001, which was enacted in the wake of the September 11, 2001 attacks, includes provisions designed to combat international money laundering and advance the U.S. government’s war against terrorism. The USA PATRIOT Act and the regulations which implement it contain many obligations which must be satisfied by financial institutions, including the Bank. Those regulations impose obligations on financial institutions, such as the Bank, to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. The failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the financial institution.

 

•

Government Policies and Future Legislation

 

As the enactment of the GLB Act and the Sarbanes-Oxley Act confirm, from time to time various laws are passed in the United States Congress as well as the Pennsylvania legislature and by various bank regulatory authorities which would alter the powers of, and place restrictions on, different types of banks and financial organizations. It is impossible to predict whether any potential legislation or regulations will be adopted and the impact, if any, of such adoption on the business of the Corporation or its subsidiaries, especially the Bank.

 

The Trump administration has indicated its intent to bring changes to the U.S. financial services industry that we cannot now predict. Public comments by President Donald J. Trump, as well as his appointees at various federal agencies, may suggest the Administration’s intent to change policies and regulations that implement current federal law, including those implementing the Dodd-Frank Act. At this point we are unable to determine what impact the Trump Administration’s policy changes might have on the Corporation or its subsidiaries.

 

 

•

Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)

 

The Dodd-Frank Act was passed by Congress on July 15, 2010, and was signed into law by President Obama on July 21, 2010. It is intended to promote financial stability in the U.S., reduce the risk of bailouts and protect against abusive financial services practices by improving accountability and transparency in the financial system and ending the concept of “too big to fail” institutions by giving regulators the ability to liquidate large financial institutions. It is the broadest overhaul of the U.S. financial system since the Great Depression and the overall impact on the Corporation and its subsidiaries is a general increase in costs related to compliance with the Dodd-Frank Act.

 

The Dodd-Frank Act has significantly changed the current bank regulatory structure and will affect into the immediate future the lending and investment activities and general operations of depository institutions and their holding companies.

 

As discussed earlier, the Dodd-Frank Act requires the Federal Reserve Board to establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository institutions; the components of Tier I capital are restricted to capital instruments that are considered to be Tier I capital for insured depository institutions. In addition, the proceeds of trust preferred securities are excluded from Tier I capital unless (i) such securities are issued by bank holding companies with assets of less than $500 million or (ii) such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets.

 

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to implement and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks, among other things, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.

 

The Dodd-Frank Act made many other changes in banking regulation. These include allowing depository institutions, for the first time, to pay interest on business checking accounts, requiring originators of securitized loans to retain a percentage of the risk for transferred loans, establishing regulatory rate-setting for certain debit card interchange fees and establishing a number of reforms for mortgage originations. Effective October 1, 2011, the debit-card interchange fee was capped at $0.21 per transaction, plus an additional 5 basis point charge to cover fraud losses. These fees are much lower than the current market rates. The regulation only impacts banks with assets above $10.0 billion.

 

The Dodd-Frank Act also broadened the base for FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that it is based on the average consolidated total assets less tangible equity capital of an insured institution instead of deposits. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.

 

Although many of the provisions of the Dodd-Frank Act are currently effective, there remain some regulations yet to be implemented. It is therefore difficult to predict at this time what impact the Dodd-Frank Act and implementing regulations will have on the Corporation and the Bank. The changes resulting from the Dodd-Frank Act could limit our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise materially and adversely affect us. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements could also materially and adversely affect us.

 

 

ITEM  1A.

RISK FACTORS

 

Investment in the Corporation’s Common Stock involves risk. The market price of the Corporation’s Common Stock may fluctuate significantly in response to a number of factors including those that follow. The following list contains certain risks that may be unique to the Corporation and to the banking industry. The following list of risks should not be viewed as an all-inclusive list or in any particular order.

 

The Corporation’s performance and financial condition may be adversely affected by regional economic conditions and real estate values

 

The Bank’s loan and deposit activities are largely based in eastern Pennsylvania. As a result, the Corporation’s consolidated financial performance depends largely upon economic conditions in this eastern Pennsylvania region. This region experienced deteriorating local economic conditions during 2008 through 2011, and a resumption of this deterioration in the regional real estate market could harm our financial condition and results of operations because of the geographic concentration of loans within this regional area and because a large percentage of our loans are secured by real property. If there is further decline in real estate values, the collateral for the Corporation’s loans will provide less security. As a result, the Corporation’s ability to recover on defaulted loans by selling the underlying real estate will be diminished, and the Bank will be more likely to suffer losses on defaulted loans.

 

 

Additionally, a significant portion of the Corporation’s loan portfolio is invested in commercial real estate loans. Often in a commercial real estate transaction, repayment of the loan is dependent on rental income. Economic conditions may affect the tenant’s ability to make rental payments on a timely basis, and may cause some tenants not to renew their leases, each of which may impact the debtor’s ability to make loan payments. Further, if expenses associated with commercial properties increase dramatically, the tenant’s ability to repay, and therefore the debtor’s ability to make timely loan payments, could be adversely affected.

 

All of these factors could increase the amount of the Corporation’s non-performing loans, increase its provision for loan and lease losses and reduce the Corporation’s net income.

 

Rapidly changing interest rate environment could reduce the Corporation’s net interest margin, net interest income, fee income and net income

 

Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a significant part of the Corporation’s net income. Interest rates are key drivers of the Corporation’s net interest margin and subject to many factors beyond the control of the Corporation. As interest rates change, net interest income is affected. Rapidly increasing interest rates in the future could result in interest expense increasing faster than interest income because of divergence in financial instrument maturities and/or competitive pressures. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth. Decreases or increases in interest rates could have a negative effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. Also, changes in interest rates might also impact the values of equity and debt securities under management and administration by the Wealth Management Division which may have a negative impact on fee income. See the section captioned “Net Interest Income” in the MD&A section of this Annual Report on Form 10-K for additional details regarding interest rate risk.

 

Economic troubles may negatively affect our leasing business

 

The Corporation’s leasing business which began operations in September 2006, consists of the nationwide leasing of various types of equipment to small- and medium-sized businesses. Continued economic sluggishness may result in higher credit losses than we would experience in our traditional lending business, as well as potential increases in state regulatory burdens such as state income taxes, personal property taxes and sales and use taxes.

 

A general economic slowdown could impact Wealth Management Division revenues

 

A general economic slowdown could decrease the value of Wealth Management Division assets under management and administration resulting in lower fee income, and clients potentially seeking alternative investment opportunities with other providers, which could result in lower fee income to the Corporation.

 

If we fail to comply with legal standards, we could incur liability to our clients or lose clients, which could negatively affect our earnings.

 

Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and applicable laws is important to client satisfaction, which in turn is important to the earnings and growth of our investment businesses. Failure to comply with these standards, adequately manage these risks or manage the differing interests often involved in the exercise of fiduciary responsibilities could also result in liability.

 

Provision for loan and lease losses and level of non-performing loans may need to be modified in connection with internal or external changes

 

All borrowers carry the potential to default and our remedies to recover may not fully satisfy money previously loaned. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which represents the Corporation’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of the Corporation, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan losses reflects the Corporation’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments different than those of the Corporation. An increase in the allowance for loan losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations.

 

 

The design of the allowance for loan loss methodology is a dynamic process that must be responsive to changes in environmental factors. Accordingly, at times the allowance methodology may be modified in order to incorporate changes in various factors including, but not limited to, levels and trends of delinquencies and charge-offs, trends in volume and types of loans, national and economic trends and industry conditions.

 

Potential acquisitions may disrupt the Corporation’s business and dilute shareholder value

 

We regularly evaluate opportunities to advance our strategic objectives by acquiring and investing in banks and in other complementary businesses, such as wealth advisory or insurance agencies, or opening new branches or offices. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short and long-term liquidity. Our acquisition activities could be material to us. For example, we could issue additional shares of common stock in a purchase transaction, which could dilute current shareholders’ ownership interest. These activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Any potential charges for impairment related to goodwill would not directly impact cash flow or tangible capital.

 

Our acquisition activities could involve a number of additional risks, including the risks of:

 

•

incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in the Corporation’s attention being diverted from the operation of our existing business;

 

•

using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;

 

•

potential exposure to unknown or contingent liabilities of banks and businesses we acquire;

 

•

the time and expense required to integrate the operations and personnel of the combined businesses;

 

•

experiencing higher operating expenses relative to operating income from the new operations;

 

•

creating an adverse short-term effect on our results of operations;

 

•

losing key employees and customers as a result of an acquisition that is poorly received;

 

•

risk of significant problems relating to the conversion of the financial and customer data of the entity being acquired into the Corporation’s financial and customer product systems; and,

 

•

potential impairment of intangible assets created in business acquisitions.

 

There is no assurance that we will be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions. Our inability to overcome these risks could have an adverse effect on our levels of reported net income, return on average equity and return on average assets, and our ability to achieve our business strategy and maintain our market value.

 

Decreased residential mortgage origination, volume and pricing decisions of competitors could affect our net income.

 

The Corporation originates, sells and services residential mortgage loans. Changes in interest rates and pricing decisions by our loan competitors affect demand for the Corporation’s residential mortgage loan products, the revenue realized on the sale of loans and revenues received from servicing such loans for others, ultimately reducing the Corporation’s net income. New regulations, increased regulatory reviews, and/or changes in the structure of the secondary mortgage markets which the Corporation utilizes to sell mortgage loans may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination business.

 

Our mortgage servicing rights could become impaired, which may require us to take non-cash charges.

 

Because we retain the servicing rights on many loans we sell in the secondary market, we are required to record a mortgage servicing right asset, which we test quarterly for impairment. The value of mortgage servicing rights is heavily dependent on market interest rates and tends to increase with rising interest rates and decrease with falling interest rates. If we are required to record an impairment charge, it would adversely affect our financial condition and results of operations.

 

 

Declines in asset values may result in impairment charges and may adversely affect the value of the Company’s results of operations, financial condition and cash flows.

 

A majority of the Corporation’s investment portfolio is comprised of securities which are collateralized by residential mortgages. These residential mortgage-backed securities include securities of U.S. government agencies, U.S. government-sponsored entities, and private-label collateralized mortgage obligations. The Corporation’s securities portfolio also includes obligations of U.S. government-sponsored entities, obligations of states and political subdivisions thereof, and equity securities. The fair value of investments may be affected by factors other than the underlying performance of the issuer or composition of the obligations themselves, such as rating downgrades, adverse changes in the business climate and a lack of liquidity for resale of certain investment securities. Quarterly, the Corporation evaluates investments and other assets for impairment indicators in accordance with U.S. GAAP. A decline in the fair value of the securities in our investment portfolio could result in an other-than temporary impairment (“OTTI”) write-down that would reduce our earnings. Further, given the significant judgments involved, if we are incorrect in our assessment of OTTI, this error could have a material adverse effect on our results of operation, financial condition, and cash flows. If the Corporation incurs OTTI charges that result in its falling below the “well capitalized” regulatory requirement, it may need to raise additional capital.

 

Accounting standards periodically change and the application of our accounting policies and methods may require management to make estimates about matters that are uncertain

 

The regulatory bodies that establish accounting standards, including, among others, the Financial Accounting Standards Board and the SEC, periodically revise or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial statements. The effect of such revised or new standards on our financial statements can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.

 

In addition, management must exercise judgment in appropriately applying many of our accounting policies and methods so they comply with generally accepted accounting principles. In some cases, management may have to select a particular accounting policy or method from two or more alternatives. In some cases, the accounting policy or method chosen might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a different policy or method. Accounting policies are critical to fairly presenting our financial condition and results of operations and may require management to make difficult, subjective or complex judgments about matters that are uncertain.

 

The FASB’s recently adopted ASU 2016-13 will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations.

           In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss model, or CECL. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan and lease losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

 

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. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.

 

Legal proceedings to which we are subject or may become subject may have a material adverse impact on our financial position and results of operations.

 

Like many banks and other financial services organizations in our industry, we are from time to time involved in various legal proceedings and subject to claims and other actions related to our business activities brought by customers, employees and others.  All such legal proceedings are inherently unpredictable and, regardless of the merits of the claims, litigation is often expensive, time-consuming, disruptive to our operations and resources, and distracting to management.  If resolved against us, such legal proceedings could result in excessive verdicts and judgments, injunctive relief, equitable relief, and other adverse consequences that may affect our financial condition and how we operate our business.  Similarly, if we settle such legal proceedings, it may affect our financial condition and how we operate our business.  Future court decisions, alternative dispute resolution awards, matters arising due to business expansion, or legislative activity may increase our exposure to litigation and regulatory investigations.  In some cases, substantial non-economic remedies or punitive damages may be sought.  Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any particular verdict, judgment, or settlement that may be entered against us, that such coverage will prove to be adequate, or that such coverage will continue to remain available on acceptable terms, if at all.  Legal proceedings to which we are subject or may become subject may have a material adverse impact on our financial position and results of operations.

 

A return to recessionary conditions or a large and unexpected rise in interest rates could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

 

Falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in 2008 that followed a national home price peak in mid-2006, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and a return to higher unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. A large or unexpected rise in interest rates could materially impact consumer and business ability to repay, thus increasing our level of nonperforming loans and reducing demand for loans. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

 

 

Increases in FDIC insurance premiums may adversely affect the Corporation’s earnings

 

In response to the impact of economic conditions since 2008 on banks generally and on the FDIC Deposit Insurance Fund (the “DIF”), the FDIC changed its risk-based assessment system and increased base assessment rates. On November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted insurance fund. In February 2011, as required under the Dodd-Frank Act, the FDIC issued a ruling pursuant to which the assessment base against which FDIC assessments for deposit insurance are made will change. Instead of FDIC insurance assessments being based upon an insured bank’s deposits, FDIC insurance assessments are now generally based on an insured bank’s total average assets minus average tangible equity. With this change, the Corporation expects that its overall FDIC insurance cost will decline. However, a change in the risk categories applicable to the Corporation’s bank subsidiaries, further adjustments to base assessment rates and any special assessments could have a material adverse effect on the Corporation.

 

The Dodd-Frank Act also requires that the FDIC take steps necessary to increase the level of the DIF to 1.35% of total insured deposits by September 30, 2020. In October 2010, the FDIC adopted a Restoration Plan to achieve that goal. Certain elements of the Restoration Plan are left to future FDIC rulemaking, as are the potential for increases to the assessment rates, which may become necessary to achieve the targeted level of the DIF. Future FDIC rulemaking in this regard may have a material adverse effect on the Corporation.

 

The stability of other financial institutions could have detrimental effects on our routine funding transactions

 

Routine funding transactions may be adversely affected by the actions and soundness of other financial institutions. Financial service institutions are interrelated as a result of trading, clearing, lending, borrowing or other relationships. Transactions are executed on a daily basis with different industries and counterparties, and routinely executed with counterparties in the financial services industry. As a result, a rumor, default or failures within the financial services industry could lead to market-wide liquidity problems which in turn could materially impact the financial condition of the Corporation.

 

The Corporation may need to raise additional capital in the future and such capital may not be available when needed or at all

 

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations and may need to raise additional capital in the future, whether in the form of debt or equity, to provide us with sufficient capital resources to meet our regulatory and business needs. We cannot assure you that such capital will be available to us on acceptable terms or at all. Our ability to raise additional capital will depend on, among other things, conditions in the capital markets at the time, which are outside of our control, and our financial condition. If the Corporation is unable to generate sufficient additional capital though its earnings, or other sources, including sales of assets, it would be necessary to slow earning asset growth and or pass up possible acquisition opportunities, which may result in a reduction of future net income growth. Further, an inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations. 

 

If sufficient wholesale funding to support earning-asset growth is unavailable, the Corporation’s net income may decrease

 

Management recognizes the need to grow both non-wholesale and wholesale funding sources to support earning asset growth and to provide appropriate liquidity. The Corporation’s asset growth over the past few years has been supplemented by various forms of wholesale funding which is defined as wholesale deposits (primarily wholesale certificates of deposit) and borrowed funds (FHLB advances, Federal advances and Federal fund line borrowings). Wholesale funding at December 31, 2017 represented approximately 15.9% of total funding compared to 18.0% at December 31, 2016 and 17.9% at December 31, 2015. Wholesale funding is subject to certain practical limits such as the FHLB’s Maximum Borrowing Capacity and the Corporation’s liquidity targets. Additionally, regulators might consider wholesale funding beyond certain points to be imprudent and might suggest that future asset growth be reduced or halted.

 

In the absence of wholesale funding sources, the Corporation may need to reduce earning asset growth through the reduction of current production, sale of assets, and/or the participating out of future and current loans or leases. This in turn might reduce future net income of the Corporation.

 

The amount loaned to us is generally dependent on the value of the collateral pledged and the Corporation’s financial condition. These lenders could reduce the percentages loaned against various collateral categories, eliminate certain types of collateral and otherwise modify or even terminate their loan programs, particularly to the extent they are required to do so because of capital adequacy or other balance sheet concerns, or if disruptions in the capital markets occur. Any change or termination of our borrowings from the FHLB, the Federal Reserve or correspondent banks may have an adverse effect on our liquidity and profitability.

 

 

The capital and credit markets are volatile and could cause the price of our stock to fluctuate

 

The capital and credit markets periodically experience volatility. In some cases, the markets may produce downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength. Market volatility may result in a material adverse effect on our business, financial condition and results of operations and/or our ability to access capital. Several factors could cause the market price for our common stock to fluctuate substantially in the future, including without limitation:

 

•

announcements of developments related to our business, any of our competitors or the financial services industry in general;

 

•

fluctuations in our results of operations;

 

•

sales of substantial amounts of our securities into the marketplace;

 

•

general conditions in our markets or the worldwide economy;

 

•

a shortfall in revenues or earnings compared to securities analysts’ expectations;

 

•

changes in analysts’ recommendations or projections;

 

	•	our announcement of new acquisitions or other projects; and
	•	compliance with regulatory changes.

 

Any failure of the Corporation and the Bank to comply with federal and state regulatory requirements could adversely affect our business.

 

The Corporation and the Bank are supervised by the Federal Reserve Bank, the Pennsylvania Department of Banking and Securities and the State of Delaware. Accordingly, the Corporation, the Bank and our subsidiaries are subject to extensive federal and state legislation, regulation and supervision that govern almost all aspects of our business operations, which are primarily designed to protect consumers, depositors and the government's deposit insurance funds, and to accomplish other governmental policy objectives such as combating terrorism. That regulatory framework is not designed to protect shareholders. We are required to comply with a variety of laws and regulations, including the Bank Secrecy Act, the USA PATRIOT Act, the Gramm Leach Bliley Act, the Equal Credit Opportunity Act, real estate-secured consumer lending regulations (such as Truth-in-Lending), Real Estate Settlement Procedures Act regulations, and licensing and registration requirements for mortgage originators. Recent and potential future changes in laws and regulations, escalating regulatory expectations and heightened regulatory attention to mortgage and foreclosure-related activities and exposures and other business practices require that we devote substantial management attention and resources to regulatory compliance. While the Corporation has policies and procedures designed to ensure compliance with regulatory requirements, there is risk that the Corporation and the Bank may be determined not to have complied with applicable requirements. Any failure by the Corporation or the Bank to comply with these requirements, even if such failure was unintentional or inadvertent, could result in adverse action to be taken by regulators, including through formal or informal supervisory enforcement actions, and could result in the assessment of fines and penalties. In some circumstances, additional negative consequences also may result from regulatory action, including restrictions on the Corporation’s business activities, acquisitions and other growth initiatives. The occurrence of one or more of these events may have a material adverse effect on our business and reputation.

