Edgar Filing: BRYN MAWR BANK CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Under Section 13 or 15 (d)

of the Securities and Exchange Act of 1934.

For Quarter ended June 30, 2014

Commission File Number 1-35746

Bryn Mawr Bank Corporation

(Exact name of registrant as specified in its charter)


Pennsylvania		23-2434506
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)

801 Lancaster Avenue, Bryn Mawr, Pennsylvania		19010
(Address of principal executive offices)		(Zip Code)

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

Not Applicable

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

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

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.


Class		Outstanding at August 5, 2014
Common Stock, par value $1		13,728,436

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED June 30, 2014

Index



PART I -	FINANCIAL INFORMATION

ITEM 1.	Financial Statements (unaudited)

	Consolidated Financial Statements	Page 3

	Notes to Consolidated Financial Statements	Page 8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 35

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 49

ITEM 4.	Controls and Procedures	Page 49

PART II -	OTHER INFORMATION	Page 50

ITEM 1.	Legal Proceedings	Page 50

ITEM 1A.	Risk Factors	Page 50

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 50

ITEM 3.	Defaults Upon Senior Securities	Page 50

ITEM 4.	Mine Safety Disclosures	Page 50

ITEM 5.	Other Information	Page 50

ITEM 6.	Exhibits	Page 51

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets—Unaudited


(dollars in thousands)	(unaudited) June 30, 2014			December 31, 2013
Assets
Cash and due from banks	$	17,018		$	13,453
Interest bearing deposits with banks		85,946			67,618

Cash and cash equivalents		102,964			81,071
Investment securities available for sale, at fair value (amortized cost of $264,039 and $287,127 as of June 30, 2014 and December 31, 2013 respectively)		266,402			285,808
Investment securities, trading		3,597			3,437
Loans held for sale		1,631			1,350
Portfolio loans and leases		1,615,542			1,547,185
Less: Allowance for loan and lease losses		(15,470	)		(15,515	)

Net portfolio loans and leases		1,600,072			1,531,670
Premises and equipment, net		32,679			31,796
Accrued interest receivable		5,526			5,728
Deferred income taxes		5,984			8,690
Mortgage servicing rights		4,760			4,750
Bank owned life insurance		20,375			20,220
Federal Home Loan Bank stock		12,775			11,654
Goodwill		32,843			32,843
Intangible assets		18,092			19,365
Other investments		4,507			4,437
Other assets		19,018			18,846

Total assets	$	2,131,225		$	2,061,665

Liabilities
Deposits:
Non-interest-bearing	$	436,739		$	426,640
Interest-bearing		1,183,193			1,164,707

Total deposits		1,619,932			1,591,347

Short-term borrowings		13,320			10,891
FHLB advances and other borrowings		233,132			205,644
Accrued interest payable		835			841
Other liabilities		20,635			23,044

Total liabilities		1,887,854			1,831,767

Shareholders’ equity
Common stock, par value $1; authorized 100,000,000 shares; issued 16,670,884 and 16,596,869 shares as of June 30, 2014 and December 31, 2013, respectively, and outstanding of 13,719,337 and 13,650,354 as of June 30, 2014 and December 31, 2013, respectively		16,671			16,597
Paid-in capital in excess of par value		97,967			95,673
Less: Common stock in treasury at cost—2,951,547 and 2,946,515 shares as of June 30, 2014 and December 31, 2013, respectively		(31,017	)		(30,764	)
Accumulated other comprehensive loss, net of tax benefit		(3,548	)		(5,565	)
Retained earnings		163,298			153,957

Total shareholders’ equity		243,371			229,898

Total liabilities and shareholders’ equity	$	2,131,225		$	2,061,665

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

Page 3

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income—Unaudited


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands, except per share data)	2014			2013			2014			2013
Interest income:
Interest and fees on loans and leases	$	19,876		$	18,219		$	38,918		$	36,030
Interest on cash and cash equivalents		44			41			81			110
Interest on investment securities:
Taxable		891			829			1,842			1,687
Non-taxable		101			98			204			182
Dividends		29			30			57			63

Total interest income		20,941			19,217			41,102			38,072

Interest expense on:
Deposits		713			694			1,402			1,469
Short-term borrowings		5			4			8			7
FHLB advances and other borrowings		781			596			1,527			1,264

Total interest expense		1,499			1,294			2,937			2,740

Net interest income		19,442			17,923			38,165			35,332
Provision for loan and lease losses		(100	)		1,000			650			1,804

Net interest income after provision for loan and lease losses		19,542			16,923			37,515			33,528
Non-interest income:
Fees for wealth management services		9,499			9,094			18,412			17,443
Service charges on deposits		656			596			1,257			1,180
Loan servicing and other fees		428			448			874			899
Net gain on sale of residential mortgage loans		537			1,492			861			3,010
Net gain on sale of investment securities available for sale		85			—			81			2
Net gain (loss) on sale of other real estate owned (“OREO”)		220			(141	)		220			(193	)
Bank owned life insurance (“BOLI”) income		74			85			155			198
Other operating income		1,258			1,369			2,036			2,194

Total non-interest income		12,757			12,943			23,896			24,733
Non-interest expenses:
Salaries and wages		9,694			9,086			18,134			17,896
Employee benefits		1,809			2,212			3,788			4,537
Net gain on curtailment of nonqualified pension plan		—			(120	)		—			(690	)
Occupancy and bank premises		1,683			1,728			3,616			3,478
Furniture, fixtures, and equipment		1,089			1,221			2,072			2,040
Advertising		455			380			794			792
Amortization of mortgage servicing rights		128			218			242			430
Net recovery of mortgage servicing rights		(3	)		(91	)		(11	)		(20	)
Amortization of intangible assets		636			660			1,273			1,321
FDIC insurance		242			275			514			533
Due diligence and merger-related expenses		377			688			641			1,402
Early extinguishment of debt—costs and premiums		—			—			—			347
Professional fees		914			664			1,507			1,239
Pennsylvania bank shares tax		412			366			780			530
Other operating expenses		3,190			3,237			6,175			6,924

Total non-interest expenses		20,626			20,524			39,525			40,759
Income before income taxes		11,673			9,342			21,886			17,502
Income tax expense		4,069			3,090			7,593			5,930

Net income	$	7,604		$	6,252		$	14,293		$	11,572

Basic earnings per common share	$	0.56		$	0.47		$	1.06		$	0.87
Diluted earnings per common share	$	0.55		$	0.46		$	1.03		$	0.86
Dividends declared per share	$	0.18		$	0.17		$	0.36		$	0.34
Weighted-average basic shares outstanding		13,531,155			13,280,624			13,508,311			13,243,289
Dilutive shares		304,998			227,150			304,913			228,782

Adjusted weighted-average diluted shares		13,836,153			13,507,774			13,813,224			13,472,071

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

Page 4

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income—Unaudited


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2014			2013			2014			2013
Net income	$	7,604		$	6,252		$	14,293		$	11,572
Other comprehensive income (loss):
Net change in unrealized gains (losses) on investment securities available for sale:
Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $702, $(1,761), $1,317 and $(1,769), respectively		1,303			(3,270	)		2,445			(3,286	)
Less: reclassification adjustment for net (gains) losses on sales realized in net income, net of tax expense (benefit) of $30, $0, $28 and $1, respectively		(55	)		—			(52	)		(1	)

Unrealized investment gains (losses), net of tax expense (benefit) of $672, $(1,761), $1,289 and $(1,768), respectively		1,248			(3,270	)		2,393			(3,287	)
Net change in fair value of derivative used for cash flow hedge:
Change in fair value of hedging instruments, net of tax (benefit) expense of $(130), $260, $(253) and $324, respectively		(242	)		482			(469	)		601
Net change in unfunded pension liability:
Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax expense of $24, $133, $50 and $267, respectively		47			248			93			494
Change in unfunded pension liability related to curtailment, net of tax expense of $0, $0, $0 and $627, respectively		—			—			—			1,165

Total change in unfunded pension liability, net of tax expense of $25, $133, $50 and $894, respectively		47			248			93			1,659

Total other comprehensive income (loss)		1,053			(2,540	)		2,017			(1,027	)
Total comprehensive income	$	8,657		$	3,712		$	16,310		$	10,545

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

Page 5

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows—Unaudited


	Six Months Ended June 30,
(dollars in thousands)	2014			2013
Operating activities:
Net Income	$	14,293		$	11,572
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		650			1,804
Depreciation of fixed assets		1,606			1,400
Net amortization of investment premiums and discounts		1,212			2,282
Net gain on sale of investment securities available for sale		(81	)		(2	)
Net gain on sale of residential mortgage loans		(861	)		(3,010	)
Stock based compensation cost		609			469
Amortization and net impairment of mortgage servicing rights		231			410
Net accretion of fair value adjustments		(1,719	)		(1,628	)
Amortization of intangible assets		1,273			1,321
Net (gain) loss on sale of OREO		(220	)		193
Net increase in cash surrender value of bank owned life insurance (“BOLI”)		(155	)		(198	)
Other, net		(3,099	)		377
Loans originated for resale		(24,672	)		(97,492	)
Proceeds from loans sold		25,011			100,998
Provision for deferred income taxes		1,620			1,123
Change in income taxes payable/receivable		(187	)		293
Change in accrued interest receivable		202			(142	)
Change in accrued interest payable		(6	)		(318	)

Net cash provided by operating activities		15,707			19,452

Investing activities:
Purchases of investment securities available for sale		(21,827	)		(70,362	)
Proceeds from maturity of investment securities and paydowns of mortgage-related securities		18,159			33,417
Proceeds from sale of investment securities available for sale		4,125			496
Net change in FHLB stock		(1,121	)		(2,267	)
Proceeds from calls of investment securities		21,500			22,512
Net change in other investments		(70	)		(32	)
Net portfolio loan and lease originations		(68,225	)		(33,417	)
Purchases of premises and equipment		(2,545	)		(1,233	)
Capitalize OREO costs		—			(485	)
Proceeds from sale of OREO		1,097			488

Net cash used in investing activities		(48,907	)		(50,883	)

Financing activities:
Change in deposits		28,598			(84,738	)
Change in short-term borrowings		2,429			62,365
Dividends paid		(4,888	)		(4,498	)
Change in FHLB advances and other borrowings		27,548			(8,583	)
Payment of contingent consideration for business combinations		—			(1,050	)
Excess tax benefit from stock-based compensation		240			148
Proceeds from sale of treasury stock from deferred compensation plans		—			365
Net purchase of treasury stock		(243	)		—
Proceeds from issuance of common stock		32			107
Proceeds from exercise of stock options		1,377			1,740

Net cash provided by (used in) financing activities		55,093			(34,144	)

Change in cash and cash equivalents		21,893			(65,575	)
Cash and cash equivalents at beginning of period		81,071			175,686

Cash and cash equivalents at end of period	$	102,964		$	110,111

Supplemental cash flow information:
Cash paid during the year for:
Income taxes	$	5,921		$	4,366
Interest		2,943			3,058
Non-cash information:
Change in other comprehensive loss	$	2,017		$	(1,027	)
Change in deferred tax due to change in comprehensive income		1,086			(552	)
Transfer of loans to other real estate owned		875			495

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

Page 6

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity—Unaudited


	For the Six Months Ended June 30, 2014
(dollars in thousands, except per share information)	Shares of Common Stock Issued		Common Stock		Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total Shareholders’ Equity
Balance December 31, 2013		16,596,869		16,597		95,673		(30,764	)		(5,565	)		153,957			229,898
Net income		—		—		—		—			—			14,293			14,293
Dividends declared, $0.36 per share		—		—		—		—			—			(4,952	)		(4,952	)
Other comprehensive income, net of tax expense of $1,086		—		—		—		—			2,017			—			2,017
Stock based compensation		—		—		609		—			—			—			609
Tax benefit from stock-based compensation		—		—		240		—			—			—			240
Net purchase of treasury stock from stock award and deferred compensation plans		—		—		45		(288	)		—			—			(243	)
Common stock issued:
Dividend Reinvestment and Stock Purchase Plan		1,159		1		31		—			—			—			32
Share-based awards and options exercises		72,856		73		1,369		35			—			—			1,477

Balance June 30, 2014		16,670,884	$	16,671	$	97,967	$	(31,017	)	$	(3,548	)	$	163,298		$	243,371

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

Page 7

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of Bryn Mawr Bank Corporation’s (the “Corporation”) management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Corporation’s Annual Report on Form 10-K for the twelve months ended December 31, 2013 (the “2013 Annual Report”).

The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.

Note 2 - Earnings Per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock, as well as the effect of restricted and performance shares becoming unrestricted common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive. All weighted average shares, actual shares and per share information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits.


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands except per share data)	2014		2013		2014		2013
Numerator:
Net income available to common shareholders	$	7,604	$	6,252	$	14,293	$	11,572

Denominator for basic earnings per share – weighted average shares outstanding		13,531,155		13,280,624		13,508,311		13,243,289
Effect of dilutive common shares		304,998		227,150		304,913		228,782

Denominator for diluted earnings per share – adjusted weighted average shares outstanding		13,836,153		13,507,774		13,813,224		13,472,071

Basic earnings per share	$	0.56	$	0.47	$	1.06	$	0.87
Diluted earnings per share	$	0.55	$	0.46	$	1.03	$	0.86
Antidilutive shares excluded from computation of average dilutive earnings per share		—		114,713		—		116,138

Note 3 - Investment Securities

The amortized cost and fair value of investment securities available for sale are as follows:

As of June 30, 2014


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	102	$	—	$	(1	)	$	101
Obligations of U.S. government agency securities		63,623		198		(484	)		63,337
Obligations of state & political subdivisions		35,864		195		(67	)		35,992
Mortgage-backed securities		109,045		2,167		(208	)		111,004
Collateralized mortgage obligations		39,674		406		(245	)		39,835
Other investments		15,731		405		(3	)		16,133

Total	$	264,039	$	3,371	$	(1,008	)	$	266,402

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As of December 31, 2013


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	102	$	—	$	(3	)	$	99
Obligations of the U.S. government and agencies		71,097		149		(1,678	)		69,568
Obligations of state and political subdivisions		37,140		141		(304	)		36,977
Mortgage-backed securities		119,044		1,392		(1,073	)		119,363
Collateralized mortgage obligations		44,463		273		(493	)		44,243
Other investments		15,281		301		(24	)		15,558

Total	$	287,127	$	2,256	$	(3,575	)	$	285,808

The following tables detail the amount of investment securities available for sale that were in an unrealized loss position as of the dates indicated:

As of June 30, 2014


	Less than 12 Months					12 Months or Longer					Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	—	$	—		$	101	$	(1	)	$	101	$	(1	)
Obligations of the U.S. government and agencies		5,492		(5	)		28,063		(479	)		33,555		(484	)
Obligations of state and political subdivisions		4,343		(13	)		4,913		(54	)		9,256		(67	)
Mortgage-backed securities		6,112		(13	)		15,248		(195	)		21,360		(208	)
Collateralized mortgage obligations		5,383		(34	)		8,403		(211	)		13,786		(245	)
Other investments		193		(3	)		—		—			193		(3	)

Total	$	21,523	$	(68	)	$	56,728	$	(940	)	$	78,251	$	(1,008	)

As of December 31, 2013


	Less than 12 Months					12 Months or Longer					Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	99	$	(3	)	$	—	$	—		$	99	$	(3	)
Obligations of the U.S. government and agencies		41,201		(1,391	)		5,774		(287	)		46,975		(1,678	)
Obligations of state and political subdivisions		13,020		(233	)		4,543		(71	)		17,563		(304	)
Mortgage-backed securities		55,672		(972	)		2,302		(101	)		57,974		(1,073	)
Collateralized mortgage obligations		26,395		(493	)		—		—			26,395		(493	)
Other investments		1,494		(24	)		—		—			1,494		(24	)

Total	$	137,881	$	(3,116	)	$	12,619	$	(459	)	$	150,500	$	(3,575	)

Management evaluates the Corporation’s investment securities available for sale that are in an unrealized loss position in order to determine if the decline in market value is other than temporary. The available for sale investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state and local municipalities and other issuers. All fixed income investment securities in the Corporation’s available for sale investment portfolio are rated as investment grade. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been

Page 9

below cost, interest rates and the bond rating of each security. The unrealized losses presented in the tables above are temporary in nature and are primarily related to market interest rates rather than the underlying credit quality of the issuers. The Corporation does not believe that these unrealized losses are other-than-temporary. The Corporation does not have the intent to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely than not that it will not have to sell these securities prior to their maturity or the recovery of their cost bases.