 

Previously enacted and potential future legislation, including legislation to reform the U.S. financial regulatory system, could adversely affect our business  

 

With the 2016 U.S. presidential election resulting in a new President and a new political party controlling the Executive Branch of the Federal Government, the new administration has brought and may continue to bring changes to the U.S. financial services industry that we cannot now predict. Public comments by President Donald J. Trump may suggest his intent to change policies and regulations that implement current federal law, including those implementing the Dodd-Frank Act. At this point we are unable to determine what impact the Trump Administration’s policy changes might have on the Corporation or its subsidiaries.

 

Market conditions have resulted in the creation of various programs by the United States Congress, the Treasury, the Federal Reserve and the FDIC that were designed to enhance market liquidity and bank capital. As these programs expire, are withdrawn or reduced, the impact on the financial markets, banks in general and their customers is unknown. This could have the effect of, among other things, reducing liquidity, raising interest rates, reducing fee revenue, limiting the ability to raise capital, all of which could have an adverse impact on the financial condition of the Bank and the Corporation.

 

 

Additionally, the federal government has passed a variety of other reforms related to banking and the financial industry including, without limitation, the Dodd-Frank Act. The Dodd-Frank Act imposes significant regulatory and compliance changes. Effects of the Dodd-Frank Act on our business include:

 

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changes to regulatory capital requirements;

 

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exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from Tier I capital;

 

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creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products);

 

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potential limitations on federal preemption;

 

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changes to deposit insurance assessments;

 

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regulation of debit interchange fees we earn;

 

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changes in retail banking regulations, including potential limitations on certain fees we may charge; and

 

●

changes in regulation of consumer mortgage loan origination and risk retention.

 

 

In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds, commonly referred to as the Volker Rule. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.

 

Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act could limit our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise materially and adversely affect us. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements could also materially and adversely affect us.

 

 

The Consumer Financial Protection Bureau (“CFPB”) may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive practices, which may directly impact the business operations of depository institutions offering consumer financial products or services including the Bank.

 

The CFPB has broad rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service (“UDAAP authority”). The potential reach of the CFPB’s broad rulemaking powers and UDAAP authority on the operations of financial institutions offering consumer financial products or services including the Bank is currently unknown.

 

Governmental discretionary policies may impact the operations and earnings of the Corporation and its subsidiaries

 

The operations of the Corporation and its subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve Board regulates monetary policy and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of all financial institutions in the past and may continue to do so in the future.

 

 

Potential losses incurred in connection with possible repurchases and indemnification payments related to mortgages that we have sold into the secondary market may require us to increase our financial statement reserves in the future

 

We engage in the origination and sale of residential mortgages into the secondary market. In connection with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. These representations and warranties vary based on the nature of the transaction and the purchaser’s or insurer’s requirements but generally pertain to the ownership of the mortgage loan, the real property securing the loan and compliance with applicable laws and applicable lender and government-sponsored entity underwriting guidelines in connection with the origination of the loan. While we believe our mortgage lending practices and standards to be adequate, we have settled a small number of claims we consider to be immaterial; however we may receive requests in the future, which could be material in volume. If that were to happen, we could incur losses in connection with loan repurchases and indemnification claims, and any such losses might exceed our financial statement reserves, requiring us to increase such reserves. In that event, any losses we might have to recognize and any increases we might have to make to our reserves could have a material adverse effect on our business, financial position, liquidity, results of operations or cash flows.

 

Our ability to realize our deferred tax asset may be reduced, which may adversely impact results of operations

 

Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. The deferred tax asset may be reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax asset. If it is determined that a valuation allowance of its deferred tax asset is necessary, the Corporation may incur a charge to earnings. The value of our deferred tax asset is directly related to effective income tax rates in effect at the time of uses. On December 22, 2017, legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Reform”), was signed into law. The Tax Reform, among other changes, reduces the U.S. federal corporate income tax rate from 35% to 21%. As a result of the Tax Reform, the Corporation has recorded a provisional one-time tax expense of $15.2 million, which consisted primarily of the re-measurement of deferred tax assets and liabilities from the enacted federal rate of 35% to 21%.

 

Environmental risk associated with our lending activities could affect our results of operations and financial condition

 

A significant portion of our loan portfolio is secured by real property. In the course of our business, we may own, acquire in bank acquisition such as the RBPI Merger, or foreclose and take title to real estate and could become subject to environmental liabilities with respect to these properties. We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. If we were to become subject to significant environmental liabilities, it could have a material adverse effect on our results of operations and financial condition.

 

Technological systems failures, interruptions and security breaches could negatively impact our operations and reputation

 

Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, and our loans. While we have established policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, any compromise of our security systems could deter customers from using our web site and our online banking service, which involve the transmission of confidential information. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

 

In addition, we outsource certain of our data processing to third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

 

The occurrence of any systems failure, interruption, or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to civil litigation and possible financial liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

 

Failure to meet customer expectations for technology-driven products and services could reduce demand for bank and wealth services

 

Financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so on our part could significantly reduce the number of new wealth and bank customers resulting in a material adverse impact on our business and therefore on our financial condition and results of operations.

 

 

The Corporation is subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors

 

Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

 

We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. Management diligently reviews and updates its internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, results of operations and financial condition.

 

Attractive acquisition opportunities may not be available to us in the future which could limit the growth of our business

 

We may not be able to sustain a positive rate of growth or be able to expand our business. We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals for a transaction, we will not be able to consummate such transaction which we believe to be in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Other factors, such as economic conditions and legislative considerations, may also impede or prohibit our ability to expand our market presence. If we are not able to successfully grow our business, our financial condition and results of operations could be adversely affected.

 

The financial services industry is very competitive, especially in the Corporation’s market area, and such competition could affect our operating results

 

The Corporation faces competition in attracting and retaining deposits, making loans, and providing other financial services such as trust and investment management services throughout the Corporation’s market area. The Corporation’s competitors include other community banks, larger banking institutions, trust companies and a wide range of other financial institutions such as credit unions, registered investment advisors, financial planning firms, leasing companies, government-sponsored enterprises, on-line banking enterprises, mutual fund companies, insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources than the Corporation. This is especially evident in regards to advertising and public relations spending. For a more complete discussion of our competitive environment, see “Business—Competition” in Item 1 above. If the Corporation is unable to compete effectively, the Corporation may lose market share and income from deposits, loans, and other products may be reduced.

 

Additionally, increased competition among financial services companies due to consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies may adversely affect our ability to market our products and services.

 

The Corporation’s common stock is subordinate to all of our existing and future indebtedness; regulatory and contractual restrictions may limit or prevent us from paying dividends on our common stock; and we are not limited on the amount of indebtedness we and our subsidiaries may incur in the future

 

Our common stock ranks junior to all indebtedness, including our outstanding subordinated notes, junior subordinated debentures and other non-equity claims on the Corporation with respect to assets available to satisfy claims on the Corporation, including in a liquidation of the Corporation. Additionally, unlike indebtedness, where principal and interest would customarily be payable on specified due dates, in the case of our common stock, dividends are payable only when, as and if authorized and declared by our Board of Directors and depend on, among other things, our results of operations, financial condition, debt service requirements, other cash needs and any other factors our Board of Directors deems relevant. Under Pennsylvania law we are subject to restrictions on payments of dividends out of lawfully available funds. Also, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

 

In addition, we are not limited by our common stock in the amount of debt or other obligations we or our subsidiaries may incur in the future. Accordingly, we and our subsidiaries may incur substantial amounts of additional debt and other obligations that will rank senior to our common stock or to which our common stock will be structurally subordinated.

 

 

There may be future sales of additional common stock or other dilution of our equity, which may adversely affect the market price of our common stock

 

We are not restricted from issuing additional common stock or other securities. Additionally, our shareholders may in the future approve the authorization of additional classes or series of stock which may have distribution or other rights senior to the rights of our common stock, or may be convertible into or exchangeable for, or may represent the right to receive, common stock or substantially similar securities. The future issuance of shares of our common stock or any other such future equity classes or series could have a dilutive effect on the holders of our common stock. Additionally, the market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or any future class or series of stock in the market or the perception that such sales could occur.

 

Downgrades in U.S. government and federal agency securities could adversely affect the Corporation

 

In addition to causing economic and financial market disruptions, any downgrades in U.S. government and federal agency securities, or failures to raise the U.S. debt limit if necessary in the future, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms, as well as have other material adverse effects on the operation of our business and our financial results and condition. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect profitability. Also, the adverse consequences as a result of the downgrade could extend to the borrowers of the loans the bank makes and, as a result, could adversely affect its borrowers’ ability to repay their loans.

 

The Corporation is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Corporation’s operations and prospects

 

The Corporation currently depends on the services of a number of key management personnel. The loss of key personnel could materially and adversely affect the results of operations and financial condition. The Corporation’s success also depends in part on the ability to attract and retain additional qualified management personnel. Competition for such personnel is strong and the Corporation may not be successful in attracting or retaining the personnel it requires.

 

Additional risk factors also include the following all of which may reduce revenues and/or increase expenses and/or pull the Corporation’s attention away from core banking operations which may ultimately reduce the Corporation’s net income:

 

 

•

changes in securities analysts’ estimates of financial performance;

•

volatility of stock market prices and volumes;

•

rumors or erroneous information;

•

changes in market values of similar companies;

•

new developments in the banking industry;

•

variations in quarterly or annual operating results;

•

new litigation or changes in existing litigation;

•

regulatory actions;

•

restructuring of government-sponsored enterprises such as Fannie Mae and Freddie Mac;

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.  

 

 

ITEM 2.

PROPERTIES

 

As of December 31, 2017, the Corporation owns or leases 37 full-service branch locations, eight limited-hour retirement community branches, two limited-service branch locations, six wealth management offices, one insurance agency and eight other office properties which serve as administrative offices.

 

The following table details the Corporation’s properties and deposits as of December 31, 2017:

 

 

Property Address		Owned/Leased
Full Service Branches (Banking Segment):
801 Lancaster Ave., Bryn Mawr, PA 19010*		Owned
105 W. 4th St., Bridgeport, PA 19405		Owned
3218 Edgemont Ave., Brookhaven, PA 19015		Owned
18 W. Eagle Rd., Havertown, PA 19083		Owned
655 W. DeKalb Pk., King of Prussia, PA 19406		Owned
22 W. State St., Media, PA 19063		Owned
732 Montgomery Ave., Narberth, PA 19072		Owned
39 W. Lancaster Ave., Paoli, PA 19301		Owned
6331 Castor Ave., Philadelphia, PA 19149		Owned
1650 Grant Ave., Philadelphia, PA 19115		Owned
330 Dartmouth Ave., Swarthmore, PA 19081		Owned
330 E. Lancaster Ave., Wayne, PA 19087		Owned
50 W. Lancaster Ave., Ardmore, PA 19003		Leased
5000 Pennell Rd., Aston, PA 19014		Leased
135 E. City Ave., Bala Cynwyd, PA 19004		Leased
1651 Blackwood Clementon Rd., Blackwood, NJ 08012		Leased
599 Skippack Pk., Blue Bell, PA 19422		Leased
US Rts. 1 and 100, Chadds Ford, PA 19317		Leased
23 E. Fifth St., Chester, PA 19013		Leased
31 Baltimore Pk., Chester Heights, PA 19017		Leased
528 Fayette St., Conshohocken, PA 19428		Leased
113 W. Germantown Pk., East Norriton, PA 19401		Leased
237 N. Pottstown Pk., Exton, PA 19341		Leased
106 E. Street Rd., Kennett Square, PA 19348		Leased
197 E. DeKalb Pk., King of Prussia, PA 19406		Leased
33 W. Ridge Pk., Limerick, PA 19468		Leased

 

 

3601 West Chester Pk., Newtown Square, PA 19073		Leased
7133 Ridge Ave., Philadelphia, PA 19128		Leased
180 W. Girard Ave., Philadelphia, PA 19123		Leased
1230 Walnut St., Philadelphia, PA 19107		Leased
124 Main St., Phoenixville, PA 19460		Leased
516 E. Lancaster Ave., Shillington, PA 19607		Leased
795 E. Lancaster Ave., Villanova, PA 19085		Leased
849 Paoli Pk., West Chester, PA 19380		Leased
436 Egypt Rd., West Norriton, PA 19428		Leased
155 York Rd., Willow Grove, PA 19046		Leased
1000 Rocky Run Parkway, Wilmington, DE 19803		Leased
Life Care Community Offices (Banking Segment):
10000 Shannondell Dr., Audubon, PA 19403		Leased
404 Cheswick Pl., Bryn Mawr, PA 19010		Leased
601 N. Ithan Ave., Bryn Mawr, PA 19010		Leased
1400 Waverly Rd., Gladwyne, PA 19035		Leased
3300 Darby Rd., Haverford, PA 19041		Leased
11 Martins Run, Media, PA 19063		Leased
535 Gradyville Rd., Newtown Square, PA 19073		Leased
1615 E. Boot Rd., West Chester, PA 19380		Leased
Limited Service Branches (Banking Segment):
20 Montchanin Rd., Suite 185 Greenville, DE 19807**		Leased
20 Nassau St., 100A, Princeton, NJ		Leased
Other Administrative Offices (Banking and Wealth Management Segments)
10 S. Bryn Mawr Ave., Bryn Mawr, PA 19010***		Owned
322 E. Lancaster Ave., Wayne, PA 19087		Owned
2, 6 S. Bryn Mawr Ave., Bryn Mawr, PA 19010		Leased
4093 W. Lincoln Hwy., Exton, PA 19341**		Leased
16 Campus Blvd., Newtown Square, PA 19073**		Leased
1 West Chocolate Ave., Hershey, PA 17033***		Leased
620 W. Germantown Pk., Plymouth Mtg, PA 19462**		Leased
20 North Waterloo Rd., Devon PA 19380***		Leased

 

 

15 Garrett Ave, Rosemont, PA 19010****		Leased
14 E Highland Ave., Philadelphia, PA 19118****		Leased
47 Hulfish St. 400, Princeton, NJ***		Leased
115 West Ave., Jenkintown, PA		Leased
3411 Silverside Rd., #103 Springer, Wilmington, DE		Leased
Subsidiary Offices (Wealth Management Segment):
Lau Associates - 20 Montchanin Rd., Suite 110, Greenville, DE 19087		Leased
BMTC-DE - 20 Montchanin Rd., Suite 100 Greenville, DE 19807		Leased

 

   *     Corporate headquarters and executive offices

 **     Lending office

***    Wealth Management office

**** Insurance Agency

 

 

ITEM  3.

LEGAL PROCEEDINGS

 

On April 11, 2017, Paul Parshall, a purported shareholder of Royal Bancshares of Pennsylvania, Inc., filed a purported class action lawsuit (the “Parshall lawsuit”) in the U.S. District Court for the Eastern District of Pennsylvania (the “Court’) against RBPI and the Corporation.  Mr. Parshall alleged that the Corporation, as a “control person” of RBPI, should be liable for what he claimed to be inadequate disclosures in the proxy statement/prospectus RBPI sent to its shareholders in connection with soliciting approval of the Corporation’s acquisition of RBPI.  Mr. Parshall did not articulate any monetary damages in his complaint, but sought the right to prevent the Corporation’s acquisition of RBPI (or in the alternative, if it does proceed, rescind it or award rescissory damages), an order for an amended proxy statement/prospectus, a declaratory judgment that the defendants, including the Corporation, violated federal securities laws, and unspecified attorney's fees and litigation costs.  On September 28, 2017, the Court approved a joint stipulation dismissing as “moot” the Parshall lawsuit with prejudice as to Mr. Parshall’s claims and without prejudice as to the putative class.  Management considers this matter closed.

 

The information required by this Item is set forth in the “Legal Matters” discussion in Note 23, “Contingencies” in the Notes to the Consolidated Financial Statements, which is included in Item 8 of this Report, and which is incorporated herein by reference in response to this Item.

 

ITEM  4.

MINE SAFETY DISCLOSURES

 

Not Applicable.

 

 PART II

 

ITEM  5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Corporation’s common stock is traded on the NASDAQ Stock Market under the symbol BMTC. As of February 23, 2018 there were 763 holders of record of the Corporation’s common stock.

 

The following table sets forth the range of high and low sales prices for the common stock for each full quarterly period within the two most recent fiscal years as well as the quarterly dividends paid.

 

		2017												2016
		High				Low				Dividend Declared				High				Low				Dividend Declared
1st Quarter		$	42.60			$	36.80			$	0.21			$	29.18			$	23.92			$	0.20
2nd Quarter		$	43.85			$	38.50			$	0.21			$	30.53			$	24.83			$	0.20
3rd Quarter		$	44.40			$	38.75			$	0.22			$	32.50			$	28.13			$	0.21
4th Quarter		$	46.55			$	41.40			$	0.22			$	42.45			$	29.50			$	0.21

 

The information regarding dividend restrictions is set forth in Note 24 – “Dividend Restrictions” in the accompanying Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

 

 

•

Comparison of Cumulative Total Return Chart

 

The following chart compares the yearly percentage change in the cumulative shareholder return on the Corporation’s common stock during the five years ended December 31, 2017, with (1) the Total Return of the NASDAQ Community Bank Index; (2) the Total Return of the NASDAQ Market Index; (3) the Total Return of the SNL Bank and Thrift Index; and (4) the Total Return of the SNL Mid-Atlantic Bank Index. This comparison assumes $100.00 was invested on December 31, 2012, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends.

 

 

 

 

 

Five Year Cumulative Return Summary
		As of December 31,
		2012				2013				2014				2015				2016				2017
Bryn Mawr Bank Corporation		$	100.00			$	139.27			$	148.16			$	139.62			$	210.83			$	225.62
NASDAQ Community Bank Index		$	100.00			$	141.68			$	148.28			$	162.44			$	225.41			$	231.20
NASDAQ Market Index		$	100.00			$	140.12			$	160.78			$	171.97			$	187.22			$	242.71
SNL Bank and Thrift		$	100.00			$	136.92			$	152.85			$	155.94			$	196.86			$	231.49
SNL Mid-Atlantic Bank		$	100.00			$	134.79			$	146.85			$	152.36			$	193.66			$	237.34

 

•

Equity Compensation Plan Information

 

The information set forth under the caption “Equity Plan Compensation Information” in the 2018 Proxy Statement is incorporated by reference herein. Additionally, equity compensation plan information is incorporated by reference to Item 12 of this Annual Report on Form 10-K. Additional information regarding the Corporation’s equity compensation plans can be found at Note 20 – “Stock-Based Compensation” in the accompanying Notes to Consolidated Financial Statements found in this Annual Report on Form 10-K.