As of June 30, 2014 and December 31, 2013, securities having fair values of $92.8 million and $94.9 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the Federal Reserve Bank of Philadelphia discount window program, Federal Home Loan Bank of Pittsburgh (“FHLB”) borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Bank’s borrowing agreement with the FHLB.

The amortized cost and fair value of investment securities available for sale as of June 30, 2014 and December 31, 2013, by contractual maturity, are shown below:


	June 30, 2014				December 31, 2013
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities¹:
Due in one year or less	$	16,417	$	16,458	$	7,859	$	7,869
Due after one year through five years		52,182		52,290		49,790		49,721
Due after five years through ten years		32,149		31,809		51,793		50,117
Due after ten years		743		774		797		824

Subtotal		101,491		101,331		110,239		108,531
Mortgage-related securities²		148,719		150,839		163,507		163,606

Total	$	250,210	$	252,170	$	273,746	$	272,137

¹	Included in the investment portfolio, but not in the table above, are mutual funds with a fair value, as of both June 30, 2014 and December 31, 2013, of $14.2 million and $13.7 million, respectively, which have no stated maturity.

²	Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As of June 30, 2014 and December 31, 2013, the Corporation’s investment securities held in trading accounts were comprised of a deferred compensation trust which is invested in marketable securities whose diversification is at the discretion of the deferred compensation plan participants.

Note 4 - Loans and Leases

A. Loans and leases outstanding are detailed by category as follows:


	June 30, 2014		December 31, 2013
Loans held for sale	$	1,631	$	1,350

Real estate loans:
Commercial mortgage	$	666,924	$	625,341
Home equity lines and loans		185,593		189,571
Residential mortgage		310,491		300,243
Construction		55,051		46,369

Total real estate loans		1,218,059		1,161,524
Commercial and industrial		334,474		328,459
Consumer		18,907		16,926
Leases		44,102		40,276

Total portfolio loans and leases		1,615,542		1,547,185

Total loans and leases	$	1,617,173	$	1,548,535

Loans with predetermined rates	$	896,505	$	850,168
Loans with adjustable or floating rates		720,668		698,367

Total loans and leases	$	1,617,173	$	1,548,535

Net deferred loan origination costs included in the above loan table	$	157	$	222

Page 10

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


(dollars in thousands)	June 30, 2014			December 31, 2013
Minimum lease payments receivable	$	50,171		$	45,866
Unearned lease income		(8,219	)		(7,534	)
Initial direct costs and deferred fees		2,150			1,944

Total	$	44,102		$	40,276

C. Non-Performing Loans and Leases⁽¹⁾


(dollars in thousands)	June 30, 2014		December 31, 2013
Non-accrual loans and leases:
Commercial mortgage	$	296	$	478
Home equity lines and loans		1,210		1,262
Residential mortgage		3,633		4,377
Construction		469		830
Commercial and industrial		2,729		3,539
Consumer		—		20
Leases		51		24

Total	$	8,388	$	10,530

⁽¹⁾

Purchased credit-impaired loans, which have been recorded at their fair values at acquisition, and which are performing, are excluded from this table, with the exception of $143 thousand and $238 thousand of purchased credit-impaired loans as of June 30, 2014 and December 31, 2013, respectively, which became non-performing subsequent to acquisition.

D. Purchased Credit-Impaired Loans

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


(dollars in thousands)	June 30, 2014		December 31, 2013
Outstanding principal balance	$	12,975	$	14,293
Carrying amount⁽¹⁾	$	9,076	$	9,880

⁽¹⁾

Includes $188 thousand and $293 thousand purchased credit-impaired loans as of June 30, 2014 and December 31, 2013, respectively, for which the Bank could not estimate the timing or amount of expected cash flows to be collected at acquisition, and for which no accretable yield is recognized. Additionally, the table above includes $143 thousand and $238 thousand of purchased credit-impaired loans as of June 30, 2014 and December 31, 2013, respectively, which became non-performing subsequent to acquisition, which are disclosed in Note 4C, above, and which also have no accretable yield.

The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Bank applies ASC 310-30, for the six months ended June 30, 2014:


(dollars in thousands)	Accretable Discount
Balance, December 31, 2013	$	6,134
Accretion		(834	)
Reclassifications from nonaccretable difference		930
Additions/adjustments		(123	)
Disposals		(2	)

Balance, June 30, 2014	$	6,105

Page 11

E. Age Analysis of Past Due Loans and Leases

The following tables present an aging of the Corporation’s loan and lease portfolio as of the dates indicated:


	Accruing Loans and Leases												Nonaccrual Loans and Leases		Total Loans and Leases
(dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Over 89 Days Past Due		Total Past Due		Current		Total Accruing Loans and Leases		Nonaccrual Loans and Leases		Total Loans and Leases
As of June 30, 2014
Commercial mortgage	$	—	$	402	$	—	$	402	$	666,226	$	666,628	$	296	$	666,924
Home equity lines and loans		86		35		—		121		184,262		184,383		1,210		185,593
Residential mortgage		2,973		—		—		2,973		303,885		306,858		3,633		310,491
Construction		—		—		—		—		54,582		54,582		469		55,051
Commercial and industrial		27		—		—		27		331,718		331,745		2,729		334,474
Consumer		—		1		—		1		18,906		18,907		—		18,907
Leases		122		98		—		220		43,831		44,051		51		44,102

	$	3,208	$	536	$	—	$	3,744	$	1,603,410	$	1,607,154	$	8,388	$	1,615,542


	Accruing Loans and Leases												Nonaccrual Loans and Leases		Total Loans and Leases
(dollars in thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		Over 89 Days Past Due		Total Past Due		Current		Total Accruing Loans and Leases		Nonaccrual Loans and Leases		Total Loans and Leases
As of December 31, 2013
Commercial mortgage	$	241	$	—	$	—	$	241	$	624,622	$	624,863	$	478	$	625,341
Home equity lines and loans		209		—		—		209		188,100		188,309		1,262		189,571
Residential mortgage		773		35		—		808		295,058		295,866		4,377		300,243
Construction		—		—		—		—		45,539		45,539		830		46,369
Commercial and industrial		334		—		—		334		324,586		324,920		3,539		328,459
Consumer		2		4		—		6		16,900		16,906		20		16,926
Leases		60		60		—		120		40,132		40,252		24		40,276

	$	1,619	$	99	$	—	$	1,718	$	1,534,937	$	1,536,655	$	10,530	$	1,547,185

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

The following tables detail the roll-forward of the Corporation’s Allowance for the three and six months ended June 30, 2014:


(dollars in thousands)	Commercial Mortgage			Home Equity Lines and Loans			Residential Mortgage		Construction		Commercial and Industrial			Consumer			Leases			Unallocated		Total
Balance, March 31, 2014	$	3,971		$	2,129		$	2,318	$	867	$	5,356		$	286		$	615		$	228	$	15,770
Charge-offs		—			(57	)		—		—		(168	)		(39	)		(40	)				(304	)
Recoveries		—			2			8		—		53			3			38					104
Provision for loan and lease losses		(140	)		520			61		133		(583	)		11			(172	)		70		(100	)

Balance, June 30, 2014	$	3,831		$	2,594		$	2,387	$	1,000	$	4,658		$	261		$	441		$	298	$	15,470