 

 

•   Issuer Purchases of Equity Securities

 

The following tables present the repurchasing activity of the Corporation during the fourth quarter of 2017:

 

Shares Repurchased in the 4^th Quarter of 2017

 

Period:		Total Number  of Shares Purchased				Average Price Paid per  Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs(1)
Oct. 1, 2017 – Oct. 31, 2017(2)			610			$	44.65				—				189,300
Nov. 1, 2017 – Nov. 30, 2017			—				—				—				189,300
Dec. 1, 2017 – Dec. 31, 2017(3)			400			$	44.36				—				189,300
Total			1,010			$	44.54				—				189,300

 

(1)

On August 6, 2015, the Corporation announced a stock repurchase program (the “2015 Program”) under which the Corporation may repurchase up to 1,200,000 shares of the Corporation’s common stock, at an aggregate purchase price not to exceed $40 million. There is no expiration date on the 2015 Program and the Corporation has no plans for an early termination of the 2015 Program. During the three months ended December 31, 2017, no repurchases occurred under the 2015 Program. As of December 31, 2017, the maximum number of shares remaining authorized for repurchase under the 2015 Program was 189,300.

(2)	On October 5, 2017, 610 shares were purchased to cover statutory tax withholding requirements on vested stock awards for certain officers of the Corporation.

(3)	On December 29, 2017, 400 were purchased by the Corporation’s deferred compensation plans through open market transactions.

 

 

ITEM  6.

SELECTED FINANCIAL DATA

 

 

Earnings		As of or for the Twelve Months Ended December 31,
(dollars in thousands)		2017				2016				2015				2014				2013
Interest income		$	129,559			$	116,991			$	108,542			$	82,906			$	78,417
Interest expense			14,432				10,755				8,415				6,078				5,427
Net interest income			115,127				106,236				100,127				76,828				72,990
Provision for loan and lease losses			2,618				4,326				4,396				884				3,575
Net interest income after provision for loan and lease losses			112,509				101,910				95,731				75,944				69,415
Non-interest income			59,132				53,968				55,785				48,223				48,283
Non-interest expense			114,395				101,674				125,590				81,319				80,668
Income before income taxes			57,246				54,204				25,926				42,848				37,030
Income taxes			34,230				18,168				9,172				15,005				12,586
Net Income		$	23,016			$	36,036			$	16,754			$	27,843			$	24,444
Per Share Data
Weighted-average shares outstanding			17,150,125				16,859,623				17,488,325				13,566,239				13,311,215
Dilutive potential Common Stock			248,798				168,499				267,996				294,801				260,395
Adjusted weighted-average shares			17,398,923				17,028,122				17,756,321				13,861,040				13,571,610
Earnings per common share:
Basic		$	1.34			$	2.14			$	0.96			$	2.05			$	1.84
Diluted		$	1.32			$	2.12			$	0.94			$	2.01			$	1.80
Dividends declared		$	0.86			$	0.82			$	0.78			$	0.74			$	0.69
Dividends declared per share to net income per basic common share			59.79	%			38.3	%			81.3	%			36.1	%			37.5	%
Shares outstanding at year end			20,161,395				16,939,715				17,071,523				13,769,336				13,650,354
Book value per share		$	26.19			$	22.50			$	21.42			$	17.83			$	16.84
Tangible book value per share		$	15.98			$	15.11			$	13.89			$	13.59			$	13.02
Profitability Ratios
Tax-equivalent net interest margin			3.69	%			3.76	%			3.75	%			3.93	%			3.98	%
Return on average assets			0.67	%			1.16	%			0.57	%			1.32	%			1.23	%
Return on average equity			5.76	%			9.75	%			4.49	%			11.56	%			11.53	%
Non-interest expense to net interest income and non-interest income			65.6	%			63.5	%			80.6	%			65.0	%			66.5	%
Non-interest income to net interest income and non-interest income			33.9	%			33.7	%			35.8	%			38.6	%			39.8	%
Average equity to average total assets			11.69	%			11.90	%			12.68	%			11.38	%			10.63	%
Financial Condition
Total assets		$	4,449,720			$	3,421,530			$	3,030,997			$	2,246,506			$	2,061,665
Total liabilities			3,921,601				3,040,403				2,665,286				2,001,032				1,831,767
Total shareholders’ equity			528,119				381,127				365,711				245,474				229,898
Interest-earning assets			4,039,763				3,153,015				2,755,506				2,092,164				1,905,398
Portfolio loans and leases			3,285,858				2,535,425				2,268,988				1,652,257				1,547,185
Investment securities			701,744				573,763				352,916				233,473				289,245
Goodwill			179,889				104,765				104,765				35,502				32,843
Intangible assets			25,966				20,405				23,903				22,998				19,365
Deposits			3,373,798				2,579,675				2,252,725				1,688,028				1,591,347
Borrowings			496,837				423,425				378,509				283,970				216,535
Wealth assets under management, administration, supervision and brokerage			12,968,738				11,328,457				8,364,805				7,699,908				7,268,273
Capital Ratios
Tier I leverage ratio (Tier I capital to total quarterly average assets)			10.04	%			8.73	%			9.02	%			9.54	%			9.29	%
Tier I capital to risk weighted assets			10.36	%			10.51	%			10.72	%			12.00	%			11.57	%
Total regulatory capital to risk weighted assets			13.85	%			12.35	%			12.61	%			12.87	%			12.55	%
Asset quality
Allowance as a percentage of portfolio loans and leases			0.53	%			0.69	%			0.70	%			0.88	%			1.00	%
Non-performing loans and leases as a % of portfolio loans and leases			0.26	%			0.33	%			0.45	%			0.61	%			0.68	%

 

 

Information related to business combinations and accounting changes may be found under the captions “Summary of Significant Accounting Policies – Nature of Business” at Note 1-A and “Recent Accounting Pronouncements” at Note 1-W, respectively, in the accompanying Notes to Consolidated Financial Statements found in this Annual Report on Form 10-K.

 

ITEM  7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS (“MD&A”)

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Brief History of the Corporation

---

The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the “Corporation”) was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation and its subsidiaries offer a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 37 full-service branches, eight limited-hour retirement community offices, two limited-service branches, six wealth management offices and a full-service insurance agency located throughout Montgomery, Delaware, Chester, Philadelphia, Berks, and Dauphin counties in Pennsylvania, Mercer and Camden counties of New Jersey, and New Castle county in Delaware. The common stock of the Corporation trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.

 

The Corporation operates in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. The Corporation and its subsidiaries are regulated by many agencies including the Securities and Exchange Commission (“SEC”), NASDAQ, Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania Department of Banking and Securities. The goal of the Corporation is to become the preeminent community bank and wealth management organization in the Philadelphia area.

 

Since January 1, 2010, the Corporation and Bank completed the following nine acquisitions:

 

●

Royal Bancshares of Pennsylvania, Inc. (“RBPI”) – December 15, 2017 (the “RBPI Merger”)

●

Harry R. Hirshorn & Company, Inc. (“Hirshorn”) – May 24, 2017

●

Robert J. McAllister Agency, Inc. (“RJM”) – April 1, 2015

●

Continental Bank Holdings, Inc. (“CBH”) – January 1, 2015 (the “CBH Merger”)

●

Powers Craft Parker and Beard, Inc. (“PCPB”) – October 1, 2014

●

First Bank of Delaware (“FBD”) – November 17, 2012

●

Davidson Trust Company (“DTC”) – May 15, 2012

●

The Private Wealth Management Group of the Hershey Trust Company (“PWMG”) – May 11, 2011

●

First Keystone Financial, Inc. (“FKB”) – July 1, 2010

 

For a more complete discussion regarding certain of these acquisitions, see Item 1 – Business at page 1 in this Form 10-K.

 

Results of Operations

 

The following is management’s discussion and analysis of the significant changes in the financial condition, results of operations, capital resources and liquidity presented in the accompanying Consolidated Financial Statements. The Corporation’s consolidated financial condition and results of operations are comprised primarily of the Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future. For more information on the factors that could affect performance, see “Special Cautionary Notice Regarding Forward Looking Statements” immediately following the index at the beginning of this document.

 

 

Critical Accounting Policies, Judgments and Estimates

---

The accounting and reporting policies of the Corporation and its subsidiaries conform to U.S. generally accepted accounting principles (“GAAP”). All inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous years' consolidated financial statements to the current year’s presentation. In preparing the Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates.

 

 

The Allowance for Loan and Lease Losses (the “Allowance”)

 

The Allowance involves a higher degree of judgment and complexity than other significant accounting policies. The Allowance is estimated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses present in the loan portfolio as of the reporting date. Management’s determination of the adequacy of the Allowance is based on frequent evaluations of the loan and lease portfolio and other relevant factors. Consideration is given to a variety of factors in establishing the estimate. Quantitative factors in the form of historical charge-off history by portfolio segment are considered. In connection with these quantitative factors, management establishes what it deems to be an adequate look-back period (“LBP”) for the charge-off history. As of December 31, 2017, management utilized a five-year LBP, which it believes adequately captures the trends in charge-offs. In addition, management develops an estimate of a loss emergence period (“LEP”) for each segment of the loan portfolio. The LEP estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan. As of December 31, 2017, management utilized a two-year LEP for its commercial loan segments and a one-year LEP for its consumer loan segments based on analyses of actual charge-offs tracked back in time to the triggering event for the eventual loss. In addition, various qualitative factors are considered, including specific terms and conditions of loans and leases, underwriting standards, delinquency statistics, industry concentration, overall exposure to a single customer, adequacy of collateral, the dependence on collateral, and results of internal loan review, including a borrower’s perceived financial and management strengths, the amounts and timing of the present value of future cash flows, and the access to additional funds. It should be noted that this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amounts and timing of expected cash flows on impaired loans and leases, the value of collateral, estimated losses on consumer loans and residential mortgages and the relevance of historical loss experience. The process also considers economic conditions and inherent risks in the loan and lease portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provision for loan and lease losses (the “Provision”) may be required that would adversely impact earnings in future periods. See the section of this document titled Asset Quality and Analysis of Credit Risk for additional information.

 

Fair Value Measurement of Investment Securities Available-for-Sale and Assessment for Impairment of Certain Investment Securities

 

Management may designate its investment securities as held-to-maturity, available-for-sale or trading. Each of these designations affords different treatment for changes in the fair market values of investment securities in the Corporation’s Consolidated Financial Statements that are otherwise identical. Should evidence emerge which indicates that management’s intent or ability to maintain the securities as originally designated is not supported, reclassifications among the three designations may be necessary and, as a result, may require adjustments to the Corporation’s Consolidated Financial Statements. As of December 31, 2017, the Corporation’s investment portfolio was primarily comprised of investment securities classified as available for sale.

 

Valuation of Goodwill and Intangible Assets

 

Goodwill and intangible assets have been recorded on the books of the Corporation in connection with its acquisitions. Management completes a goodwill impairment analysis at least on an annual basis, or more often if events and circumstances indicate that there may be impairment. Management also completes an annual impairment test for other intangible assets, or more often, if events and circumstances indicate a possible impairment. During 2016, management made a voluntary change in the method of applying an accounting principle related to the timing of the annual goodwill impairment assessment from December 31st to October 31st based on the time-intensive nature of the goodwill impairment assessment. Management does not consider this change in impairment testing date to be a material change in application of an accounting principle. There was no goodwill impairment recorded during the twelve-month periods ended December 31, 2017, 2016 or 2015. There was no impairment of identifiable intangible assets during the twelve-month periods ended December 31, 2017 or 2016. For the twelve-month period ended December 31, 2015, a $387 thousand impairment related to a favorable lease asset was incurred. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.

 

Other significant accounting policies are presented in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements. The Corporation’s accounting policies have not substantively changed any aspect of its overall approach in the application of the foregoing policies.

 

 

Overview of General Economic, Regulatory and Governmental Environment

---

Domestic economic growth in the U.S. accelerated in the middle two quarters of 2017, after a slow start to the year. U.S. Real GDP grew by +3.2% in the third quarter, after a growth level of +3.1% in the second quarter. On a preliminary basis, Real GDP grew at +2.6% in the fourth quarter of 2017, with forecasts for faster growth in the first half of 2018.

 

At the Federal Open Market Committee’s last meeting of 2017 on December 12-13, the Federal Reserve raised the target range for the federal funds rate by 0.25% to a range of 1.25% - 1.50%, as expected. On January 31 of this year, the FOMC completed its first two-day meeting of 2018 and delivered a more hawkish tone in its statement concerning growth and inflation. Currently, Fed Funds futures are implying that the Fed will raise short term rates three times over the course of the year.

 

 

With monetary policy turning less accommodative, fiscal policy has become more supportive of growth. H.R.1, or the “Tax Cuts and Jobs Act” (“Tax Reform”) was signed into law by President Trump on December 22, 2017, and became effective on January 1, 2018. The legislation is designed to lower both corporate and individual income rates, with the dual goals of making U.S. corporations more competitive globally with a less onerous tax structure, as well as providing U.S. individual taxpayers with more after-tax discretionary income.

 

Financial markets entered 2018, with the major stock market indices registering new highs and interest rates, both at the short and long ends of the yield curve, rising. Fundamental drivers of financial asset prices remain very strong. However, we believe that volatility will run at a higher level this year versus 2017.

 

 

Executive Overview

---

The following Executive Overview provides a summary-level review of the results of operation for 2017 compared to 2016 and 2016 compared to 2015 as well as a comparison of the December 31, 2017 balance sheet as compared to the December 31, 2016 balance sheet. More detailed information regarding these comparisons can be found in the sections that follow.

 

2017 Compared to 2016

 

Income Statement

 

The Corporation reported net income of $23.0 million or $1.32 diluted earnings per share for the twelve months ended December 31, 2017, as compared to $36.0 million, or $2.12 diluted earnings per share, for the same period in 2016. Return on average equity ("ROE") and return on average assets ("ROA") for the twelve months ended December 31, 2017, were 5.76% and 0.67%, respectively, as compared to 9.75% and 1.16%, respectively, for the same period in 2016. The primary cause for the $13.0 million decrease in net income was the one-time income tax charge of $15.2 million recorded for the re-measurement of the Corporation’s net deferred tax asset. The re-measurement was required as a result of the passage of Tax Reform signed into law on December 22, 2017, which lowered the top federal corporate income tax rate from 35% to 21%. In addition to this one-time tax charge, due diligence, merger-related and merger integration costs increased by $6.1 million year over year primarily related to the RBPI Merger.

 

Average loans and investments increased $309.1 million over the prior year driving a $12.8 million increase in tax-equivalent interest income. Average interest-bearing deposits and borrowings increased $210.6 million contributing to a $3.7 million increase in interest expense over the prior year. The tax-equivalent yield earned on loans for the twelve months ended December 31, 2017 decreased one basis point from the same period in 2016, while the tax-equivalent yield in available for sale investments increased 24 basis points over the same period. The rate paid on interest-bearing deposits and borrowings also increased by twelve and six basis points, respectively.

 

For the twelve months ended December 31, 2017, the Provision of $2.6 million was a $1.7 million decrease from the $4.3 million recorded for the same period in 2016. Slightly lower net loan and lease charge-offs for 2017 as compared to 2016, combined with stable credit quality and improvements in certain qualitative indicators which factor into the calculation of the Allowance, accounted for the decrease in Provision.

 

Non-interest income for the twelve months ended December 31, 2017 was $59.1 million, a $5.2 million increase from the same period in 2016. An increase of $2.0 million in fees for wealth management services resulted as wealth assets under management, administration, supervision and brokerage increased $1.64 billion from December 31, 2016 to December 31, 2017. Insurance revenue increased $867 thousand for the twelve months ended December 31, 2017 as compared to the same period in 2016, due to the May 2017 acquisition of Hirshorn Boothby. Revenue from our capital markets initiative, which was launched in the second quarter of 2017, contributed $2.4 million to non-interest income for the twelve-months ended December 31, 2017. These increases were partially offset by a $607 thousand decrease in net gain on sale of loans.

 

Non-interest expense for the twelve months ended December 31, 2017, was $114.4 million, an increase of $12.7 million, as compared to the same period in 2016. The increase was largely related to a $6.1 million increase in due diligence and merger-related expenses primarily related to the RBPI Merger. A $5.8 million increase in salaries and wages was largely due to staffing increases from our capital markets initiative, the Hirshorn Boothby acquisition and the Princeton wealth management office and to a smaller extent, the December 15, 2017 RBPI Merger. Annual salary and wage increases and increases in incentive compensation also contributed to the increase.

 

 

Balance Sheet

 

Asset quality as of December 31, 2017 is stable, with nonperforming loans and leases comprising 0.26% of portfolio loans as compared to 0.33% of portfolio loans as of December 31, 2016. The Allowance of $17.5 million was 0.53% of portfolio loans and leases as of December 31, 2017, as compared to $17.5 million, or 0.69% of portfolio loans and leases, at December 31, 2016. The 16 basis point decrease in the Allowance as a percentage of portfolio loans was primarily related to the addition of $570.4 million of loans acquired in the RBPI Merger, for which no Allowance was carried-over in acquisition. These acquired loans were recorded at fair value, which considers an estimate of lifetime credit losses, and therefore excludes the loans, initially, from the requirement for an Allowance.

 

Total portfolio loans and leases of $3.29 billion as of December 31, 2017 increased $750.4 million, or 29.6%, from $2.54 billion as of December 31, 2016. As noted previously, this increase includes $570.4 million of loans acquired in the RBPI Merger.

 

The Corporation’s available for sale investment portfolio was $689.2 million as compared to $567.0 million at December 31, 2016. The $122.2 million increase in available for sale investments over the period was the result of purchases made during 2017 in anticipation of the RBPI Merger and the immediate sale of the acquired investment portfolio.

 

Deposits of $3.37 billion, as of December 31, 2017, increased $794.1 million from December 31, 2016. The RBPI Merger added $593.2 million of deposits. The portion of the deposits in the noninterest-bearing category was 27.4% of total deposits.

 

Wealth Assets

 

Wealth assets under management, administration, supervision and brokerage increased to $12.97 billion as of December 31, 2017, an increase of $1.64 billion from $11.33 billion as of December 31, 2016. The increase in wealth assets was comprised of a $582 million increase in account balances whose fees are based on market value, and a $1.06 billion increase in fixed rate flat-fee account balances.

 

2016 Compared to 2015

 

Income Statement

 

The Corporation reported net income of $36.0 million or $2.12 diluted earnings per share for the twelve months ended December 31, 2016, as compared to $16.8 million, or $0.94 diluted earnings per share, for the same period in 2015. Return on average equity ("ROE") and return on average assets ("ROA") for the twelve months ended December 31, 2016, were 9.75% and 1.16%, respectively, as compared to 4.49% and 0.57%, respectively, for the same period in 2015. The increase in net income for the twelve months ended December 31, 2016, as compared to the same period in 2015, was largely related to the $17.4 million pre-tax loss on the settlement of the corporate pension plan, which was recorded for the twelve months ended December 31, 2015. In addition to the absence of the pension settlement charge, net interest income for the twelve months ended December 31, 2016 increased by $6.1 million and due diligence, merger-related and merger integration expenses decreased by $6.7 million from the same period in 2015.

 

The $6.2 million increase in the Corporation’s tax-equivalent net interest income for the twelve months ended December 31, 2016, as compared to the same period in 2015, was related to a $268.8 million increase in average loans offset by a $117.8 million decrease in interest-earning deposits with other banks. This redeployment of low-yielding cash on deposit with other banks to higher yielding loans resulted in an $8.2 million increase in tax-equivalent interest income. The tax-equivalent yield earned on loans for the twelve months ended December 31, 2016 was 4.57%, while the tax-equivalent yield earned on interest-earning deposits with other banks was only 0.39%. Partially offsetting the increase in average loans, average interest-bearing deposits increased by $86.4 million, accompanied by an eight basis point increase in rate paid on deposits. Average long-term Federal Home Loan Bank (“FHLB”) advances and other borrowings decreased by $29.0 million between the twelve month periods ended December 31, 2015 and 2016 as the inflow of deposits during 2016 alleviated the need to increase borrowings to support loan growth.

 

For the twelve months ended December 31, 2016, the Provision of $4.3 million was virtually unchanged from the $4.4 million recorded for the same period in 2015. Net loan and lease charge offs for the twelve months ended December 31, 2016 totaled $2.7 million, a decrease of $428 thousand from the same period in 2015.

 

Non-interest income for the twelve months ended December 31, 2016 was $54.0 million, a $1.8 million decrease from the same period in 2015. Decreases of $1.0 million in gain on sale of available for sale investment securities, $319 thousand in dividends on FHLB and Federal Reserve Bank (“FRB”) stocks and $204 thousand in fees for wealth management services were the primary contributors to this decrease.

 

 

Non-interest expense for the twelve months ended December 31, 2016, was $101.7 million, a decrease of $23.9 million, as compared to the same period in 2015. The primary causes of this decrease were the absences of the $17.4 million loss on settlement of the corporate pension and the $6.7 million in due diligence, merger-related and merger integration costs recorded in 2015. Partially offsetting these improvements were increases of $2.8 million and $679 thousand in salaries and wages and furniture, fixtures and equipment, respectively.

 

Balance Sheet

 

Asset quality as of December 31, 2016 was stable, with nonperforming loans and leases comprising 0.33% of portfolio loans as compared to 0.45% of portfolio loans as of December 31, 2015. The Allowance of $17.5 million was 0.69% of portfolio loans and leases as of December 31, 2016, as compared to $15.9 million, or 0.70% of portfolio loans and leases, at December 31, 2015. The relatively unchanged level of Allowance reflects the continued strength of credit quality in the loan portfolio.

 

Total portfolio loans and leases of $2.54 billion as of December 31, 2016 increased $266.4 million, or 11.7%, from $2.27 billion as of December 31, 2015.

 

The Corporation’s available for sale investment portfolio as of December 31, 2016 had a fair value of $567.0 million, as compared to $349.0 million at December 31, 2015. Largely responsible for the increase was the purchase, in December 2016, of $200 million of short-term treasury bills.

 

Deposits of $2.58 billion, as of December 31, 2016, increased $327.0 million from December 31, 2015. One third of the increase in deposits was in the non-interest-bearing segment of the portfolio.

 

Wealth Assets

 

Wealth assets under management, administration, supervision and brokerage increased to $11.33 billion as of December 31, 2016, an increase of $2.96 billion from $8.36 billion as of December 31, 2015. Approximately two-thirds of the increase in assets was in flat-fee or fixed-fee accounts.

 

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;

●

Non-Interest 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;

●

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

●

Income Tax Expense, which include state and federal jurisdictions.

 

 

Net Interest Income

---

Rate/Volume Analyses (Tax-equivalent Basis)*

 

The rate volume analysis in the table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the years 2017 as compared to 2016, and 2016 as compared to 2015, allocated by rate and volume. The change in interest income / expense due to both volume and rate has been allocated to changes in volume.

 

		Year Ended December 31,
(dollars in thousands)		2017 Compared to 2016												2016 Compared to 2015
increase/(decrease)		Volume				Rate				Total				Volume				Rate				Total
Interest Income:
Interest-bearing deposits with banks		$	(35	)		$	41			$	6			$	(300	)		$	59			$	(241	)
Investment securities - taxable			1,427				1,018				2,445				213				373				586
Investment securities -nontaxable			(216	)			49				(167	)			(19	)			20				1
Loans and leases			10,733				(267	)			10,466				12,636				(4,418	)			8,218
Total interest income			11,909				841				12,750				12,530				(3,966	)			8,564
Interest expense:
Savings, NOW and market rate accounts			161				643				804				167				—				167
Wholesale deposits			186				639				825				192				276				468
Retail time deposits			500				786				1,286				48				938				986
Borrowed funds – short-term			226				1,071				1,297				1				44				45
Borrowed funds – long-term			(971	)			238				(733	)			(404	)			203				(201	)
Subordinated notes			182				(30	)			152				864				11				875
Junior subordinated debentures			46				—				46				—				—				—
Total interest expense			330				3,347				3,677				868				1,472				2,340
Interest differential		$	11,579			$	(2,506	)		$	9,073			$	11,662			$	(5,438	)		$	6,224

 

* The tax rate used in the calculation of the tax-equivalent income is 35%.

 

 

Analysis of Interest Rates and Interest Differential

 

The table below presents the major asset and liability categories on an average daily basis for the periods presented, along with tax-equivalent interest income and expense and key rates and yields:

 

		For the Year Ended December 31,
		2017												2016												2015
(dollars in thousands)		Average Balance				Interest Income/ Expense				Average Rates Earned/ Paid				Average Balance				Interest Income/ Expense				Average Rates Earned/ Paid				Average Balance				Interest Income/ Expense				Average Rates Earned/ Paid
Assets:
Interest-bearing deposits with banks		$	34,122			$	174				0.51	%		$	43,214			$	168				0.39	%		$	161,032			$	409				0.25	%
Investment securities - available for sale:
Taxable			409,813				8,229				2.01	%			329,161				5,784				1.76	%			315,741				5,124				1.62	%
Tax –Exempt			27,062				575				2.12	%			38,173				742				1.94	%			39,200				741				1.89	%
Total investment securities – available for sale			436,875				8,804				2.02	%			367,334				6,526				1.78	%			354,941				5,865				1.65	%
Investment securities – held to maturity			5,621				4				0.07	%			2,060				4				0.19	%			—				—				—
Investment securities – trading			4,185				2				0.05	%			3,740				2				0.05	%			3,881				80				2.06	%
Loans and leases(1)(2)(3)			2,664,944				121,391				4.56	%			2,429,416				110,925				4.57	%			2,160,628				102,707				4.75	%
Total interest-earning assets			3,145,747				130,375				4.14	%			2,845,764				117,625				4.13	%			2,680,482				109,061				4.07	%
Cash and due from banks			13,293												16,317												17,615
Allowance for loan and lease losses			(17,181	)											(17,159	)											(15,099	)
Other assets			274,287												260,728												259,515
Total assets		$	3,416,146											$	3,105,650											$	2,942,513
Liabilities:
Savings, NOW, and market rate accounts		$	1,383,560			$	3,289				0.24	%		$	1,292,228			$	2,485				0.19	%		$	1,249,567			$	2,318				0.19	%
Wholesale deposits			188,179				2,065				1.10	%			163,724				1,240				0.76	%			130,773				772				0.59	%
Time deposits			330,797				3,394				1.03	%			266,772				2,108				0.79	%			255,961				1,122				0.44	%
Total interest-bearing deposits			1,902,536				8,748				0.46	%			1,722,724				5,833				0.34	%			1,636,301				4,212				0.26	%
Short-term borrowings			128,008				1,390				1.09	%			37,041				93				0.25	%			36,010				48				0.13	%
Long-term FHLB advances			161,004				2,620				1.63	%			225,815				3,353				1.48	%			254,828				3,554				1.39	%
Subordinated notes			33,153				1,628				4.91	%			29,503				1,476				5.00	%			12,013				601				5.00	%
Junior subordinated debt			997				46				4.61	%			—				—				—				—				—				—
Total interest-bearing liabilities			2,225,698				14,432				0.65	%			2,015,083				10,755				0.53	%			1,939,152				8,415				0.43	%
Non-interest-bearing deposits			751,069												687,134												594,122
Other liabilities			40,109												33,904												36,151
Total non-interest-bearing liabilities			791,178												721,038												630,273
Total liabilities			3,016,876												2,736,121												2,569,425
Shareholders’ equity			399,270												369,529												373,088
Total liabilities and shareholders’ equity		$	3,416,146											$	3,105,650											$	2,942,513
Net interest spread											3.49	%											3.60	%											3.64	%
Effect of non-interest-bearing sources											0.20	%											0.16	%											0.11	%
Net interest income/margin on earning assets						$	115,943				3.69	%						$	106,870				3.76	%						$	100,646				3.75	%
Tax-equivalent adjustment (tax rate 35%)						$	816				0.03	%						$	634				0.02	%						$	519				0.02	%

 

(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 $947, $522 and $424 for the years ended December 31, 2017, 2016 and 2015, respectively.

 

 

Tax-Equivalent Net Interest Income and Margin – 2017 Compared to 2016

 

Tax-equivalent net interest income increased $9.1 million while net interest margin decreased seven basis point to 3.69% for the twelve months ended December 31, 2017. The $10.5 million increase in tax-equivalent interest income on loans was primarily volume-driven, with average loans increasing $235.5 million year over year with yields remaining relatively flat. Tax-equivalent interest income on available for sale securities increased $2.3 million over the prior year as average available for sale investment securities increased $69.5 million and experienced a 24 basis point increase in tax-equivalent yield.

 

Average interest-bearing deposits increased $179.8 million accompanied by a twelve basis point increase in the rate paid on these deposits. Average borrowings increased $30.8 million with an eight basis point increase in rates paid. The increases in average interest-bearing deposits and borrowings along with the increase in related rates paid corresponded to a $3.7 million increase in interest expense over the prior period. The contribution to the tax-equivalent net interest margin from the accretion of purchase accounting adjustments was lower in 2017 than 2016, adding seven basis points in 2017 as compared to 13 basis points in 2016.

 

 

Tax-Equivalent Net Interest Income and Margin – 2016 Compared to 2015

 

The tax-equivalent net interest margin increased 1 basis point to 3.76% for the twelve months ended December 31, 2016, as compared to 3.75%, for the same period in 2015. The effect on interest income of the $268.8 million increase in average loans between periods was partially offset by an 18 basis point decrease in tax-equivalent yield earned on loans and leases between periods. On the liability side, the $86.4 million increase in average interest-bearing deposits, accompanied by an 8 basis point increase in rate paid on deposits and the $29.0 million decrease in long-term FHLB advances and other borrowings whose rate paid increased by 9 basis points, combined to offset the margin improvement from the asset growth. The contribution to the tax-equivalent net interest margin from the accretion of purchase accounting adjustments was lower in 2016 than 2015, adding 13 basis points in 2016 as compared to 18 basis points in 2016.

 

Tax-equivalent net interest income for the twelve months ended December 31, 2016 of $106.9 million, was $6.2 million higher than the tax-equivalent net interest income of $100.6 million for the same period in 2015. The primary driver for the increase in tax-equivalent net interest income was the volume increase in average loans and leases, partially offset by a yield decrease, which added $8.2 million in interest income. The impact of this loan growth was partially offset by a volume increase and an increase in rate paid for interest-bearing deposits, which decreased tax-equivalent net interest income by $1.6 million.

 

 

Tax-Equivalent Net Interest Margin – Quarterly Comparison

 

The tax-equivalent net interest margin and related components for the past five quarters are shown in the table below:

 

Quarter		Year		Earning-Asset Yield				Interest- Bearing Liability Cost				Net Interest Spread				Effect of Non- Interest- Bearing Sources				Tax-Equivalent Net Interest Margin
4th		2017			4.15	%			0.74	%			3.41	%			0.21	%			3.62	%
3rd		2017			4.18	%			0.67	%			3.51	%			0.20	%			3.71	%
2nd		2017			4.11	%			0.61	%			3.50	%			0.18	%			3.68	%
1st		2017			4.14	%			0.56	%			3.58	%			0.16	%			3.74	%
4th		2016			4.05	%			0.56	%			3.49	%			0.16	%			3.65	%

 

 

Interest Rate Sensitivity

 

Management actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The Corporation’s Asset Liability Committee (“ALCO”), using policies and procedures approved by the Corporation’s Board of Directors, is responsible for the management of the Corporation’s interest rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities. This is accomplished through the management of the investment portfolio, the pricings of loans and deposit offerings and through wholesale funding. Wholesale funding is available from multiple sources including borrowings from the FHLB, the Federal Reserve Bank of Philadelphia’s discount window, federal funds from correspondent banks, certificates of deposit from institutional brokers, Certificate of Deposit Account Registry Service (“CDARS”), Insured Network Deposit (“IND”) Program, Charity Deposits Corporation (“CDC”) (formerly known as Institutional Deposit Corporation (“IDC”)), Insured Cash Sweep (“ICS”) and Pennsylvania Local Government Investment Trust (“PLGIT”).

 

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

 

The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock”, in the yield curve and subjective adjustments in deposit pricing, might have on management’s projected net interest income over the next 12 months.

 

This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next twelve months. By definition, the simulation is 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 December 31, 2017								Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2016
		Amount				Percentage				Amount				Percentage
+300 basis points		$	15,953				10.66	%		$	10,207				9.01	%
+200 basis points		$	10,644				7.11	%		$	6,653				5.87	%
+100 basis points		$	5,316				3.55	%		$	3,048				2.69	%
-100 basis points		$	(6,913	)			(4.62	%)		$	(4,397	)			(3.88	%)

 

 

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of December 31, 2017 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 December 31, 2017 than it was as of December 31, 2016. This increase in sensitivity is related to a decrease in cash balances, an increase in floating rate loans, the issuance of subordinated debt which has a fixed rate for five years, and an increase in fixed rate certificates of deposit. The magnitude of the change in net interest income resulting from a 100 basis point decrease in rates as compared to the magnitude of the increase in net income accompanying a 100 basis point increase in rates is the result of the ability to decrease loan rates to more of a degree than deposits rates in a down 100 basis point rate shift.

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 uncertain economic environment and the current extended period of very low interest rates, the reliability of management’s assumptions in the interest rate simulation model is more uncertain than in prior periods. Actual customer behavior, as it relates to deposit activity, may be significantly different than expected behavior, which could cause an unexpected outcome and may result in lower net interest income than that derived from the analysis referenced above.

 

 

Gap Analysis

 

The interest sensitivity, or gap analysis, identifies interest rate risk by showing repricing gaps in the Corporation’s balance sheet. All assets and liabilities are reflected based on behavioral sensitivity, which is usually the earliest of: repricing, maturity, contractual amortization, prepayments or likely call dates. Non-maturity deposits, such as NOW, savings and money market accounts are spread over various time periods based on the expected sensitivity of these rates considering liquidity and the investment preferences of management. Non-rate-sensitive assets and liabilities are spread over time periods to reflect management’s view of the maturity of these funds.

 

 

Non-maturity deposits (demand deposits in particular) are recognized by the Bank’s regulatory agencies to have different sensitivities to interest rate environments. Consequently, it is an accepted practice to spread non-maturity deposits over defined time periods to capture that sensitivity. Commercial demand deposits are often in the form of compensating balances, and fluctuate inversely to the level of interest rates; the maturity of these deposits is reported as having a shorter life than typical retail demand deposits. Additionally, the Bank’s regulatory agencies have suggested distribution limits for non-maturity deposits. However, management has taken a more conservative approach than these limits would suggest by forecasting these deposit types with a shorter maturity. The following table presents the Corporation’s gap analysis as of December 31, 2017:

 

(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		$	48.4			$	—			$	—			$	—			$	—			$	48.4
Investment securities(1)			224.3				61.1				290.4				125.9				—				701.7
Loans and leases(2)			1,237.4				393.6				1,205.7				453.0				—				3,289.7
Allowance			—				—				—				—				(17.5	)			(17.5	)
Cash and due from banks			—				—				—				—				11.7				11.7
Other assets			—				—				—				—				415.7				415.7
Total assets		$	1,510.1			$	454.7			$	1,496.1			$	578.9			$	409.9			$	4,449.7
Liabilities and shareholders’ equity:
Demand, non-interest-bearing		$	56.3			$	168.9			$	233.2			$	466.4			$	—			$	924.8
Savings, NOW and market rate			114.8				344.6				814.9				408.2				—				1,682.5
Time deposits			58.2				321.6				149.0				3.4				—				532.2
Wholesale non-maturity deposits			62.3				—				—				—				—				62.3
Wholesale time deposits			94.4				62.6				14.9				—				—				171.9
Short-term borrowings			237.9				—				—				—				—				237.9
Long-term FHLB advances			31.4				52.4				55.3				—				—				139.1
Subordinated notes			—				—				98.4				—				—				98.4
Junior subordinated debentures			21.4				—				—				—				—				21.4
Other liabilities			—				—				—				—				51.1				51.1
Shareholders’ equity			18.9				56.6				301.8				150.8				—				528.1
Total liabilities and shareholders’ equity		$	695.6			$	1,006.7			$	1,667.5			$	1,028.8			$	51.1			$	4,449.7
Interest-earning assets		$	1,510.1			$	454.7			$	1,496.1			$	578.9			$	—			$	4,039.8
Interest-bearing liabilities			620.4				781.2				1,132.5				411.6				—				2,945.7
Difference between interest-earning assets and interest-bearing liabilities		$	889.7			$	(326.5	)		$	363.6			$	167.3			$	—			$	1,094.1
Cumulative difference between interest earning assets and interest-bearing liabilities		$	889.7			$	563.2			$	926.8			$	1,094.1			$	—			$	1,094.1
Cumulative earning assets as a % of cumulative interest-bearing liabilities			243	%			140	%			137	%			137	%

 

	(1)	Investment securities include available for sale, held to maturity and trading.
	(2)	Loans include portfolio loans and leases and loans held for sale.

 

 

The table above indicates that the Corporation is asset sensitive and should experience an increase in net interest income in the near term, if interest rates rise. Accordingly, if rates decline, net interest income should decline. Actual results may differ from expected results for many reasons including market reactions, competitor responses, customer behavior and/or regulatory actions.