(dollars in thousands)	Commercial Mortgage			Home Equity Lines and Loans			Residential Mortgage			Construction		Commercial and Industrial			Consumer			Leases			Unallocated			Total
Balance, December 31, 2013	$	3,797		$	2,204		$	2,446		$	845	$	5,011		$	259		$	604		$	349		$	15,515
Charge-offs		(20	)		(443	)		(17	)		—		(169	)		(71	)		(122	)					(842	)
Recoveries		1			2			12			—		54			6			72						147
Provision for loan and lease losses		53			831			(54	)		155		(238	)		67			(113	)		(51	)		650

Balance June 30, 2014	$	3,831		$	2,594		$	2,387		$	1,000	$	4,658		$	261		$	441		$	298		$	15,470

Page 12

The following table details the roll-forward of the Corporation’s Allowance for the three and six months ended June 30, 2013:


(dollars in thousands)	Commercial Mortgage		Home Equity Lines and Loans			Residential Mortgage			Construction			Commercial and Industrial			Consumer			Leases			Unallocated		Total
Balance, March 31, 2013	$	4,106	$	2,030		$	1,829		$	1,051		$	4,437		$	211		$	525		$	258	$	14,447
Charge-offs		—		(292	)		—			(550	)		(183	)		(32	)		(107	)				(1,164	)
Recoveries		—		—			4			18			41			2			96					161
Provision for loan and lease losses		375		371			(60	)		134			—			37			37			106		1,000

Balance, June 30, 2013	$	4,481	$	2,109		$	1,773		$	653		$	4,295		$	218		$	551		$	364	$	14,444


(dollars in thousands)	Commercial Mortgage		Home Equity Lines and Loans			Residential Mortgage			Construction			Commercial and Industrial			Consumer			Leases			Unallocated		Total
Balance, December 31, 2012	$	3,907	$	1,857		$	2,024		$	1,019		$	4,637		$	189		$	493		$	299	$	14,425
Charge-offs		—		(352	)		—			(720	)		(718	)		(70	)		(134	)				(1,994	)
Recoveries		—		—			8			18			45			4			134					209
Provision for loan and lease losses		574		604			(259	)		336			331			95			58			65		1,804

Balance, June 30, 2013	$	4,481	$	2,109		$	1,773		$	653		$	4,295		$	218		$	551		$	364	$	14,444

The following table details the allocation of the Allowance by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2014 and December 31, 2013:


(dollars in thousands)	Commercial Mortgage		Home Equity Lines and Loans		Residential Mortgage		Construction		Commercial and Industrial		Consumer		Leases		Unallocated		Total
As of June 30, 2014
Allowance on loans and leases:
Individually evaluated for impairment	$	—	$	249	$	634	$	—	$	843	$	33	$	—	$	—	$	1,759
Collectively evaluated for impairment		3,747		2,345		1,753		1,000		3,815		228		441		298		13,627
Purchased credit-impaired⁽¹⁾		84		—		—		—		—		—		—		—		84

Total	$	3,831	$	2,594	$	2,387	$	1,000	$	4,658	$	261	$	441	$	298	$	15,470

As of December 31, 2013
Allowance on loans and leases:
Individually evaluated for impairment	$	—	$	121	$	814	$	—	$	532	$	52	$	—	$	—	$	1,519
Collectively evaluated for impairment		3,797		2,083		1,632		845		4,479		207		604		349		13,996
Purchased credit-impaired⁽¹⁾		—		—		—		—		—		—		—		—		—

Total	$	3,797	$	2,204	$	2,446	$	845	$	5,011	$	259	$	604	$	349	$	15,515

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

Page 13

The following table details the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2014 and December 31, 2013:


(dollars in thousands)	Commercial Mortgage		Home Equity Lines and Loans		Residential Mortgage		Construction		Commercial and Industrial		Consumer		Leases		Total
As of June 30, 2014
Carrying value of loans and leases:
Individually evaluated for impairment	$	153	$	1,434	$	9,453	$	693	$	3,892	$	33	$	—	$	15,658
Collectively evaluated for impairment		658,101		184,145		301,006		54,333		330,247		18,874		44,102		1,590,808
Purchased credit-impaired⁽¹⁾		8,670		14		32		25		335		—		—		9,076

Total	$	666,924	$	185,593	$	310,491	$	55,051	$	334,474	$	18,907	$	44,102	$	1,615,542

As of December 31, 2013
Carrying value of loans and leases:
Individually evaluated for impairment	$	236	$	1,428	$	9,860	$	1,172	$	4,758	$	52	$	—	$	17,506
Collectively evaluated for impairment		616,077		188,128		290,345		44,715		323,384		16,874		40,276		1,519,799
Purchased credit-impaired⁽¹⁾		9,028		15		38		482		317		—		—		9,880

Total	$	625,341	$	189,571	$	300,243	$	46,369	$	328,459	$	16,926	$	40,276	$	1,547,185

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

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

•

Pass – Loans considered satisfactory with no indications of deterioration.

•

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

•

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

•

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

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

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of June 30, 2014 and December 31, 2013:

Credit Risk Profile by Internally Assigned Grade


	Commercial Mortgage				Construction				Commercial and Industrial				Total
(dollars in thousands)	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
Pass	$	664,729	$	620,227	$	54,583	$	43,812	$	327,875	$	320,211	$	1,047,187	$	984,250
Special Mention		—		2,793		—		—		110		387		110		3,180
Substandard		2,195		2,321		468		2,557		6,489		7,861		9,152		12,739

Total	$	666,924	$	625,341	$	55,051	$	46,369	$	334,474	$	328,459	$	1,056,449	$	1,000,169

Page 14

Credit Risk Profile by Payment Activity


	Residential Mortgage				Home Equity Lines and Loans				Consumer				Leases				Total
(dollars in thousands)	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
Performing	$	306,858	$	295,866	$	184,383	$	188,309	$	18,907	$	16,906	$	44,051	$	40,252	$	554,199	$	541,333
Non-performing		3,633		4,377		1,210		1,262		—		20		51		24		4,894		5,683

Total	$	310,491	$	300,243	$	185,593	$	189,571	$	18,907	$	16,926	$	44,102	$	40,276	$	559,093	$	547,016

G. Troubled Debt Restructurings (“TDRs”):

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

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

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


(dollars in thousands)	June 30, 2014		December 31, 2013
TDRs included in nonperforming loans and leases	$	1,597	$	1,699
TDRs in compliance with modified terms		7,487		7,277

Total TDRs	$	9,084	$	8,976

The following tables present information regarding loan and lease modifications categorized as TDRs for the three and six months ended June 30, 2014:


	For the Three Months Ended June 30, 2014
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and industrial		1	$	246	$	255

Total		1	$	246	$	255


	For the Six Months Ended June 30, 2014
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential mortgage		2	$	392	$	394
Home equity lines and loans		1		70		70
Commercial and industrial		1		246		255

Total		4	$	708	$	719

Page 15

The following tables present information regarding the types of loan and lease modifications made for the three and six months ended June 30, 2014:


	Number of Contracts for the Three Months Ended June 30, 2014
	Interest Rate Change		Loan Term Extension		Interest Rate Change and Term Extension		Interest Rate Change and/or Interest-Only Period		Contractual Payment Reduction (Leases only)		Forgiveness of Interest
Commercial and industrial		—		—		1		—		—		—

Total		—		—		1		—		—		—


	Number of Contracts for the Six Months Ended June 30, 2014
	Interest Rate Change		Loan Term Extension		Interest Rate Change and Term Extension		Interest Rate Change and/or Interest-Only Period		Contractual Payment Reduction (Leases only)		Forgiveness of Interest
Residential mortgage		—		—		2		—		—		—
Home equity lines and loans		—		1		—		—		—		—
Commercial and industrial		—		—		1		—		—		—

Total		—		1		3		—		—		—

During the three and six months ended June 30, 2014, there were no defaults of loans or leases that had been previously modified to troubled debt restructurings.

H. Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized as of the dates or for the periods indicated:


(dollars in thousands)	Recorded Investment⁽²⁾		Principal Balance		Related Allowance		Average Principal Balance		Interest Income Recognized		Cash-Basis Interest Income Recognized
As of or for the three months ended June 30, 2014
Impaired loans with related Allowance:
Home equity lines and loans	$	501	$	560	$	249	$	581	$	2	$	—
Residential mortgage		4,638		4,652		634		4,711		31		—
Commercial and industrial		3,172		3,448		843		3,484		3		—
Consumer		32		33		33		33		—		—

Total	$	8,343	$	8,693	$	1,759	$	8,809	$	36	$	—
Impaired loans without related Allowance^{(1) (3)}:
Commercial mortgage	$	153	$	154	$	—	$	190	$	—	$	—
Home equity lines and loans		933		943		—		1,018		1		—
Residential mortgage		4,815		5,166		—		5,467		42		—
Construction		693		1,654		—		1,697		2		—
Commercial and industrial		721		725		—		742		2

Total	$	7,315	$	8,642	$	—	$	9,114	$	47	$	—

Grand total	$	15,658	$	17,335	$	1,759	$	17,923	$	83	$	—

⁽¹⁾	The table above does not include the recorded investment of $74 thousand of impaired leases without a related Allowance.

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

⁽³⁾	This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

Page 16


(dollars in thousands)	Recorded Investment⁽²⁾		Principal Balance		Related Allowance		Average Principal Balance		Interest Income Recognized		Cash-Basis Interest Income Recognized
As of or for the six months ended June 30, 2014
Impaired loans with related Allowance:
Home equity lines and loans	$	501	$	560	$	249	$	584	$	4	$	—
Residential mortgage		4,638		4,652		634		4,713		62		—
Commercial and industrial		3,172		3,448		843		3,503		7		—
Consumer		32		33		33		33		1		—

Total	$	8,343	$	8,693	$	1,759	$	8,833	$	74	$	—
Impaired loans without related Allowance^{(1) (3)}:
Commercial mortgage	$	153	$	154	$	—	$	190	$	—	$	—
Home equity lines and loans		933		943		—		1,020		2		—
Residential mortgage		4,815		5,166		—		5,468		83		—
Construction		693		1,654		—		1,710		3		—
Commercial and industrial		721		725		—		750		4		—

Total	$	7,315	$	8,642	$	—	$	9,138	$	92	$	—

Grand total	$	15,658	$	17,335	$	1,759	$	17,971	$	166	$	—

⁽¹⁾	The table above does not include the recorded investment of $74 thousand of impaired leases without a related Allowance.

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

⁽³⁾	This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.


(dollars in thousands)	Recorded Investment⁽²⁾		Principal Balance		Related Allowance		Average Principal Balance		Interest Income Recognized		Cash-Basis Interest Income Recognized
As of or for the three months ended June 30, 2013
Impaired loans with related Allowance:
Commercial mortgage	$	181	$	190	$	25	$	192	$	—	$	—
Home equity lines and loans		715		762		207		767		7		—
Residential mortgage		4,454		4,430		388		4,234		29		—
Commercial and industrial		2,560		2,639		466		2,670		15		—
Consumer		5		5		5		7		—		—

Total	$	7,915	$	8,026	$	1,091	$	7,870	$	51	$	—
Impaired loans without related Allowance^{(1) (3)}:
Commercial mortgage	$	342	$	347	$	—	$	377	$	6	$	—
Home equity lines and loans		1,230		1,228		—		1,328		10		—
Residential mortgage		4,696		4,747		—		5,026		50		—
Construction		2,418		3,380		—		3,536		8		—
Commercial and industrial		1,663		1,863		—		1,863		—		—

Total	$	10,349	$	11,565	$	—	$	12,130	$	74	$	—

Grand total	$	18,264	$	19,591	$	1,091	$	20,000	$	125	$	—

⁽¹⁾	The table above does not include the recorded investment of $80 thousand of impaired leases without a related Allowance.

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

⁽³⁾	This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

Page 17


(dollars in thousands)	Recorded Investment⁽²⁾		Principal Balance		Related Allowance		Average Principal Balance		Interest Income Recognized		Cash-Basis Interest Income Recognized
As of or for the six months ended June 30, 2013
Impaired loans with related Allowance:
Commercial mortgage	$	181	$	190	$	25	$	192	$	—	$	—
Home equity lines and loans		715		762		207		777		14		—
Residential mortgage		4,454		4,430		388		4,339		59		—
Commercial and industrial		2,560		2,639		466		2,677		33		—
Consumer		5		5		5		8		—		—

Total	$	7,915	$	8,026	$	1,091	$	7,993	$	106	$	—
Impaired loans without related Allowance^{(1) (3)}:
Commercial mortgage	$	342	$	347	$	—	$	379	$	12	$	—
Home equity lines and loans		1,230		1,228		—		1,331		22		—
Residential mortgage		4,696		4,747		—		5,025		122		—
Construction		2,418		3,380		—		3,679		18		—
Commercial and industrial		1,663		1,863		—		1,863		1		—

Total	$	10,349	$	11,565	$	—	$	12,277	$	175	$	—

Grand total	$	18,264	$	19,591	$	1,091	$	20,270	$	281	$	—

⁽¹⁾	The table above does not include the recorded investment of $80 thousand of impaired leases without a related Allowance.

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

⁽³⁾	This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.


(dollars in thousands)	Recorded Investment⁽²⁾		Principal Balance		Related Allowance
As of December 31, 2013
Impaired loans with related allowance:
Home equity lines and loans	$	277	$	279	$	121
Residential mortgage		5,297		5,312		814
Commercial and industrial		2,985		3,100		532
Consumer		52		54		52

Total		8,611		8,745		1,519
Impaired loans^(1),(3) without related allowance:
Commercial mortgage		236		237		—
Home equity lines and loans		1,151		1,159		—
Residential mortgage		4,563		4,911		—
Construction		1,172		2,134		—
Commercial and industrial		1,773		1,954		—

Total		8,895		10,395		—

Grand total	$	17,506	$	19,140	$	1,519

⁽¹⁾	The table above does not include the recorded investment of $63 thousand of impaired leases without a related Allowance.

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

⁽³⁾	This table excludes all purchased credit-impaired loans, which are discussed in Note 4D, above.

Page 18

Note 5 - Deposits

The following table details the components of deposits:


(dollars in thousands)	June 30, 2014		December 31, 2013
Savings accounts	$	145,312	$	135,240
Interest-bearing checking accounts		263,247		266,787
Market-rate accounts		559,070		544,310
Wholesale non-maturity deposits		41,840		42,936
Wholesale time deposits		50,152		34,640
Time deposits		123,572		140,794

Total interest-bearing deposits		1,183,193		1,164,707
Non-interest-bearing deposits		436,739		426,640

Total deposits	$	1,619,932	$	1,591,347

Note 6 - Borrowings

A. Short-term borrowings

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

A summary of short-term borrowings is as follows:


(dollars in thousands)	June 30, 2014		December 31, 2013
Overnight fed funds	$	—	$	—
Revolving line of credit		—		—
Short-term FHLB advances		—		—
Repurchase agreements		13,320		10,891

Total short-term borrowings	$	13,320	$	10,891

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


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2014			2013			2014			2013
Balance at period-end	$	13,320		$	71,768		$	13,320		$	71,768
Maximum amount outstanding at any month-end		28,017			71,768			28,017			71,768
Average balance outstanding during the period		17,220			13,358			15,167			12,672
Weighted-average interest rate:
As of period-end		0.10	%		0.23	%		0.10	%		0.23	%
Paid during the period		0.12	%		0.12	%		0.11	%		0.13	%

B. Long-term FHLB Advances and Other Borrowings

The Corporation’s long-term FHLB advances and other borrowings consist of advances from the FHLB with original maturities of greater than one year and an adjustable-rate commercial loan from a correspondent bank.