 

 

Provision for Loan and Lease Losses

---

General Discussion of the Allowance for Loan and Lease Losses

 

The balance of the Allowance for loan and lease losses is determined based on management’s review and evaluation of the loan and lease portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses.

 

Increases to the Allowance are implemented through a corresponding Provision (expense) in the Corporation’s statement of income. Loans and leases deemed uncollectible are charged against the Allowance. Recoveries of previously charged-off amounts are credited to the Allowance.

 

While management considers the Allowance to be adequate, based on information currently available, future additions to the Allowance may be necessary due to changes in economic conditions or management’s assumptions as to future delinquencies, recoveries and losses and management’s intent regarding the disposition of loans. In addition, the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank of Philadelphia, as an integral part of their examination processes, periodically review the Corporation’s Allowance.

 

The Corporation’s Allowance is comprised of four components that are calculated based on various independent methodologies. All components of the Allowance are based on management’s estimates. These estimates are summarized earlier in this document under the heading “Critical Accounting Policies, Judgments and Estimates.”

 

 

The four components of the Allowance are as follows:

 

●

Specific Loan Evaluation Component – Loans and leases for which management has reason to believe it is probable that it will not be able to collect all contractually due amounts of principal and interest are evaluated for impairment on an individual basis and a specific allocation of the Allowance is assigned, if necessary.

 

●

Historical Charge-Off Component – Homogeneous pools of loans are evaluated to determine average historic charge-off rates. Management applies a rolling, twenty quarter charge-off history as a look-back period to determine these average charge-off rates. Management evaluates the length of this look-back period to determine its appropriateness. In addition, management develops an estimate of a loss emergence period for each segment of the loan portfolio. The loss emergence period estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan.

 

●

Qualitative Factors Component – Various qualitative factors are considered as they relate to the different homogeneous loan pools to adjust the historic charge-off rates so that they reflect current economic conditions that may not be accurately reflected in the historic charge-off rates. These factors include delinquency trends, economic conditions, loan terms, credit grades, concentrations of credit, regulatory environment and other relevant factors. The resulting adjustments are combined with the historic charge-off rates and result in an allocation rate for each homogeneous loan pool.

 

●

Unallocated Component – This amount represents the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the specific, historical, and qualitative losses in the portfolio discussed above. There are many factors considered, such as the inherent delay in obtaining information regarding a customer’s financial information or changes in their business condition, the judgmental nature of loan and lease evaluations, the delay in interpreting economic trends, and the judgmental nature of collateral assessments.

 

 

As part of the process of calculating 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 employees as well as an external loan review service. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

 

●

Pass – Loans considered satisfactory with no indications of deterioration.

 

●

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 well-defined weaknesses that may jeopardize the liquidation of the collateral and repayment 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. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

 

 

Consumer credit exposure, which includes residential mortgages, home equity lines and loans, leases and consumer loans, are assigned a credit risk profile based on payment activity (that is, their delinquency status).

 

Refer to Note 5-F in the Notes to Consolidated Financial Statements for details regarding credit quality indicators associated with the Corporation’s loan and lease portfolio.

 

Portfolio Segmentation – The Corporation’s loan and lease portfolio is divided into specific segments of loans and leases having similar characteristics. These segments are as follows:

 

●

Commercial mortgage

●

Home equity lines and loans

●

Residential mortgage

●

Construction

●

Commercial and industrial

●

Consumer

●

Leases

 

 

Refer to Note 5 in the Notes to Consolidated Financial Statements and the section of this MD&A under the heading “Portfolio Loans and Leases” for details of the Corporation’s loan and lease portfolio, broken down by portfolio segment.

 

Impairment Measurement – In accordance with guidance provided by ASC 310-10, "Receivables", the Corporation employs one of three methods to determine and measure impairment:

 

●

the Present Value of Future Cash Flow Method;

●

the Fair Value of Collateral Method;

●

the Observable Market Price of a Loan Method.

 

Loans and leases for which there is an indication that all contractual payments may not be collectible are evaluated for impairment on an individual basis. Loans that are evaluated on an individual basis include non-performing loans, troubled debt restructurings and purchased credit-impaired loans.

 

Nonaccrual Loans – In general, loans and leases that are delinquent on contractually due principal or interest payments for more than 89 days are placed on nonaccrual status and any unpaid interest is reversed as a charge to interest income. When the loan resumes payment, all payments (principal and interest) are applied to reduce principal. After a period of six months of satisfactory performance, the loan may be placed back on accrual status. Any interest payments received during the nonaccrual period that had been applied to reduce principal are reversed and recorded as a deferred fee which accretes to interest income over the remaining term of the loan or lease. In certain cases, management may have information about a loan or lease that may indicate a future disruption or curtailment of contractual payments. In these cases, management will preemptively place the loan or lease on nonaccrual status.

 

Troubled Debt Restructurings (“TDRs”) – Management follows guidance provided by ASC 310-40, “Troubled Debt Restructurings by Creditors.” A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction of interest rate or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, management will make the necessary disclosures related to the TDR. In certain cases, a modification may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered to be a TDR. Once a loan or lease has been modified and is considered a TDR, it is reported as an impaired loan or lease. If the loan or lease deemed a TDR has performed for at least six months at the level prescribed by the modification, it is not considered to be non-performing; however, it will generally continue to be reported as impaired. Loans and leases that have performed for at least six months are reported as TDRs in compliance with modified terms.

 

Refer to Note 5-G in the Notes to Consolidated Financial Statements for more information regarding the Corporation's TDRs.

 

Charge-off Policy - The Corporation’s charge-off policy is that, on a periodic basis, not less often than quarterly, delinquent and non-performing loans that exceed the following limits are considered for full or partial charge-off:

 

●

Open-ended consumer loans exceeding 180 days past due.

●

Closed-ended consumer loans exceeding 120 days past due.

●

All commercial/business purpose loans exceeding 180 days past due.

●

All leases exceeding 120 days past due.

 

Any other loan or lease, for which management has reason to believe collectability is unlikely, and for which sufficient collateral does not exist, is also charged off.

 

Refer to Note 5-F in the Notes to Consolidated Financial Statements for more information regarding the Corporation's charge-offs and factors which influenced management’s judgment with respect thereto.

 

 

Loans Acquired in Mergers and Acquisitions

 

In accordance with GAAP, the loans acquired from RBPI, FKB, FBD and CBH were recorded at their fair value with no carryover of the previously associated allowance for loan loss.

 

Certain loans were acquired which exhibited deteriorated credit quality since origination and for which management does not expect to collect all contractual payments. Accounting for these purchased credit-impaired (“PCI”) loans is done in accordance with ASC 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality”. The loans were recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield. On a regular basis, at least quarterly, an assessment is made on PCI loans to determine if there has been any improvement or deterioration of the expected cash flows. If there has been improvement, an adjustment is made to increase the recognition of interest on the PCI loan, as the estimate of expected loss on the loan is reduced. Conversely, if there is deterioration in the expected cash flows of a PCI loan, an allowance is recorded in connection with the loan. Management evaluates PCI loans individually for further impairment as well as for improvements to expected cash flows.

 

Loans acquired in acquisitions which do not exhibit deteriorated credit quality at the time of acquisition are accounted for under ASC 310-20 and receive a loan mark based on a credit and interest-rate analysis. The resulting discount or premium is accreted or amortized, respectively, to interest income over their remaining maturity. These non-impaired acquired loans, along with the balance of the Corporation's loan and lease portfolio are evaluated on either an individual basis or on a collective basis for impairment. For a more information regarding the Corporation's impaired loans and leases, refer to Notes 5-F and 5-H and for more information regarding loan marks, refer to Note 5-I in the Notes to Consolidated Financial Statements.

 

 

Asset Quality and Analysis of Credit Risk

 

As of December 31, 2017, total non-performing loans and leases were $8.6 million, representing 0.26% of portfolio loans and leases, as compared to $8.4 million, or 0.33% of portfolio loans and leases, as of December 31, 2016. The $216 thousand increase in non-performing loans and leases was comprised of increases of $1.8 million and $552 thousand in residential mortgages and commercial mortgages, respectively. These increases were partially offset by decreases of $1.3 million and $808 thousand in non-performing commercial and industrial loans and home equity lines and loans, respectively.

 

The Provision for the twelve-month periods ended December 31, 2017, 2016 and 2015 was $2.6 million, $4.3 million and $4.4 million, respectively. The Provision recorded during any given period reflects an allocation related to net new loan volume, changes in the economic environment, and the replenishment of Allowance consumed by charge-offs of loans and leases for which the Corporation had not specifically reserved. Net loan charge-offs for the twelve months ended December 31, 2017 totaled $2.6 million as compared to $2.7 million for the same period in 2016. Total portfolio loans increased by $750.4 million during the twelve months ended December 31, 2017 as compared to $266.4 million for the same period in 2016. As of December 31, 2017, the Allowance of $17.5 million represents 0.53% of portfolio loans and leases, as compared to the Allowance as of December 31, 2016 of $17.5 million, which represented 0.69% of portfolio loans and leases as of that date.

 

As of December 31, 2017, the Corporation had other real estate owned (“OREO”) valued at $304 thousand, as compared to $1.0 million as of December 31, 2016. The decrease was related to the sale of five residential properties, carried at $1.2 million, which resulted in a $104 thousand loss on sale. Additions to OREO during 2017 included one residential property added through foreclosure and the properties acquired in the RBPI Merger.

 

As of December 31, 2017, the Corporation had $9.1 million of TDRs, of which $5.8 million were in compliance with their modified terms for six months or greater, and hence, excluded from non-performing loans and leases. As of December 31, 2016, the Corporation had $9.0 million of TDRs, of which $6.4 million were in compliance with their modified terms.

 

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 payments in accordance with the original terms of the loans and leases. Included in impaired loans and leases are non-accrual loans and leases and TDRs in compliance with modified terms. Purchased credit-impaired loans are not included in impaired loan and lease totals. As of December 31, 2017, the Corporation had $14.2 million of impaired loans and leases, as compared to $14.4 million as of December 31, 2016. Refer to Note 5-H in the Notes to 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 very proactive with its loan review process, including engaging the services of an independent outside loan review firm, which helps identify developing credit issues. These proactive steps include the procurement of additional collateral (preferably outside the current loan structure) whenever possible. Management believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall losses.

 

 

Non-Performing Assets, TDRs and Related Ratios as of or for the Twelve Months Ended December 31,

 

(dollars in thousands)		2017				2016				2015				2014				2013
Non-accrual loans and leases		$	8,579			$	8,363			$	10,244			$	10,096			$	10,530
Loans 90 days or more past due and still accruing			—				—				—				—				—
Total non-performing loans and leases			8,579				8,363				10,244				10,096				10,530
Other real estate owned			304				1,017				2,638				1,147				855
Total non-performing assets		$	8,883			$	9,380			$	12,882			$	11,243			$	11,385
TDRs included in non-performing assets		$	3,289			$	2,632			$	1,935			$	4,315			$	1,699
TDRs in compliance with modified terms			5,800				6,395				4,880				4,157				7,277
Total TDRs		$	9,089			$	9,027			$	6,815			$	8,472			$	8,976
Allowance for loan and lease losses to non-performing loans and leases			204.3	%			209.1	%			154.8	%			144.5	%			147.3	%
Non-performing loans and leases to total loans and leases			0.26	%			0.33	%			0.45	%			0.61	%			0.68	%
Allowance for loan losses to total portfolio loans and leases			0.53	%			0.69	%			0.70	%			0.88	%			1.00	%
Non-performing assets to total assets			0.20	%			0.27	%			0.43	%			0.50	%			0.55	%
Period-end portfolio loans and leases		$	3,285,858			$	2,535,425			$	2,268,988			$	1,652,257			$	1,547,185
Average portfolio loans and leases		$	2,660,999			$	2,419,950			$	2,153,542			$	1,608,248			$	1,453,555
Allowance for loan and lease losses		$	17,525			$	17,486			$	15,857			$	14,586			$	15,515
Interest income that would have been recorded on impaired loans if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination		$	708			$	1,098			$	1,100			$	533			$	1,074
Interest income on impaired loans included in net income for the period		$	485			$	551			$	513			$	341			$	365

 

 

As of December 31, 2017, management is not aware of any loan or lease, other than those disclosed in the table above, for which it has any serious doubt as to the borrower’s ability to pay in accordance with the terms of the loan.

 

 

Summary of Changes in the Allowance for Loan and Lease Losses

 

(dollars in thousands)		2017				2016				2015				2014				2013
Balance, January 1		$	17,486			$	15,857			$	14,586			$	15,515			$	14,425
Charge-offs:
Consumer			(154	)			(173	)			(177	)			(144	)			(194	)
Commercial and industrial			(692	)			(1,298	)			(1,220	)			(415	)			(781	)
Real estate			(1,056	)			(1,008	)			(1,615	)			(1,231	)			(891	)
Construction			—				—				—				—				(737	)
Leases			(1,224	)			(808	)			(442	)			(410	)			(376	)
Total charge-offs			(3,126	)			(3,287	)			(3,454	)			(2,200	)			(2,979	)
Recoveries:
Consumer			8				23				29				17				10
Commercial and industrial			25				93				35				98				65
Real estate			182				178				160				47				105
Construction			4				64				4				60				24
Leases			328				232				101				165				290
Total recoveries			547				590				329				387				494
Net charge-offs			(2,579	)			(2,697	)			(3,125	)			(1,813	)			(2,485	)
Provision for loan and lease losses			2,618				4,326				4,396				884				3,575
Balance, December 31		$	17,525			$	17,486			$	15,857			$	14,586			$	15,515
Ratio of net charge-offs to average portfolio loans outstanding			0.10	%			0.17	%			0.15	%			0.11	%			0.17	%

 

 

Allocation of Allowance for Loan and Lease Losses

 

The following table sets forth an allocation of the Allowance by portfolio segment. The specific allocations in any portfolio segment may be changed in the future to reflect then-current conditions. Accordingly, management considers the entire Allowance to be available to absorb losses in any portfolio segment.

 

		December 31,
		2017								2016								2015								2014								2013
(dollars in thousands)		Allowance				% Loans to Total Loans				Allowance				% Loans to Total Loans				Allowance				% Loans to Total Loans				Allowance				% Loans to Total Loans				Allowance				% Loans to Total Loans
Allowance at end of period applicable to:
Commercial mortgage		$	7,550				46.4	%		$	6,227				43.8	%		$	5,199				42.5	%		$	3,948				41.8	%		$	3,797				40.4	%
Home equity lines and loans			1,086				6.6				1,255				8.2				1,307				9.2				1,917				11.0				2,204				12.3
Residential mortgage			1,926				14.0				1,917				16.3				1,740				17.9				1,736				19.0				2,446				19.4
Construction			937				6.5				2,233				5.6				1,324				4.0				1,367				4.0				845				3.0
Commercial and industrial			5,038				21.9				5,142				22.9				5,609				23.1				4,533				20.3				5,011				21.2
Consumer			246				1.1				153				1.0				142				1.0				238				1.1				259				1.1
Leases			742				3.5				559				2.2				518				2.3				468				2.8				604				2.6
Unallocated			—				—				—				—				18				—				379				—				349				—
Total		$	17,525				100.0	%		$	17,486				100.0	%		$	15,857				100.0	%		$	14,586				100.0	%		$	15,515				100.0	%

 

Non-Interest Income

---

2017 Compared to 2016

 

Non-interest income for the twelve months ended December 31, 2017 was $59.1 million, an increase of $5.2 million as compared to the same period in 2016. An increase of $2.0 million in fees for wealth management services resulted as wealth assets under management, administration, supervision and brokerage increased $1.64 billion from December 31, 2016 to December 31, 2017. Insurance revenue increased $867 thousand for the twelve months ended December 31, 2017 as compared to the same period in 2016, due to the May 2017 acquisition of Hirshorn Boothby. Gain on trading investments, which is reported under “Other operating income” increased $501 thousand between periods. The Corporation’s trading investments are comprised solely of investments held in deferred compensation plan trusts whose investment decisions are at the sole discretion of the plan participants. Revenue from our capital markets initiative, which was launched in the second quarter of 2017, contributed $2.4 million to non-interest income for the twelve months ended December 31, 2017. Partially offsetting these increases was a $607 thousand decrease in net gain on sale of loans as mortgage refinancing activity slowed during 2017 with increasing interest rates.

 

Components of other operating income for the indicated years ended December 31 include:

 

(dollars in thousands)		2017				2016				2015
Merchant interchange fees		$	1,443			$	1,381			$	1,238
Bank owned life insurance income			959				908				783
Commissions and fees			621				673				867
Safe deposit box rentals			365				382				384
Other investment income			48				223				248
Rent income			193				163				175
Gain (loss) on trading investments			613				112				(9	)
Miscellaneous other income			1,079				1,026				1,163
Other operating income		$	5,321			$	4,868			$	4,849

 

 

2016 Compared to 2015

 

Non-interest income for the twelve months ended December 31, 2016 was $54.0 million, a decrease of $1.8 million as compared to the same period in 2015. The decrease was related to a $1.0 million decrease in gain on sale of available for sale investment securities, a $319 thousand decrease in dividends on FHLB and FRB stocks and a $204 thousand decrease in fees for wealth management services. The decrease in gain on sale of available for sale investment securities resulted from the very limited sales during the twelve months ended December 31, 2016, which resulted in a loss on sale of $77 thousand as compared to the sale of $64.0 million of available for sale investment securities sold during the same period in 2015, which resulted in a gain on sale of $931 thousand. The majority of the investments sold in 2015 had been acquired in the CBH Merger and were strategically sold to shorten the duration of the portfolio. The $319 thousand decrease in dividends on FHLB and FRB stocks occurred due to the special dividend paid on FHLB stock in 2015 which was not repeated in 2016. The $204 thousand decrease in fees for wealth management services was related to the shift in the composition of the wealth management portfolio, with more of the portfolio being comprised of assets held in lower-yielding fixed-fee accounts as of December 31, 2016 as compared to December 31, 2015.

 

 

Non-Interest Expense

---

2017 Compared to 2016

 

Non-interest expense for the twelve months ended December 31, 2017 was $114.4 million, an increase of $12.7 million, compared to the same period in 2016. The increase was largely related to a $6.1 million increase in due diligence and merger-related and merger integration expenses primarily related to the RBPI Merger and a $5.8 million increase in salary and wages due to staffing increases from our Capital Markets initiative, the Hirshorn Boothby acquisition and the Princeton wealth management office, annual salary and wage increases, increases in incentive compensation and to a smaller extent, the additional staff added in the December 15, 2017 RBPI Merger.

 

Components of other operating expense for the indicated years ended December 31 include:

 

(dollars in thousands)		2017				2016				2015
Telephone and data lines		$	1,616			$	1,620			$	1,704
FDIC insurance			1,580				1,616				1,447
Temporary help and recruiting.			852				1,522				1,362
Loan processing			291				93				1,110
Debt prepayment penalty			—				—				1,131
Travel and entertainment			900				894				868
Insurance			838				788				770
MSR amortization and impairment / (recovery)			745				881				660
Stationary and supplies			488				518				623
Director fees			542				566				568
Postage			575				551				540
Outsourced services			315				569				508
Contributions			1,511				957				468
Dues and subscriptions			871				456				441
Portfolio maintenance			417				391				385
Other taxes			39				45				80
Deferred compensation expense			783				664				15
Miscellaneous other expense			2,603				1,505				1,643
Other operating expense		$	14,966			$	13,636			$	14,323

 

2016 Compared to 2015

 

Non-interest expense for the twelve months ended December 31, 2016 was $101.7 million, a decrease of $23.9 million, as compared to the same period in 2015. The primary driver for the decrease related to the $17.4 million loss on settlement of the corporate pension plan and the $6.7 million of due diligence, merger-related and merger integration expenses which had been recorded in the twelve months ended December 31, 2015 but not repeated in 2016. Decreases in several other noninterest expense categories also occurred as the efficiencies and cost-saves related to the CBH Merger began to be realized. Partially offsetting these decreases was a $2.8 million increase in salaries and wages related to annual salary increases, incentive increases and the hiring of several new senior and executive officers during 2016.

 

Secondary Market Sold-Loan Repurchase Demands

 

In the course of originating residential mortgage loans and selling those loans in the secondary market, the Corporation makes various representations and warranties to the purchasers of the mortgage loans. Each residential mortgage loan originated by the Corporation is evaluated by an automated underwriting application, which verifies the underwriting criteria and certifies the loan’s eligibility for sale to the secondary market. Any exceptions discovered during this process are remedied prior to sale. These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans. Under the representations and warranties, failure by the Corporation to comply with the underwriting and appraisal standards could result in the Corporation’s being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the Corporation within the specified period following discovery. As of December 31, 2017, there were no pending or unsettled loan repurchase demands.

 

 

Income Tax Expense

---

Income tax expense for the twelve months ended December 31, 2017 was $34.2 million as compared to $18.2 million and $9.2 million for the same periods in 2016 and 2015, respectively. The effective tax rates for the twelve-month periods ended December 31, 2017, 2016 and 2015 were 59.8%, 33.5% and 35.4%, respectively. The increase in rate from 33.5% to 59.8% between 2016 and 2017 was directly related to the Tax Reform enacted on December 22, 2017. The Tax Reform lowered the top federal corporate rate from 35% to 21%. In accordance with GAAP, this required the re-measurement, in the period including the enactment, of the Corporation’s net deferred tax asset to reflect the rate at which they will be recognized in future periods. The result was a $15.2 million one-time charge to income tax expense. Excluding the $15.2 million discrete income tax charge, the effective tax rate for 2017 was 33.3%. For more information related to income taxes, refer to Note 19 in the Notes to Consolidated Financial Statements.

 

 

Balance Sheet Analysis

---

Asset Changes

 

Total assets as of December 31, 2017 increased to $4.45 billion from $3.42 billion as of December 31, 2016. The $1.03 billion increase was largely attributable to the $859.4 million of assets acquired in the RBPI Merger. The following pro forma balance sheets detail the changes in balance sheet items, excluding the effect of the RBPI Merger from December 31, 2016 to December 31, 2017. The RBPI balances shown are as of the merger date of December 15, 2017.

 

(dollars in thousands)		Bryn Mawr Bank Corporation December 31, 2017 (Actual)				Royal Bancshares of Pennsylvania, Inc. December 15, 2017 Opening Balances				Bryn Mawr Bank Corporation December 31, 2017 (Excluding RBPI Opening Balances)				Bryn Mawr Bank Corporation December 31, 2016 (Actual)				Change from December 31, 2016 to December 31,  2017 (Excluding RBPI Opening Balances) ($)				Change from December 31, 2016  to December 31, 2017 (Excluding RBPI Opening Balances) (%)
Assets
Cash and due from banks		$	11,657			$	4,822			$	6,835			$	16,559			$	(9,724	)			(58.7	)%
Interest-bearing deposits with banks			48,367				12,271				36,096				34,206				1,890				5.5	%
Cash and cash equivalents			60,024				17,093				42,931				50,765				(7,834	)			(15.4	)%
Investment securities available for sale			689,202				121,586				567,616				566,996				620				0.1	%
Investment securities held to maturity			7,932				—				7,932				2,879				5,053				175.5	%
Investment securities, trading			4,610				—				4,610				3,888				722				18.6	%
Loans held for sale			3,794				—				3,794				9,621				(5,827	)			(60.6	)%
Portfolio loans and leases			3,285,858				570,374				2,715,484				2,535,425				180,059				7.1	%
Less: Allowance for loan and lease losses			(17,525	)			—				(17,525	)			(17,486	)			(39	)			0.2	%
Net portfolio loans and leases			3,268,333				570,374				2,697,959				2,517,939				180,020				7.1	%
Premises and equipment, net			54,458				8,264				46,194				41,778				4,416				10.6	%
Accrued interest receivable			14,246				2,535				11,711				8,533				3,178				37.2	%
Mortgage servicing rights			5,861				—				5,861				5,582				279				5.0	%
Bank-owned life insurance			56,667				16,550				40,117				39,279				838				2.1	%
FHLB stock			20,083				—				20,083				17,305				2,778				16.1	%
Goodwill			179,889				72,762				107,127				104,765				2,362				2.3	%
Intangible assets			25,966				5,235				20,731				20,405				326				1.6	%
Other investments			12,470				5,902				6,568				8,627				(2,059	)			(23.9	)%
Other assets			46,185				39,118				7,067				23,168				(16,101	)			(69.5	)%
Total assets		$	4,449,720			$	859,419			$	3,590,301			$	3,421,530			$	168,771				4.9	%
Liabilities
Deposits:
Non-interest-bearing		$	924,844			$	98,418			$	826,426			$	736,180			$	90,246				12.3	%
Interest-bearing			2,448,954				494,754				1,954,200				1,843,495				110,705				6.0	%
Total deposits			3,373,798				593,172				2,780,626				2,579,675				200,951				7.8	%
Short-term borrowings			237,865				15,000				222,865				204,151				18,714				9.2	%
FHLB advances and other borrowings			139,140				59,568				79,572				189,742				(110,170	)			(58.1	)%
Subordinated notes			98,416				—				98,416				29,532				68,884				233.3	%
Junior subordinated debentures			21,416				21,416				—				—				—				—
Accrued interest payable			3,527				2,816				711				2,734				(2,023	)			(74.0	)%
Other liabilities			47,439				29,621				17,818				34,569				(16,751	)			(48.5	)%
Total liabilities			3,921,601				721,593				3,200,008				3,040,403				159,605				5.2	%
Shareholders’ equity
Common stock			24,360				3,099				21,261				21,111				150				0.7	%
Paid-in capital in excess of par value			371,486				135,410				236,076				232,806				3,270				1.4	%
Common stock in treasury, at cost			(68,179	)			—				(68,179	)			(66,950	)			(1,229	)			1.8	%
Accumulated other comprehensive loss, net of tax benefit			(4,414	)			—				(4,414	)			(2,409	)			(2,005	)			83.2	%
Retained earnings			205,549				—				205,549				196,569				8,980				4.6	%
Total Bryn Mawr Bank Corporation shareholders’ equity			528,802				138,509				390,293				381,127				9,166				2.4	%
Noncontrolling interest			(683	)			(683	)			—				—				—				—
Total shareholders’ equity			528,119				137,826				390,293				381,127				9,166				2.4	%
Total liabilities and shareholders’ equity		$	4,449,720			$	859,419			$	3,590,301			$	3,421,530			$	168,771				4.9	%

 

 

The following table details the maturity and weighted average yield ⁽¹⁾ of the available for sale investment portfolio ⁽²⁾ as of December 31, 2017:

 

(dollars in thousands)		Maturing During 2018				Maturing From 2019 Through 2022				Maturing From 2023 Through 2027				Maturing After 2027				Total
U.S. Treasury securities:
Amortized cost		$	200,077			$	—			$	—			$	—			$	200,077
Weighted average yield			1.41	%			—				—				—				1.41	%
Obligations of the U.S. government and agencies:
Amortized cost			1,268				114,357				21,964				15,439				153,028
Weighted average yield			1.54	%			2.07	%			2.25	%			2.68	%			2.15	%
State and political subdivisions(1):
Amortized cost			9,174				10,995				1,183				—				21,352
Weighted average yield			1.50	%			1.68	%			1.60	%			—				1.60	%
Mortgage-related securities(3):
Amortized cost			107				9,199				44,797				259,451				313,554
Weighted average yield			2.48	%			2.77	%			2.59	%			2.37	%			2.41	%
Other investment securities:
Amortized cost			500				1,100				—				—				1,600
Weighted average yield			2.38	%			2.19	%			—				—				2.25	%
Total amortized cost		$	211,126			$	135,651			$	67,944			$	274,890			$	689,611
Weighted average yield			1.41	%			2.08	%			2.46	%			2.39	%			2.04	%

 

(1)	Weighted average yields on tax-exempt obligations have not been computed on a tax-equivalent basis.
(2)	Excluded from the above table is the Corporation’s investment in bond mutual funds with an amortized cost of $3.2 million, which have no stated maturity or constant stated yield.
(3)	Mortgage-related securities are included in the above table based on their contractual maturity. However, mortgage-related securities, by design, have scheduled monthly principal payments which are not reflected in this table.

 

      

The following table details the amortized cost of the available for sale investment portfolio as of the dates indicated:

 

		Amortized Cost as of December 31,
(dollars in thousands)		2017				2016				2015
U.S. Treasury securities		$	200,077			$	200,094			$	101
Obligations of the U.S. government and agencies			153,028				83,111				101,342
Obligations of state and political subdivisions			21,352				33,625				41,892
Mortgage-backed securities			275,958				185,997				157,422
Collateralized mortgage obligations			37,596				49,488				29,756
Other investment securities			4,813				16,575				17,263
Total amortized cost		$	692,824			$	568,890			$	347,776

 

 

Portfolio Loans and Leases

 

The table below details the loan portfolio as of the dates indicated:

 

		December 31,
(dollars in thousands)		2017				2016				2015				2014				2013
Commercial mortgage		$	1,523,377			$	1,110,898			$	964,259			$	689,528			$	625,341
Home equity lines & loans			218,275				207,999				209,473				182,082				189,571
Residential mortgage			458,886				413,540				406,404				313,442				300,243
Construction			212,454				141,964				90,421				66,267				46,369
Commercial & industrial			719,312				579,791				524,515				335,645				328,459
Consumer			38,153				25,341				22,129				18,480				16,926
Leases			115,401				55,892				51,787				46,813				40,276
Total portfolio loans and leases			3,285,858				2,535,425				2,268,988				1,652,257				1,547,185
Loans held for sale			3,794				9,621				8,987				3,882				1,350
Total		$	3,289,652			$	2,545,046			$	2,277,975			$	1,656,139			$	1,548,535

 

 

The following table summarizes the loan maturity distribution and interest rate sensitivity as of December 31, 2017. Excluded from the table are residential mortgage, home equity lines and loans and consumer loans:

 

(dollars in thousands)		Maturing During 2018				Maturing From 2019 Through 2022				Maturing After 2022				Total
Loan portfolio maturity:
Commercial and industrial		$	287,145			$	210,978			$	221,189			$	719,312
Construction			154,304				38,849				19,301				212,454
Commercial mortgage			93,063				492,261				938,053				1,523,377
Leases			7,829				106,929				643				115,401
Total		$	542,341			$	849,017			$	1,179,186			$	2,570,544
Interest sensitivity on the above loans:
Loans with predetermined rates		$	132,976			$	654,397			$	466,097			$	1,253,470
Loans with adjustable or floating rates			409,365				194,620				713,089				1,317,074
Total		$	542,341			$	849,017			$	1,179,186			$	2,570,544

 

The list below identifies certain key characteristics of the Corporation’s loan and lease portfolio. Refer to the loan and lease portfolio tables in Note 5 in the Notes to Consolidated Financial Statements and the section of this MD&A under the heading “Portfolio Loans and Leases” for further details.

 

●

Portfolio Loans and Leases – The Corporation’s $3.29 billion loan and lease portfolio is predominantly based in the Corporation’s traditional market areas of Chester, Delaware and Montgomery counties in Pennsylvania, New Castle county in Delaware, and in the greater Philadelphia area, none of which has experienced the real estate price appreciation and subsequent decline that many other areas of the country have experienced over the last ten years. As indicated in the pro forma balance sheet above, under the heading “Asset Changes,” the RBPI Merger initially added $570.4 million of portfolio loans.

 

●

Concentrations – The Corporation has a significant portion of its portfolio loans (excluding leases) in real estate-related loans. As of December 31, 2017 and December 31, 2016, loans secured by real estate were $2.41 billion and $1.87 billion or 73.4% and 73.9% of the total loan portfolio of $3.29 billion and $2.54 billion. A predominant percentage of the Corporation’s real estate exposure, both commercial and residential, is within Pennsylvania, Delaware and Southern and Central New Jersey. Management is aware of this concentration and mitigates this risk to the extent possible in many ways, including the underwriting and assessment of the borrower’s capacity to repay, equity in the underlying real estate collateral and a review of a borrower’s global cash flows. For a substantial portion of the loans in the real estate portfolio, the Corporation has recourse to the owners/sponsors, primarily through personal guaranties, in addition to liens on collateral. This recourse provides credit strength, as it incorporates the borrowers’ global cash flows.

 

In addition to loans secured by real estate, commercial and industrial loans comprise 21.9% of the total loan portfolio as of December 31, 2017.

 

●

Construction – The construction portfolio of $212.5 million accounts for 6.5% of the total loan and lease portfolio at December 31, 2017, an increase of $70.5 million from December 31, 2016. Construction loans acquired in the RBPI Merger totaled $84.2 million as of December 31, 2017. The construction loan segment of the portfolio, which consists of residential site development loans, commercial construction loans and loans for construction of individual homes, had no delinquent or nonperforming loans as of both December 31, 2017 and 2016.

 

 

●

Residential Mortgages – Residential mortgage loans were $458.9 million as of December 31, 2017, an increase of $45.3 million from December 31, 2016. Residential mortgage loans acquired in the RBPI Merger totaled $39.2 million as of December 31, 2017. The residential mortgage segment accounts for 14.0% of the total loan and lease portfolio as of December 31, 2017. The residential mortgage segment of the portfolio had a delinquency rate on performing loans, as of December 31, 2017, of 0.32%, as compared to 0.32% as of December 31, 2016. Nonperforming residential mortgage loans comprised 0.96% of the residential mortgage segment of the portfolio as of December 31, 2017, as compared to 0.64% as of December 31, 2016. Management believes it is well protected with its collateral position on this portfolio.

 

●

Commercial Mortgages – Commercial mortgages were $1.52 billion as of December 31, 2017, an increase of $412.5 million from December 31, 2016. Commercial mortgages acquired in the RBPI Merger totaled $275.1 million as of December 31, 2017. Management has made a concerted effort, over several operating cycles, to attract strong commercial real estate entrepreneurs in its primary trade area. The commercial mortgage segment accounts for 46.4% of the total loan and lease portfolio as of December 31, 2017. The commercial mortgage segment of the portfolio had a delinquency rate on performing loans, as of December 31, 2017, of 0.25%, as compared to 0.12% as of December 31, 2016. Nonperforming commercial mortgage loans comprised 0.06% of the commercial mortgage segment of the portfolio as of December 31, 2017, as compared to 0.03% as of December 31, 2016. The borrowers comprising this segment of the portfolio generally have strong, global cash flows, which have remained stable in this tough economic environment.

 

●

Commercial and Industrial – Commercial and industrial loans were $719.3 million as of December 31, 2017, an increase of $139.5 million from December 31, 2016. Commercial and industrial loans acquired in the RBPI Merger totaled $107.9 million as of December 31, 2017. The commercial and industrial segment accounts for 21.9% of the total loan and lease portfolio as of December 31, 2017. The commercial and industrial segment of the portfolio had a delinquency rate on performing loans, as of December 31, 2017, of 0.13%, as compared to 0.01% as of December 31, 2016. Nonperforming commercial and industrial loans comprised 0.24% of the commercial and industrial segment of the portfolio as of December 31, 2017, as compared to 0.51% as of December 31, 2016. The commercial and industrial segment of the portfolio consists of loans to privately held institutions, family businesses, non-profit institutions and private banking relationships. While certain of these loans are collateralized by real estate, others are collateralized by non-real estate business assets, including accounts receivable and inventory.

 

●

Home Equity Loans and Lines of Credit – Home equity loans and lines of credit were $218.3 million as of December 31, 2017, an increase of $10.3 million from December 31, 2016. Home equity loans and lines of credit acquired in the RBPI Merger totaled $11.9 million as of December 31, 2017. The home equity loans and lines of credit segment accounts for 6.6% of the total loan and lease portfolio as of December 31, 2017. The home equity loans and lines of credit segment of the portfolio had a delinquency rate on performing loans, as of December 31, 2017, of 0.16%, as compared to 0.01% as of December 31, 2016. Nonperforming home equity loans and lines of credit comprised 0.68% of the home equity loans and lines of credit segment of the portfolio as of December 31, 2017, as compared to 1.10% as of December 31, 2016. The Corporation originates the majority of its home equity loans and lines of credit through its branch network.

 

●

Consumer loans – Consumer loans were $38.2 million as of December 31, 2017, an increase of $12.8 million from December 31, 2016. Consumer loans acquired in the RBPI Merger totaled $2.9 million as of December 31, 2017. The consumer loan segment accounted for 1.2% of the total loan and lease portfolio as of December 31, 2017. The consumer loan segment of the portfolio had a delinquency rate on performing loans, as of December 31, 2017, of 2.9%, as compared to 0.06% as of December 31, 2016. Nonperforming consumer loans comprised 0.00% of the consumer loan segment of the portfolio as of December 31, 2017, as compared to 0.01% as of December 31, 2016.

 

●

Leasing – Leases totaled $115.4 million as of December 31, 2017, an increase of $59.5 million from December 31, 2016. Leases acquired in the RBPI Merger totaled $47.3 million as of December 31, 2017. The lease segment of the portfolio accounted for 3.5% of the total loan and lease portfolio as of December 31, 2017. The lease segment of the portfolio had a delinquency rate on performing leases, as of December 31, 2017, of 0.26%, as compared to 0.47% as of December 31, 2016. Nonperforming leases comprised 0.09% of the leasing segment of the portfolio as of December 31, 2017, as compared to 0.24% as of December 31, 2016.

 

 

Goodwill and Intangible Assets – Goodwill as of December 31, 2017 increased by $75.1 million from December 31, 2016 as a result of the RBPI Merger and the acquisition of Hirshorn. Intangible assets, other than Mortgage Servicing Rights (“MSRs”), increased by $5.6 million from December 31, 2016. The RBPI Merger and the acquisition of Hirshorn added $8.3 million of intangible assets, which was partially offset by $2.7 million of amortization. For more information regarding goodwill and intangible assets, see Notes 2 and 3 in the Notes to Consolidated Financial Statements.