The following table presents the remaining periods until maturity of the long-term FHLB advances and other borrowings:


(dollars in thousands)	June 30, 2014		December 31, 2013
Within one year	$	18,675	$	3,917
Over one year through five years		209,457		196,727
Over five years through ten years		5,000		5,000

Total	$	233,132	$	205,644

Page 19

The following table presents rate and maturity information on long-term FHLB advances and other borrowings:


(dollars in thousands)	Maturity Range⁽¹⁾				Weighted Average Rate			Coupon Rate						Balance
Description	From		To		Weighted Average Rate			From			To			June 30, 2014		December 31, 2013
Fixed amortizing		04/09/15		04/09/15		3.57	%		3.57	%		3.57	%	$	1,325	$	2,102
Adjustable amortizing		12/31/16		12/31/16		3.25	%		3.25	%		3.25	%		5,375		7,050
Bullet maturity – fixed rate		03/23/15		05/20/20		1.41	%		0.58	%		2.41	%		160,000		140,000
Bullet maturity – variable rate		06/25/15		11/28/17		0.40	%		0.25	%		0.54	%		45,000		35,000
Convertible-fixed⁽²⁾		01/03/18		08/20/18		2.95	%		2.58	%		3.50	%		21,432		21,492

Total														$	233,132	$	205,644

⁽¹⁾	Maturity range refers to June 30, 2014 balances.

⁽²⁾

FHLB advances whereby the FHLB has the option, at predetermined times, to convert the fixed interest rate to an adjustable interest rate indexed to the London Interbank Offered Rate (“LIBOR”). The Corporation has the option to prepay these advances, without penalty, if the FHLB elects to convert the interest rate to an adjustable rate. As of June 30, 2014, substantially all the FHLB advances with this convertible feature are subject to conversion in fiscal 2014. These advances are included in the maturity ranges in which they mature, rather than the period in which they are subject to conversion.

C. Other Borrowings Information

As of June 30, 2014 the Corporation had a maximum borrowing capacity with the FHLB of approximately $866.5 million, of which the unused capacity was $624.2 million. In addition, there were unused capacities of $64.0 million in overnight federal funds line, $84.0 million of Federal Reserve Discount Window borrowings and $3.0 million in a revolving line of credit from a correspondent bank as of June 30, 2014. In connection with its FHLB borrowings, the Corporation is required to hold the capital stock of the FHLB. The amount of FHLB capital stock held was $12.8 million at June 30, 2014, and $11.7 million at December 31, 2013. The carrying amount of the FHLB capital stock approximates its redemption value.

Note 7 - Derivatives and Hedging Activities

In December, 2012, the Corporation entered into a forward-starting interest rate swap to hedge the cash flows of a $15 million floating-rate FHLB borrowing. The interest rate swap involves the exchange of the Corporation’s floating rate interest payments on the underlying principal amount. This swap was designated, and qualified, for cash-flow hedge accounting. The term of the swap begins November 30, 2015 and ends November 28, 2022. For derivative instruments that are designated and qualify as hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in the periods in which the hedged forecasted transaction affects earnings.

The following table details the Corporation’s derivative positions as of the balance sheet dates indicated:

As of June 30, 2014:

(dollars in thousands)

Notional Amount

Trade Date

Effective
Date

Maturity
Date

Receive (Variable)
Index

Current
Projected
Receive Rate

Pay Fixed
Swap Rate

Fair Value of
Asset
(Liability)

15,000

12/13/2012

11/30/2015

11/28/2022

US 3-Month LIBOR

2.828

2.376

420

As of December 31, 2013:

(dollars in thousands)

Trade Date

Effective
Date

Maturity
Date

Receive (Variable)
Index

Current
Projected
Receive Rate

Pay Fixed
Swap Rate

Fair Value of
Asset
(Liability)

Notional Amount

15,000

12/13/2012

11/30/2015

11/28/2022

US 3-Month LIBOR

3.597

2.376

1,142

For each of the three and six month periods ended June 30, 2014 and 2013, there were no reclassifications of the interest-rate swap’s fair value from other comprehensive income to earnings.

Page 20

Note 8 - Stock-Based Compensation

A. General Information

The Corporation permits the issuance of stock options, dividend equivalents, performance awards, stock appreciation rights, restricted stock and/or restricted stock units to employees and directors of the Corporation under several plans. The terms and conditions of awards under the plans are determined by the Corporation’s Compensation Committee.

Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved the Corporation’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of the Corporation’s common stock were made available for award grants. On April 28, 2010, the shareholders approved the Corporation’s “2010 Long Term Incentive Plan” (“2010 LTIP”) under which a total of 445,002 shares of the Corporation’s common stock were made available for award grants.

The equity awards granted under the 2007 and 2010 LTIPs were authorized to be in the form of, among others, options to purchase the Corporation’s common stock, restricted stock awards or units (“RSA”s or “RSU”s) and performance stock awards or units (“PSA”s or “PSU”s).

RSAs and RSUs have a restriction based on the passage of time and may also have a restriction based on non-market-related performance criteria. The fair value of the RSAs and RSUs is based on the closing price on the day preceding the date of the grant.

The PSAs and PSUs have a restriction based on the passage of time, but also have a restriction based on performance criteria related to the Corporation’s total shareholder return relative to the performance of the community bank index for the respective period. The amount of PSAs or PSUs earned will not exceed 100% of the PSAs or PSUs awarded. The fair value of the PSAs and PSUs is calculated using the Monte Carlo Simulation method.

B. Stock Options

Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period. The fair value of stock option grants is determined using the Black-Scholes pricing model. The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk-free interest rate and annual dividend yield.

The following table provides information about options outstanding for the three months ended June 30, 2014:


	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Options outstanding, March 31, 2014		585,196		$	20.77	$	4.70
Granted		—		$	—	$	—
Forfeited		—		$	—	$	—
Expired		—		$	—	$	—
Exercised		(63,310	)	$	20.14	$	4.43

Options outstanding, June 30, 2014		521,886		$	20.84	$	4.73

The following table provides information about options outstanding for the six months ended June 30, 2014:


	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Options outstanding, December 31, 2013		591,086		$	20.73	$	4.70
Granted		—		$	—	$	—
Forfeited		—		$	—	$	—
Expired		—		$	—	$	—
Exercised		(69,200	)	$	19.90	$	4.43

Options outstanding, June 30, 2014		521,886		$	20.84	$	4.73

Page 21

The following table provides information about unvested options for the three months ended June 30, 2014:


	Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Unvested options, March 31, 2014		30,146	$	18.27	$	4.42
Granted		—	$	—	$	—
Vested		—	$	—	$	—
Forfeited		—	$	—	$	—

Unvested options, June 30, 2014		30,146	$	18.27	$	4.42

The following table provides information about unvested options for the six months ended June 30, 2014:


	Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Unvested options, December 31, 2013		30,146	$	18.27	$	4.42
Granted		—	$	—	$	—
Vested		—	$	—	$	—
Forfeited		—	$	—	$	—

Unvested options, June 30, 2014		30,146	$	18.27	$	4.42

For the three and six months ended June 30, 2014, the Corporation recognized $25 thousand and $50 thousand, respectively, of expense related to stock options. As of June 30, 2014, the total not-yet-recognized compensation expense of unvested stock options was $14 thousand. This expense will be recognized over a weighted average period of 0.1 years.

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised during the three and six months ended June 30, 2014 and 2013 are detailed below:


(dollars in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2014		2013		2014		2013
Proceeds from exercise of stock options	$	1,274	$	510	$	1,377	$	1,740
Related tax benefit recognized		152		28		174		144

Net proceeds of options exercised	$	1,426	$	538	$	1,551	$	1,884

Intrinsic value of options exercised	$	510	$	113	$	577	$	447

The following table provides information about options outstanding and exercisable at June 30, 2014:


(dollars in thousands, except exercise price)	Outstanding		Exercisable
Number of shares		521,886		491,740
Weighted average exercise price	$	20.84	$	21.00
Aggregate intrinsic value	$	4,319	$	3,992
Weighted average contractual term in years		3.0		2.8

C. Restricted Stock Awards and Performance Stock Awards

The Corporation has granted RSAs, PSAs and PSUs under the 2007 LTIP and 2010 LTIP.

RSAs and RSUs

The compensation expense for the RSAs and RSUs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight line basis over the vesting period.