 

FHLB Stock - The Corporation’s investment in stock issued by the FHLB as of December 31, 2017 increased by $2.8 million, from December 31, 2016. The Corporation must purchase, or the FHLB must redeem, its stock based on the Corporation’s borrowings balance with the FHLB.

 

Mortgage Servicing Rights - MSRs increased $279 thousand to $5.9 million as of December 31, 2017 from $5.6 million as of December 31, 2016. This increase was the result of $1.0 million of MSRs recorded during the twelve months ended December 31, 2017, reduced by amortization of $791 thousand and a recovery of previously recorded impairments of $45 thousand during the period.

 

 

The following table details activity related to mortgage servicing rights for the periods indicated:

 

		For the Twelve Months Ended or as of December 31,
(dollars in thousands)		2017				2016				2015
Mortgage originations		$	190,007			$	280,059			$	231,049
Mortgage loans sold:
Servicing retained		$	103,439			$	138,134			$	107,351
Servicing released			27,871				22,829				29,630
Total mortgage loans sold		$	131,310			$	160,963			$	136,981
Percentage of originated mortgage loans sold			69.1	%			57.5	%			59.3	%
Servicing retained %			78.8	%			85.8	%			78.4	%
Servicing released %			21.2	%			14.2	%			21.6	%
Residential mortgage loans serviced for others		$	650,703			$	631,889			$	601,939
Mortgage servicing rights		$	5,861			$	5,582			$	5,142
Gain on sale of mortgage loans		$	2,038			$	2,693			$	2,327
Loan servicing and other fees		$	1,939			$	1,939			$	2,087
Amortization of MSRs		$	791			$	750			$	590
(Recovery) / Impairment of MSRs		$	(45	)		$	131			$	70

 

 

Liability Changes

 

Total liabilities as of December 31, 2017 increased $881.2 million, to $3.92 billion from December 31, 2016. The increase was largely related to the $721.6 million of liabilities assumed in the RBPI Merger.

 

Deposits - Deposits of $3.37 billion, as of December 31, 2017, increased $794.1 million from December 31, 2016. The 30.8% increase was largely related to the $593.2 million of deposits assumed in the RBPI Merger, along with $200.9 million of organic deposit growth.

 

 

The following table details deposits as of the dates indicated:

 

		As of December 31,
(dollars in thousands)		2017				2016				2015				2014				2013
Interest-bearing checking		$	481,336			$	379,424			$	338,861			$	277,228			$	266,787
Money market			862,639				761,657				749,726				566,354				544,310
Savings			338,572				232,193				187,299				138,992				135,240
Wholesale non-maturity deposits			62,276				74,272				67,717				66,693				42,936
Wholesale time deposits			171,929				73,037				53,185				73,458				34,640
Retail time deposits			532,202				322,912				229,253				118,400				140,794
Interest-bearing deposits		$	2,448,954			$	1,843,495			$	1,626,041			$	1,241,125			$	1,164,707
Non-interest-bearing deposits			924,844				736,180				626,684				446,903				426,640
Total deposits		$	3,373,798			$	2,579,675			$	2,252,725			$	1,688,028			$	1,591,347

 

 

The following table summarizes the maturities of certificates of deposit of $100,000 or greater at December 31, 2017:

 

(dollars in thousands)		Retail				Wholesale
Three months or less		$	24,719			$	92,663
Three to six months			52,355				50,305
Six to twelve months			120,052				10,239
Greater than twelve months			62,548				14,993
Total		$	259,674			$	168,200

 

For more information regarding deposits, including average amount of deposits and average rate paid, refer to the sections of this MD&A under the headings “Balance Sheet Analysis” and “Analysis of Interest Rates and Interest Differential”.

 

Borrowings - Short-term borrowings (original maturity of one year or less) as of December 31, 2017, which consisted of funds obtained from overnight repurchase agreements with commercial customers and short-term FHLB advances increased $33.7 million from December 31, 2016. As of December 31, 2017, long-term FHLB advances decreased $50.6 million from December 31, 2016. See the Liquidity Section of this MD&A under the heading “Liquidity” for further details on the Corporation’s FHLB available borrowing capacity.

 

Subordinated Notes – Subordinated notes, as of December 31, 2017, totaled $98.4 million and were comprised of $29.6 million of 10-year 4.75% fixed-to-floating notes which mature in August 2025, and $68.8 million of 4.25% 10-year fixed-to-floating notes which mature in December 2027.

 

Junior subordinated debentures – In connection with the RBPI Merger, the Corporation acquired Royal Bancshares Capital Trust I (“Trust I”) and Royal Bancshares Capital Trust II (“Trust II”) (collectively, the “Trusts”), which were utilized for the sole purpose of issuing and selling capital securities representing preferred beneficial interests. Although the Corporation owns $774,000 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 3.74% as of December 31, 2017. The rate resets quarterly based on 3-month LIBOR plus 2.15%. On the date acquired, management recorded these junior subordinated debentures at fair value. The amortization of the fair value mark will adjust interest expense to closer reflect market rates paid on similar debt.

 

Trust I and Trust II each 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 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 $387,000 each as investments in unconsolidated entities, within Other Assets, and records dividend income upon declaration by Trust I and Trust II within Other Income.

 

 

Discussion of Segments

---

The Corporation has two operating segments: Wealth Management and Banking. These segments are discussed below. Detailed segment information appears in Note 28 in the Notes to Consolidated Financial Statements.

 

Wealth Management Segment Activity

 

The Wealth Management segment, which includes the insurance reporting unit, reported a pre-tax segment profit (“PTSP”) for the twelve months ended December 31, 2017 of $15.1 million, a $702 thousand, or 4.9%, increase from the same period in 2016. Fees for wealth management services for 2017 increased by $2.0 million from the amount recorded in 2016, while expenses increased by $2.3 million during the same period. The increase in fees, year over year, is related to the $1.64 billion increase in assets under management, administration, supervision and brokerage. Approximately two-thirds of the growth of the wealth asset portfolio was from accounts whose fees are charged on a flat or fixed basis. However, nearly two-thirds of the increase in wealth management fees was derived from market-value based fee accounts, as a result of the strong market performance experienced in 2017. Revenue from the insurance division, which is reported as part of the Wealth Management segment, increased by $867 thousand, or 23.3%, partially as a result of the Hirshorn acquisition, in addition to organic growth.

 

 

The Wealth Management segment, which includes the insurance reporting unit, reported a PTSP for the twelve months ended December 31, 2016 of $14.4 million, a $1.4 million, or 8.6%, decrease from the same period in 2015. Fees for wealth management services for 2016 decreased by $204 thousand from the amount recorded in 2015, while expenses increased by $1.1 million during the same period. The decrease in fees, year over year, despite the $2.96 billion increase in wealth assets from December 31, 2015 to December 31, 2016, is indicative of the continuing shift, during 2016, in the composition of the wealth portfolio. Much of the increase in wealth assets during 2016 was comprised of accounts with flat-fee arrangements, rather than market-based fees. Revenue from the insurance division, which is reported as part of the Wealth Management segment, was relatively unchanged for the twelve months ended December 31, 2016 as compared to the same period in 2015.

 

Wealth Assets Under Management, Administration, Supervision and Brokerage (“Wealth Assets”)

 

Wealth Asset accounts are categorized into two groups; the first account group consists predominantly of clients whose fees are determined based on the market value of the assets held in their accounts (“Market Value” fee basis). The second account group consists predominantly of clients whose fees are set at fixed amounts (“Fixed Fee” basis), and, as such, are not affected by market value changes.

 

 

The following tables detail the composition of Wealth Assets as it relates to the calculation of fees for wealth management services:

 

(dollars in thousands)		Wealth Assets as of:
Fee Basis		December 31, 2017				December 31, 2016				December 31, 2015
Market value		$	5,884,692			$	5,302,463			$	4,971,636
Fixed fee			7,084,046				6,025,994				3,393,169
Total		$	12,968,738			$	11,328,457			$	8,364,805

 

(dollars in thousands)		Percentage of Wealth Assets as of:
Fee Basis		December 31, 2017				December 31, 2016				December 31, 2015
Market value			45.4	%			46.8	%			59.4	%
Fixed fee			54.6	%			53.2	%			40.6	%
Total			100.0	%			100.0	%			100.0	%

 

The following tables detail the composition of fees for wealth management services for the periods indicated:

 

(dollars in thousands)		For the Twelve Months Ended:
Fee Basis		December 31, 2017				December 31, 2016				December 31, 2015
Market value		$	29,752			$	28,418			$	29,219
Fixed fee			8,983				8,272				7,675
Total		$	38,735			$	36,690			$	36,894

 

(dollars in thousands)		Percentage of Fees for Wealth Management Services:
Fee Basis		December 31, 2017				December 31, 2016				December 31, 2015
Market value			76.8	%			77.5	%			79.2	%
Fixed fee			23.2	%			22.5	%			20.8	%
Total			100.0	%			100.0	%			100.0	%

 

Banking Segment Activity

 

Banking segment data as presented in Note 28 in the Notes to Consolidated Financial Statements indicates a PTSP of $42.2 million in 2017, $39.8 million in 2016 and $10.2 million in 2015. See the section of this MD&A under the heading “Components of Net Income” for a discussion of the Banking Segment.

 

 

Capital and Regulatory Capital Ratios

---

Consolidated shareholders’ equity of the Corporation was $528.1 million, or 11.9% of total assets, as of December 31, 2017, as compared to $381.1 million, or 11.1% of total assets, as of December 31, 2016.

 

In March 2015, the Corporation filed a shelf registration statement on Form S-3 (the “Shelf Registration Statement”). The Shelf Registration Statement allows the Corporation to raise additional capital through offers and sales of registered securities consisting of common stock, debt securities, warrants to purchase common stock, stock purchase contracts and units or units consisting of any combination of the foregoing securities. Using the prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, the Corporation may sell, from time to time, in one or more offerings, such securities in a dollar amount up to $200 million, in the aggregate.

 

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

 

For the twelve months ended December 31, 2017, the Corporation did not issue any shares through the Plan. No RFWs were approved during the twelve months ended December 31, 2017. No other sales of equity securities were executed under the Shelf Registration Statement during the twelve months ended December 31, 2017.

 

Accumulated other comprehensive loss (“AOCL”), as of December 31, 2017 was $4.4 million, an increase of $2.0 million from December 31, 2016. The primary cause of the increase in AOCL was the increase in unrealized losses on available for sale investment securities, whose fair values were affected by rising interest rates. In addition, the Corporation early-adopted ASU 2018-02, which allowed for the reclassification of $782 thousand of stranded tax effects from AOCL to retained earnings.

 

As detailed in Note 25-E in the Notes to Consolidated Financial Statements, the capital ratios, as of December 31, 2017 and 2016 indicate levels above the regulatory minimum to be considered “well capitalized.” In addition to the capital issued in the RBPI Merger, during the fourth quarter of 2017, regulatory capital increases at the Corporation included the net issuance of $68.8 million of subordinated notes, which qualify as Tier II capital and the acquisition of $21.4 million of junior subordinated debentures, which are carried in Tier I capital. On the Bank level, the Corporation down-streamed $15.0 million of capital to the Bank in the fourth quarter of 2017, increasing its Tier I capital balance.

 

 

Liquidity

---

The Corporation has significant sources of liquidity at December 31, 2017. The liquidity position is managed on a daily basis as part of the daily settlement function and on a monthly basis as part of the asset liability management process. The Corporation’s primary liquidity is maintained by managing its deposits along with the utilization of borrowings from the FHLB, purchased federal funds and utilization of other wholesale funding sources. Secondary sources of liquidity include the sale of investment securities and certain loans in the secondary market.

 

Other wholesale funding sources include certificates of deposit from brokers, generally available in blocks of $1.0 million or more. Funds obtained through these programs totaled $172 million as of December 31, 2017.

 

As of December 31, 2017, the maximum borrowing capacity with the FHLB was $1.37 billion, with an unused borrowing availability of $1.02 billion. Borrowing availability at the Federal Reserve Discount Window was $121.3 million, and overnight Fed Funds lines, consisting of lines from seven banks, totaled $79.0 million. On a monthly basis, the Corporation’s Asset Liability Committee reviews the Corporation’s liquidity needs. This information is reported to the Risk Management Committee of the Board of Directors on a quarterly basis.

 

As of December 31, 2017, the Corporation held $20.1 million of FHLB stock as required by the borrowing agreement between the FHLB and the Corporation.

 

The Corporation has an agreement with CDC to provide up to $5 million, plus interest, of money market deposits at an agreed upon rate currently at 0.40%. The Corporation had $10 thousand in balances as of December 31, 2017 under this program. The Corporation can request an increase in the agreement amount as it deems necessary. In addition, the Corporation has an agreement with IND to provide up to $40 million, plus 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 $31 million in balances as of December 31, 2017 under this program.

 

 

The Corporation’s available for sale investment portfolio of $689.2 million as of December 31, 2017 was 15.5% of total assets. Some of these investments were in short-term, high-quality, liquid investments to earn more than the 25 basis points currently earned on Fed Funds. The Corporation’s policy is to maintain its investment portfolio at a minimum level of 10% of total assets. The portion of the investment portfolio that is not already pledged against borrowings from the FHLB or other funding sources, provides the Corporation with the ability to utilize the securities to borrow additional funds through the FHLB, Federal Reserve or through other repurchase agreements.

 

Management continually evaluates its borrowing capacity and sources of liquidity. Management believes that it has sufficient capacity to fund expected 2018 earning asset growth with wholesale sources, along with deposit growth from its internal branch and wealth products.

 

 

Off Balance Sheet Risk

---

The Corporation becomes party to financial instruments 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 and create off-balance sheet risk.

 

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.

 

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

 

The following chart presents the off-balance sheet commitments of the Corporation as of December 31, 2017, listed by dates of funding or payment:

 

(dollars in millions)		Total				Within 1 Year				2 - 3 Years				4 - 5 Years				After 5 Years
Unfunded loan commitments		$	748.3			$	468.5			$	94.0			$	19.8			$	166.0
Standby letters of credit			17.0				11.3				5.5				0.2				—
Total		$	765.3			$	479.8			$	99.5			$	20.0			$	166.0

 

Estimated fair values of the Corporation’s off-balance sheet instruments 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. Collateral requirements for off-balance sheet items are generally based upon the same standards and policies as booked loans. 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 instruments.

 

 

Contractual Cash Obligations of the Corporation as of December 31, 2017

---

 

(dollars in millions)		Total				Within 1 Year				2 - 3 Years				4 - 5 Years				After 5 Years
Deposits without a stated maturity		$	2,669.7			$	2,669.7			$	—			$	—			$	—
Wholesale and retail certificates of deposit			704.1				537.1				136.5				29.7				0.8
Short-term borrowings			237.9				237.9				—				—				—
Long-term FHLB Advances			189.7				75.0				102.2				12.5				—
Subordinated Notes			100.0				—				—				—				100.0
Junior subordinated debentures			25.8				—				—				—				25.8
Operating leases			32.6				6.9				8.5				6.1				11.1
Purchase obligations			5.1				3.4				1.7				—				—
Total		$	3,964.9			$	3,530.0			$	248.9			$	48.3			$	137.7

 

 

Other Information

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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.

 

Effect 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  7A.

QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required by this Item 7A is incorporated by reference to information appearing in the MD&A Section of this Annual Report on Form 10-K, more specifically in the sections entitled “Interest Rate Sensitivity,” “Summary of Interest Rate Simulation,” and “Gap Analysis.”

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following audited Consolidated Financial Statements and related documents are set forth in this Annual Report on Form 10-K on the following pages:

 

	Page
Report of Independent Registered Public Accounting Firm	54
Consolidated Balance Sheets	55
Consolidated Statements of Income	56
Consolidated Statements of Comprehensive Income	57
Consolidated Statements of Cash Flows	58
Consolidated Statements of Changes in Shareholders’ Equity	59
Notes to Consolidated Financial Statements	60

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders and the Board of Directors
Bryn Mawr Bank Corporation:

 

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Bryn Mawr Bank Corporation and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Basis for Opinion

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

(signed) KPMG LLP

 

We have served as the Company’s auditor since 2004.

 

Philadelphia, Pennsylvania
March 1, 2018

 

 

Consolidated Balance Sheets

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Consolidated Statements of Income

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Consolidated Statements of Comprehensive Income

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Consolidated Statements of Cash Flows

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

Consolidated Statements of Changes in Shareholders' Equity

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM  9.

CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM  9A.

CONTROLS AND PROCEDURES

 

•

Evaluation of Disclosure Controls and Procedures

 

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 Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2017 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as of December 31, 2017 are effective.

 

•

Changes in Internal Control over Financial Reporting

 

There were no changes in the Corporation’s internal control over financial reporting during the fourth quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

•

Design and Evaluation of Internal Control Over Financial Reporting

 

Pursuant to Section 404 of Sarbanes-Oxley, the following is a report of management’s assessment of the design and effectiveness of our internal controls for the fiscal year ended December 31, 2017, and a report from our independent registered public accounting firm attesting to the effectiveness of our internal controls:

 

 

Management’s Report on Internal Control Over Financial Reporting

         The Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on Management’s best estimates and judgments.

 

The Corporation’s Management is responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; provide a reasonable assurance that receipts and expenditures of the Corporation are only being made in accordance with authorizations of Management and directors of the Corporation; and provide a reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by Management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are noted.

 

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. 

 

The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, assessed the Corporation’s system of internal control over financial reporting as of December 31, 2017, in relation to the criteria for effective control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, Management concludes that, as of December 31, 2017, the Corporation’s system of internal control over financial reporting is effective.

 

KPMG, LLP, which is the independent registered public accounting firm that audited the financial statements in this Annual Report on Form 10-K, has issued an attestation report on the Corporation’s internal control over financial reporting, which can be found under the heading “Report of Independent Registered Public Accounting Firm” at page 54, and is incorporated by reference herein.

 

ITEM  9B.

OTHER INFORMATION

 

None.

 

PART III

 

ITEM  10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required for Item 10 is incorporated by reference to the sections titled “Our Board of Directors,” “Information About our Directors,” “Information About our Executive Officers,” “Corporate Governance,” “Audit Committee Report” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2018 Proxy Statement.

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information required for Item 11 is incorporated by reference to section titled “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the 2018 Proxy Statement.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The information required for Item 12 is incorporated by reference to the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the 2018 Proxy Statement.

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The information required for Item 13 is incorporated by reference to sections titled “Transactions with Related Persons” and “Corporate Governance – Director Independence” in the 2018 Proxy Statement.

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required for Item 14 is incorporated by reference to the section “Independent Registered Public Accounting Firm” in the 2018 Proxy Statement.

 

PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

Item 15(a) (1 & 2) Financial Statements and Schedules

 

The financial statements listed in the accompanying index to financial statements are filed as part of this Annual Report.  