For the three and six months ended June 30, 2014, the Corporation recognized $81 thousand and $162 thousand, respectively of expense related to the Corporation’s RSAs and RSUs. As of June 30, 2014, there was $313 thousand of unrecognized compensation cost related to RSAs and RSUs. This cost will be recognized over a weighted average period of 1.3 years.

Page 22

The following table details the unvested RSAs and RSUs for the three and six months ended June 30, 2014:


	Three Months Ended June 30, 2014					Six Months Ended June 30, 2014
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance		41,500		$	19.93		54,156		$	19.36
Granted		—			—		—			—
Vested		(6,135	)		20.38		(18,791	)		18.44
Forfeited		—			—		—			—

Ending balance		35,365		$	19.85		35,365		$	19.85

For the three and six months ended June 30, 2014, the Corporation recorded a tax benefit of $16 thousand and $66 thousand related to the vesting of RSAs.

PSAs and PSUs

The compensation expense for PSAs and PSUs is measured based on the grant date fair value as calculated using the Monte Carlo Simulation method.

For the three and six months ended June 30, 2014, the Corporation recognized $196 thousand and $397 thousand of expense related to the PSAs and PSUs. As of June 30, 2014, there was $1.1 million of unrecognized compensation cost related to PSAs. This cost will be recognized over a weighted average period of 1.8 years.

The following table details the unvested PSAs and PSUs for the three and six months ended June 30, 2014:


	Three Months Ended June 30, 2014					Six Months Ended June 30, 2014
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance		204,980		$	11.90		204,980		$	11.90
Granted		—			—		—			—
Vested		—			—		—			—
Forfeited		(1,000	)		12.09		(1,000	)		12.09

Ending balance		203,980		$	11.90		203,980		$	11.90

Note 9 - Pension and Other Post-Retirement Benefit Plans

The Corporation has three defined benefit pension plans: the qualified defined-benefit plan (the “QDBP”) which covers all employees over age 20 1/2 who meet certain service requirements, and two non-qualified defined-benefit pension plans (“SERP I” and “SERP II”) which are restricted to certain senior officers of the Corporation.

SERP I provides each participant with the equivalent pension benefit provided by the QDBP on any compensation and bonus deferrals that exceed the IRS limit applicable to the QDBP.

On February 12, 2008, the Corporation amended the QDBP and SERP I to freeze further increases in the defined-benefit amounts to all participants, effective March 31, 2008.

On April 1, 2008, the Corporation added SERP II, a non-qualified defined-benefit plan which was restricted to certain senior officers of the Corporation. Effective January 1, 2013, the Corporation curtailed SERP II, as further increases to the defined-benefit amounts to over 20% of the participants have been frozen. As a result of the curtailment, for the three and six months ended June 30, 2013, the Corporation recorded a gain of $120 thousand and $690 thousand, respectively, which represented the reversal of previous amounts that had been expensed in anticipation of future service of the curtailed participants.

The Corporation also has a postretirement benefit plan (“PRBP”) that covers certain retired employees and a group of current employees. The PRBP was closed to new participants in 1994. In 2007, the Corporation amended the PRBP to allow for settlement of obligations to certain current and retired employees. Certain retired participant obligations were settled in 2007 and current employee obligations were settled in 2008.

Page 23

The following tables provide details of the components of the net periodic benefits cost (benefit) for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,
	SERP I and SERP II					QDBP						PRBP
(dollars in thousands)	2014		2013			2014			2013			2014		2013
Service cost	$	18	$	18		$	—		$	—		$	—	$	—
Interest cost		45		39			410			371			7		7
Expected return on plan assets		—		—			(837	)		(745	)		—		—
Amortization of transition obligation		—		—			—			—			—		—
Amortization of prior service costs		4		4			—			—			—		—
Amortization of net loss		11		13			98			431			15		20
Gain on curtailment		—		(120	)		—			—			—		—

Net periodic benefit cost	$	78	$	(46	)	$	(329	)	$	57		$	22	$	27


	Six Months Ended June 30,
	SERP I and SERP II					QDBP						PRBP
(dollars in thousands)	2014		2013			2014			2013			2014		2013
Service cost	$	36	$	36		$	—		$	—		$	—	$	—
Interest cost		91		79			820			743			14		14
Expected return on plan assets		—		—			(1,674	)		(1,491	)		—		—
Amortization of transition obligation		—		—			—			—			—		—
Amortization of prior service costs		7		7			—			—			—		—
Amortization of net loss		22		26			196			862			30		39
Gain on curtailment		—		(690	)		—			—			—		—

Net periodic benefit cost	$	156	$	(542	)	$	(658	)	$	114		$	44	$	53

QDBP: No contributions to the QDBP were made for the three and six months ended June 30, 2014.

SERP I and SERP II: The Corporation contributed $37 thousand and $74 thousand during the three and six months ended June 30, 2014, respectively, and is expected to contribute an additional $74 thousand to the SERP I and SERP II plans for the remaining six months of 2014.

PRBP: In 2005, the Corporation capped the maximum annual payment under the PRBP at 120% of the 2005 benefit. This maximum was reached in 2008 and the cap is not expected to be increased above this level.

Page 24

Note 10 - Segment Information

The Corporation aggregates certain of its operations and has identified two segments as follows: Banking and Wealth Management.

The following tables detail segment information for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30, 2014									Three Months Ended June 30, 2013
(dollars in thousands)	Banking			Wealth Management			Consolidated			Banking			Wealth Management			Consolidated
Net interest income	$	19,441		$	1		$	19,442		$	17,922		$	1		$	17,923
Less: loan loss provision		(100	)		—			(100	)		1,000			—			1,000

Net interest income after loan loss provision		19,541			1			19,542			16,922			1			16,923

Other income:
Fees for wealth management services		—			9,499			9,499			—			9,094			9,094
Service charges on deposit accounts		656			—			656			596			—			596
Loan servicing and other fees		428			—			428			448			—			448
Net gain on sale of loans		537			—			537			1,492			—			1,492
Net gain on sale of available for sale securities		85			—			85			—			—			—
Net loss on sale of other real estate owned		220			—			220			(141	)		—			(141	)
BOLI income		74			—			74			85			—			85
Other operating income		1,232			26			1,258			1,322			47			1,369

Total other income		3,232			9,525			12,757			3,802			9,141			12,943
Other expenses:
Salaries & wages		6,539			3,155			9,694			6,040			3,046			9,086
Employee benefits		1,057			752			1,809			1,463			749			2,212
Occupancy & equipment		1,308			375			1,683			1,354			374			1,728
Amortization of intangible assets		71			565			636			80			580			660
Professional fees		883			31			914			614			50			664
Other operating expenses		5,053			837			5,890			5,130			1,044			6,174

Total other expenses		14,911			5,715			20,626			14,681			5,843			20,524

Segment profit		7,862			3,811			11,673			6,043			3,299			9,342
Intersegment (revenues) expenses*		(93	)		93			—			(152	)		152			—

Pre-tax segment profit after eliminations	$	7,769		$	3,904		$	11,673		$	5,891		$	3,451		$	9,342

% of segment pre-tax profit after eliminations		66.6	%		33.4	%		100.0	%		63.1	%		36.9	%		100.0	%

Segment assets (dollars in millions)	$	2,091		$	40		$	2,131		$	1,967		$	43		$	2,010

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


	Six Months Ended June 30, 2014									Six Months Ended June 30, 2013
(dollars in thousands)	Banking			Wealth Management			Consolidated			Banking			Wealth Management			Consolidated
Net interest income	$	38,164		$	1		$	38,165		$	35,331		$	1		$	35,332
Less: loan loss provision		650			—			650			1,804			—			1,804

Net interest income after loan loss provision		37,514			1			37,515			33,527			1			33,528