 

 

	Page
Report of Independent Registered Public Accounting Firm	54
Consolidated Balance Sheets	55
Consolidated Statements of Income	56
Consolidated Statements of Comprehensive Income	57
Consolidated Statements of Cash Flows	58
Consolidated Statement of Changes in Shareholders’ Equity	59
Notes to Consolidated Financial Statements	60

 

Item 15(a) (3) and (b) — Exhibits

 

 

Exhibit No.		Description and References
2.1		Stock Purchase Agreement, dated as of February 18, 2011, by and between Bryn Mawr Bank Corporation and Hershey Trust Company, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed with SEC on February 18, 2011
2.2		Amendment to Stock Purchase Agreement, dated as of May 27, 2011, by and between Hershey Trust Company and Bryn Mawr Bank Corporation, incorporated by reference to Exhibit 2.2 of the Corporation’s 8-K filed with the SEC on May 27, 2011
2.3		Assignment and Assumption Agreement, dated as of May 27, 2011, by and between Hershey Trust Company and PWMG Bank Holding Company Trust, incorporated by reference to Exhibit 2.3 of the Corporation’s 8-K filed with the SEC on May 27, 2011
2.4		Stock Purchase Agreement, dated as of February 3, 2012, by and among Bryn Mawr Bank Corporation, Davidson Trust Company, Boston Private (PA) Corporation, Bruce K. Bauder, Ernest E. Cecilia, Joseph J. Costigan, William S. Covert, James M. Davidson, Steven R. Klammer, N. Ray Sague, Malcolm C. Wilson, Boston Private Financial Holdings, Inc., and Alvin A. Clay III, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed with the SEC on February 7, 2012
2.5		Purchase and Assumption Agreement, dated as of April 27, 2012, by and between The Bryn Mawr Trust Company and First Bank of Delaware, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed with the SEC on May 2, 2012
2.6		Amendment to Stock Purchase Agreement, dates as of May 15, 2012, by and among Bryn Mawr Bank Corporation, Davidson Trust Company, Boston Private (PA) Corporation, Bruce K. Bauder, Ernest E. Cecilia, Joseph J. Costigan, William S. Covert, James M. Davidson, Steven R. Klammer, N. Ray Sague, Malcolm C. Wilson, Boston Private Financial Holdings, Inc., and Alvin A. Clay III, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed with the SEC on May 18, 2012
2.7		Amendment to Purchase and Assumption Agreement, dated as of October 12, 2012, by and between The Bryn Mawr Trust Company and First Bank of Delaware, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed with the SEC on October 18, 2012

 

 

Exhibit No.		Description and References
2.8		Amendment to Purchase and Assumption Agreement, dated as of November 14, 2012, by and between The Bryn Mawr Trust Company and First Bank of Delaware, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed with the SEC on November 19, 2012
2.9		Agreement and Plan of Merger, dated as of May 5, 2014, by and between Bryn Mawr Bank Corporation and Continental Bank Holdings, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed with the SEC on May 5, 2014
2.10		Amendment to Agreement and Plan of Merger, dated as of October 23, 2014, between Bryn Mawr Bank Corporation and Continental Bank Holdings, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed with the SEC on October 23, 2014
2.11		Stock Purchase Agreement, dated as of August 21, 2014, by and among The Bryn Mawr Trust Company, Donald W. Parker, Edward F. Lee, and Powers Craft Parker and Beard, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 10-Q filed with the SEC on November 7, 2014
2.12		Amendment to Stock Purchase Agreement, dated as of October 1, 2014, by and among The Bryn Mawr Trust Company, Donald W. Parker, Edward F. Lee, and Powers Craft Parker and Beard, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed with the SEC on October 3, 2014
2.13		Agreement and Plan of Merger, dated as of January 30, 2017, by and between Bryn Mawr Bank Corporation and Royal Bancshares of Pennsylvania, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed with the SEC on January 31, 2017
2.14		Amendment No. 1 to Agreement and Plan of Merger, dated December 14, 2017, by and between Bryn Mawr Bank Corporation and Royal Bancshares of Pennsylvania, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed with the SEC on December 18, 2017
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
4.1		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
4.2		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
4.3		Indenture, dated August 6, 2015, by and between Bryn Mawr Bank Corporation and U.S. Bank National Association, as trustee, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on August 7, 2015
4.4		Forms of 4.75% Subordinated Note due 2025 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as Exhibit 4.1), incorporated by reference to the Corporation’s Form 8-K filed with the SEC on August 7, 2015
4.5		Indenture, dated as of December 13, 2017 between Bryn Mawr Bank Corporation and U.S. Bank National Association, as trustee, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on December 13, 2017
4.6		First Supplemental Indenture, dated as of December 13, 2017 between Bryn Mawr Bank Corporation and U.S. Bank National Association as trustee, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on December 13, 2017
4.7		Form of 4.25% Fixed-to-Floating Rate Subordinated Note due December 15, 2027 (included as Exhibit A to the Indenture filed as Exhibit 4.2), incorporated by reference to the Corporation’s Form 8-K filed with the SEC on December 13, 2017
4.8		Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee, dated October 27, 2004, incorporated by reference to Exhibit 4.1 to RBPI’s Current Report on Form 8-K (included as Exhibit A to Exhibit 10.1) filed with the SEC on November 1, 2004
4.9		Junior Subordinated Debt Security Due 2034 issued by Royal Bancshares of Pennsylvania, Inc. to JPMorgan Chase Bank, as Institutional Trustee, dated October 27, 2004, incorporated by reference to Exhibit 4.2 to RBPI’s Current Report on Form 8-K (included as Exhibit A to Exhibit 10.2) filed with the SEC on November 1, 2004
4.10		Indenture by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan Chase Bank, as Trustee, dated October 27, 2004, incorporated by reference to Exhibit 10.1 to RBPI’s Current Report on Form 8-K filed with the Commission on November 1, 2004
4.11		Indenture by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan Chase Bank, as Trustee, dated October 27, 2004, incorporated by reference to Exhibit 10.2 to RBPI’s Current Report on Form 8-K filed with the Commission on November 1, 2004
4.12		Guarantee Agreement by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan Chase Bank, as Guarantee Trustee, dated October 27, 2004, incorporated by reference to Exhibit 10.3 to RBPI’s Current Report on Form 8-K filed with the Commission on November 1, 2004

 

 

Exhibit No.		Description and References
4.13		Guarantee Agreement by and between Royal Bancshares of Pennsylvania, Inc. and JPMorgan Chase Bank, as Guarantee Trustee, October 27, 2004, incorporated by reference to Exhibit 10.4 to RBPI’s Current Report on Form 8-K filed with the Commission on November 1, 2004
4.14		Warrant to Purchase Class A Common Stock, issued February 20, 2009, by Royal Bancshares of Pennsylvania, Inc. to the United States Department of the Treasury, incorporated by reference to Exhibit 4.1 to RBPI’s Current Report on Form 8-K filed with the Commission on February 26, 2009
10.1*		Amended and Restated Supplemental Employee Retirement Plan of the Bryn Mawr Bank Corporation, effective January 1, 1999, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 10-K filed with the SEC on March 13, 2008
10.2**		Form of Restricted Stock Agreement for Employees (Service/Performance Based) Subject to the 2010 Long Term Incentive Plan, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 10-K filed with the SEC on March 16, 2011
10.3*		Amended and Restated Deferred Bonus Plan for Executives of Bryn Mawr Bank Corporation, effective January 1, 2008 incorporated by reference to Exhibit 10.4 of the Corporation’s Form 10-K filed with the SEC on March 16, 2009
10.4*		Amended and Restated Deferred Payment Plan for Directors of Bryn Mawr Bank Corporation, effective January 1, 2008 incorporated by reference to Exhibit 10.5 of the Corporation’s Form 10-K filed with the SEC on March 16, 2009
10.5*		Amended and Restated Deferred Payment Plan for Directors of Bryn Mawr Trust Company, effective January 1, 2008 incorporated by reference to Exhibit 10.6 of the Corporation’s Form 10-K filed with the SEC on March 16, 2009
10.6*		Employment Letter Agreement, dated as of April 25, 2014, between the Corporation and Francis J. Leto, incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed with the SEC on April 25, 2014
10.7*		Amendment to 2012 Restricted Stock Agreement, dated August 20, 2014, between Bryn Mawr Bank Corporation and Fredrick C. Peters, II, incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed with the SEC on August 21, 2014
10.8*		Amendment to 2013 Restricted Stock Unit Agreement, dated August 20, 2014, between Bryn Mawr Bank Corporation and Fredrick C. Peters, II, incorporated by reference to Exhibit 10.2 to the Corporation’s Form 8-K filed with the SEC on August 21, 2014
10.9*		Standard Form of Executive Change-of-Control Agreement, incorporated by reference to Exhibit 10.2 of the Corporation’s Form 8-K filed with the SEC on December 18, 2017
10.10*		Executive Change-of-Control Amended and Restated Severance Agreement, dated May 21, 2004, between the Bryn Mawr Trust Company and Alison E. Gers, incorporated by reference to Exhibit 10.M of the Corporation’s Form 10-K filed with the SEC on March 15, 2007
10.11*		Executive Change-of-Control Amended and Restated Severance Agreement, dated May 21, 2004, between the Bryn Mawr Trust Company and Joseph G. Keefer, incorporated by reference to Exhibit 10.N of the Corporation’s Form 10-K filed with the SEC on March 15, 2007
10.12*		Form of Restricted Stock Unit Agreement for Executives (Time/Performance Based), filed herewith
10.13**		Form of Key Employee Non-Qualified Stock Option Agreement, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 10-Q filed with the SEC on May 10, 2005
10.14**		Form of Non-Qualified Stock Option Agreement for Non-Employee Directors, incorporated by reference to Exhibit 10.2 of the Corporation’s Form 10-Q filed with the SEC on May 10, 2005
10.15**		Form of Restricted Stock Unit Agreement for Employees (Service/Performance Based) – Multi-Year Vesting, incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed with the SEC on September 17, 2014
10.16**		2007 Long Term Incentive Plan, effective April 25, 2007, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 10-Q filed with the SEC May 10, 2007
10.17**		Bryn Mawr Bank Corporation Supplemental Employee Retirement Plan for Select Executives, executed December 8, 2008, incorporated by reference to Exhibit 10.20 of the Corporation’s Form 10-K filed with the SEC on March 16, 2009
10.18		Form of Director Letter Agreement, incorporated by reference to Exhibit 10.2 to the Corporation’s Form 10-Q filed with the SEC on August 8, 2014
10.19*		Executive Change-of-Control Amended and Restated Severance Agreement, dated November 2, 2009, between the Bryn Mawr Trust Company and Francis J. Leto, incorporated by reference to Exhibit 10.1 of the Corporation’s 8-K filed with the SEC on November 6, 2009
10.20**		Form of Restricted Stock Unit Agreement for Employees (Time-Based Cliff Vesting), incorporated by reference to Exhibit 10.2 to the Corporation’s Form 10-Q filed with the SEC on August 7, 2015
10.21**		Bryn Mawr Bank Corporation 2010 Long-Term Incentive Plan, effective April 28, 2010, incorporated by reference to Exhibit 10.24 of the Corporation’s Form 10-Q filed with the SEC on May 10, 2010
10.22**		Amended and Restated Bryn Mawr Bank Corporation 2010 Long-Term Incentive Plan, effective April 30, 2015, incorporated by reference to Appendix A of the Corporation’s Proxy Statement on Definitive Schedule 14A filed with the SEC on March 20, 2015

 

 

Exhibit No.		Description and References
10.23**		First Keystone Financial, Inc. Amended and Restated 1998 Stock Option Plan, as assumed by Bryn Mawr Bank Corporation, incorporated by reference to Exhibit 10.1 of the Corporation’s Post-Effective Amendment No.1 to Form S-4 on Form S-3, filed with the SEC on July 9, 2010
10.24		Continental Bank Holdings, Inc. Amended and Restated 2005 Stock Incentive Plan, incorporated by reference to Exhibit 4.3 of the Corporation’s Form S-8 filed with the SEC on January 22, 2015
10.25**		Restricted Stock Agreement for Employees (Service/Performance Based) Subject to the 2010 Long Term Incentive Plan, dated as of January 10, 2011, for Francis J. Leto, incorporated by reference to Exhibit 10.30 of the Corporation’s Form 10-K filed with the SEC on March 16, 2011
10.26		Amendment No. 2 to Stock Purchase Agreement by and between PWMG Bank Holding Company Trust and Bryn Mawr Bank Corporation dated September 29, 2011, filed with the SEC on Form 8-K on October 4, 2011
10.27**		Form of Restricted Stock Agreement for Employees (Service/Performance Based) Subject to the 2010 Long Term Incentive Plan, incorporated by reference to Exhibit 10.32 of the Corporation’s Form 10-Q filed with the SEC on November 9, 2011
10.28**		Form of Restricted Stock Agreement for Directors (Service/Performance Based) Subject to the 2010 Long Term Incentive Plan, incorporated by reference to Exhibit 10.33 of the Corporation’s Form 10-Q filed with the SEC on November 9, 2011
10.29*		Amendment No. 1 to Amended and Restated Deferred Bonus Plan for Executives of Bryn Mawr Bank Corporation, effective as of January 1, 2013, incorporated by reference to Exhibit 10.29 of the Corporation’s Form 10-K filed with the SEC on March 15, 2013
10.30*		Amendment No. 2 to Amended and Restated Deferred Bonus Plan for Executives of Bryn Mawr Bank Corporation, effective as of January 1, 2013, incorporated by reference to Exhibit 10.30 of the Corporation’s Form 10-K filed with the SEC on March 15, 2013
10.31*		Form of Letter Agreement entered into with certain executive officers of the Corporation in connection with the curtailment of benefits under the Bryn Mawr Bank Corporation Supplemental Employee Retirement Plan for Select Executives, executed December 8, 2008 (SERP II), incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed with the SEC on April 4, 2013
10.32*		Bryn Mawr Bank Corporation Executive Deferred Compensation Plan, effective January 1, 2013, incorporated by reference to Exhibit 10.32 of the Corporation’s Form 10-K filed with the SEC on March 14, 2014
10.33*		Retention Bonus Agreement, dated as of June 10, 2013, by and between The Bryn Mawr Trust Company and Francis J. Leto, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed with the SEC on June 14, 2013
10.34*		Form of Restricted Stock Unit Agreement for Directors (Time/Performance Based), filed herewith
10.35**		Form of Restricted Stock Unit Agreement for Employees (Service/Performance Based), incorporated by reference to Exhibit 10.4 to the Corporation’s Form 10-Q filed with the SEC on November 7, 2014
10.36**		Form of Restricted Stock Unit Agreement for Directors (Service/Performance Based), incorporated by reference to Exhibit 10.5 to the Corporation’s Form 10-Q filed with the SEC on November 7, 2014
10.37**		Form of Restricted Stock Unit Agreement – Inducement Grant, incorporated by reference to Exhibit 10.6 to the Corporation’s Form 10-Q filed with the SEC on November 7, 2014
10.38		Second Amended and Restated Dividend Reinvestment and Stock Purchase Plan, effective April 30, 2015, incorporated by reference to the Corporation’s prospectus supplement filed with the SEC on May 1, 2015 pursuant to Rule 424 (b) under the Securities Act of 1933, as amended
10.39*		Employment Letter Agreement, dated December 15, 2017, by and between The Bryn Mawr Trust Company and F. Kevin Tylus, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed with the SEC on December 18, 2017

 

 

Exhibit No.		Description and References
10.40		Form of Subordinated Note Purchase Agreement, dated August 6, 2015, by and among Bryn Mawr Bank Corporation and the Purchasers identified therein, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on August 7, 2015
10.41		Form of Registration Rights Agreement, dated August 6, 2015, by and among Bryn Mawr Bank Corporation and Purchasers identified therein, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on August 7, 2015
10.42*		Employment Letter Agreement, dated September 8, 2015, by and among Bryn Mawr Bank Corporation, The Bryn Mawr Trust Company and Michael W. Harrington, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed with the SEC on September 9, 2015
10.43*		Executive Change-of-Control Severance Agreement, dated as of September 8, 2015, by and between The Bryn Mawr Trust Company and Michael W. Harrington, incorporated by reference to Exhibit 10.2 to the Corporation’s Form 8-K filed with the SEC on September 9, 2015
10.44*		Employment Agreement. dated as of April 1, 2015, between The Bryn Mawr Trust Company and Lori Goldman, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 10-Q filed with the SEC on November 3, 2017
10.45*		Employment Letter Agreement, dated November 20, 2017, by and between Bryn Mawr Bank Corporation, The Bryn Mawr Trust Company and Jennifer Dempsey Fox, filed herewith
10.46*		Form of Restricted Stock Unit Agreement for New Employee, filed herewith
12.1		Ratio of Earnings to Fixed Charges, filed herewith
21.1		List of Subsidiaries, filed herewith
23.1		Consent of KPMG LLP, 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
99.1		Corporation’s Proxy Statement for 2017 Annual Meeting to be held on April 19, 2018, expected to be filed with the SEC on or about March 9, 2018
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

 

 

---

*	Management contract or compensatory plan arrangement.

 

**	Shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.

 

 

Item 15(c) — Not Applicable

 

Item 16 — None.

 

 

SIGNATURES

 

Pursuant to the requirements of section 13 or 15d of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

Bryn Mawr Bank Corporation

 

By  /s/ Michael W. Harrington
         Michael W. Harrington
         Chief Financial Officer

         (Principal Financial Officer)

 

Date: March 1, 2018

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Corporation and in the capacities and on the date indicated.

 

NAME		TITLE			DATE
/s/ Britton H. Murdoch		Chairman and Director			March 1, 2018
Britton H. Murdoch
/s/ Francis J. Leto		President and Chief Executive Officer			March 1, 2018
Francis J. Leto		(Principal Executive Officer) and Director
/s/ Michael W. Harrington		Chief Financial Officer			March 1, 2018
Michael W. Harrington		(Principal Financial Officer)
/s/ Michael T. LaPlante		Chief Accounting Officer			March 1, 2018
Michael T. LaPlante		(Principal Accounting Officer)
/s/ Diego F. Calderin		Director			March 1, 2018
Diego F. Calderin
/s/ Michael J. Clement		Director			March 1, 2018
Michael J. Clement
/s/ Andrea F. Gilbert		Director			March 1, 2018
Andrea F. Gilbert
/s/ Wendell F Holland		Director			March 1, 2018
Wendell F. Holland
/s/ Scott M. Jenkins		Director			March 1, 2018
Scott M. Jenkins

 

/s/ Jerry L. Johnson			Director		March 1, 2018
Jerry L. Johnson
/s/ A. John May, III			Director		March 1, 2018
A. John May, III
/s/ Lynn B. McKee			Director		March 1, 2018
Lynn B. McKee
/s/ F. Kevin Tylus			Director		March 1, 2018
F. Kevin Tylus

 

129