Other income:
Fees for wealth management services		—			18,412			18,412			—			17,443			17,443
Service charges on deposit accounts		1,257			—			1,257			1,180			—			1,180
Loan servicing and other fees		874			—			874			899			—			899
Net gain on sale of loans		861			—			861			3,010			—			3,010
Net gain on sale of available for sale securities		81			—			81			2			—			2
Net loss on sale of other real estate owned		220			—			220			(193	)		—			(193	)
BOLI income		155			—			155			198			—			198
Other operating income		1,966			70			2,036			2,104			90			2,194

Total other income		5,414			18,482			23,896			7,200			17,533			24,733
Other expenses:
Salaries & wages		12,186			5,948			18,134			11,911			5,985			17,896
Employee benefits		2,270			1,519			3,788			3,040			1,497			4,537
Occupancy & equipment		2,882			734			3,616			2,728			750			3,478
Amortization of intangible assets		141			1,131			1,273			160			1,161			1,321
Professional fees		1,450			57			1,507			1,123			116			1,239
Other operating expenses		9,355			1,852			11,207			10,268			2,020			12,288

Total other expenses		28,284			11,241			39,525			29,230			11,529			40,759

Segment profit		14,644			7,242			21,886			11,497			6,005			17,502
Intersegment (revenues) expenses*		(186	)		186			—			(304	)		304			—

Pre-tax segment profit after eliminations	$	14,458		$	7,428		$	21,886		$	11,193		$	6,309		$	17,502

% of segment pre-tax profit after eliminations		66.1	%		33.9	%		100.0	%		64.0	%		36.0	%		100.0	%

Segment assets (dollars in millions)	$	2,091		$	40		$	2,131		$	1,967		$	43		$	2,010

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

Other segment information is as follows:

Wealth Management Segment Information


	*(dollars in millions)*
	June 30, 2014		December 31, 2013
Assets under management, administration, supervision and brokerage:	$	7,569.8	$	7,268.3

Page 25

Note 11 - Mortgage Servicing Rights

The following tables summarize the Corporation’s activity related to mortgage servicing rights (“MSRs”) for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,
(dollars in thousands)	2014			2013
Balance, beginning of period	$	4,734		$	4,593
Additions		151			324
Amortization		(128	)		(218	)
Recovery		3			91
Impairment		—			—

Balance, end of period	$	4,760		$	4,790

Fair value	$	5,552		$	5,621

Loans serviced for others	$	622,808		$	623,498


	Six Months Ended June 30,
(dollars in thousands)	2014			2013
Balance, beginning of period	$	4,750		$	4,491
Additions		241			709
Amortization		(242	)		(430	)
Recovery		11			91
Impairment		—			(71	)

Balance, end of period	$	4,760		$	4,790

Fair value	$	5,552		$	5,621

Loans serviced for others	$	622,808		$	623,498

As of June 30, 2014 and December 31, 2013, key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10 and 20 percent adverse changes in those assumptions are as follows:


(dollars in thousands)	June 30, 2014			December 31, 2013
Fair value amount of MSRs	$	5,552		$	5,733
Weighted average life (in years)		6.4			6.3
Prepayment speeds (constant prepayment rate)*		10.4			11.1
Impact on fair value:
10% adverse change	$	(182	)	$	(206	)
20% adverse change	$	(359	)	$	(402	)
Discount rate		10.5	%		10.50	%
Impact on fair value:
10% adverse change	$	(219	)	$	(231	)
20% adverse change	$	(421	)	$	(445	)

*	Represents the weighted average prepayment rate for the life of the MSR asset.

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

Page 26

Note 12 - Goodwill and Other Intangibles

The Corporation’s goodwill and intangible assets related to the acquisitions of Lau Associates LLC (“Lau”) in July, 2008, First Keystone Financial, Inc. (“FKF”) in July, 2010, the Private Wealth Management Group of the Hershey Trust Company (“PWMG”) in May, 2011, and Davidson Trust Company (“DTC”) in May, 2012, and the First Bank of Delaware (“FBD”) transaction in November, 2012 are detailed below:


(dollars in thousands)	Balance December 31, 2013		Additions/ Adjustments		Amortization			Balance June 30, 2014		Amortization Period
Goodwill – Wealth segment	$	20,412	$	—	$	—		$	20,412	Indefinite
Goodwill – Banking segment		12,431		—		—			12,431	Indefinite

Total	$	32,843	$	—	$	—		$	32,843
Core deposit intangible	$	1,342	$	—	$	(142	)	$	1,200	10 Years
Customer relationships		13,595		—		(618	)		12,977	10 to 20 Years
Non-compete agreements		3,218		—		(513	)		2,705	5 to 5¹⁄₂ Years
Trade name		1,210		—		—			1,210	Indefinite

Total	$	19,365	$	—	$	(1,273	)	$	18,092

Grand total	$	52,208	$	—	$	(1,273	)	$	50,935

The Corporation performed its annual review of goodwill and identifiable intangible assets as of December 31, 2013 in accordance with ASC 350, “Intangibles Goodwill and Other.” For the three and six months ended June 30, 2014, the Corporation determined there were no events that would necessitate impairment testing of goodwill and other intangible assets.

Note 13 - Accumulated Other Comprehensive Loss

The following tables detail the components of accumulated other comprehensive (loss) income for the three and six month periods ended June 30, 2014 and 2013:


(dollars in thousands)	Net Change in Unrealized Gains on Available-for- Sale Investment Securities			Net Change in Fair Value of Derivative Used for Cash Flow Hedge			Net Change in Unfunded Pension Liability			Accumulated Other Comprehensive Loss
Balance, March 31, 2014	$	288		$	516		$	(5,405	)	$	(4,601	)
Net change		1,248			(242	)		47			1,053

Balance, June 30, 2014	$	1,536			274			(5,358	)		(3,548	)

Balance, March 31, 2013	$	3,147		$	95		$	(11,807	)	$	(8,565	)
Net change		(3,270	)		482			248			(2,540	)

Balance, June 30, 2013	$	(123	)	$	577		$	(11,559	)	$	(11,105	)


(dollars in thousands)	Net Change in Unrealized Gains on Available-for- Sale Investment Securities			Net Change in Fair Value of Derivative Used for Cash Flow Hedge			Net Change in Unfunded Pension Liability			Accumulated Other Comprehensive Loss
Balance, December 31, 2013	$	(857	)	$	743		$	(5,451	)	$	(5,565	)
Net change		2,393			(469	)		93			2,017

Balance, June 30, 2014	$	1,536			274			(5,358	)		(3,548	)

Balance, December 31, 2012	$	3,164		$	(24	)	$	(13,218	)	$	(10,078	)
Net change		(3,287	)		601			1,659			(1,027	)

Balance, June 30, 2013	$	(123	)	$	577		$	(11,559	)	$	(11,105	)

Page 27

The following tables detail the amounts reclassified from each component of accumulated other comprehensive loss to each component’s applicable income statement line, for the three and six month periods ended June 30, 2014 and 2013:


Description of Accumulated Other Comprehensive Loss Component	Amount Reclassified from Accumulated Other Comprehensive Loss						Affected Income Statement Category
	For The Three Months Ended June 30,						Affected Income Statement Category
	2014			2013
*Net unrealized gain on investment securities available for sale:*
Realization of gain on sale of investment securities available for sale	$	(85	)	$	—		Net gain on sale of available for sale investment securities
		30			—		Less: income tax expense

	$	(55	)	$	—		Net of income tax

*Unfunded pension liability:*
Amortization of net loss included in net periodic pension costs*	$	124		$	464		Employee benefits
Amortization of prior service cost included in net periodic pension costs*		4			4		Employee benefits
Amortization of transition obligation included in net periodic pension costs*		—			—		Employee benefits
Gain on curtailment of SERP II		—			(120	)	Net gain on curtailment of nonqualified pension plan

		128			348		Total expense before income tax benefit
		45			122		Less: income tax benefit

	$	83		$	226		Net of income tax


Description of Accumulated Other Comprehensive Loss Component	Amount Reclassified from Accumulated Other Comprehensive Loss						Affected Income Statement Category
	For The Six Months Ended June 30,						Affected Income Statement Category
	2014			2013
*Net unrealized gain on investment securities available for sale:*
Realization of gain on sale of investment securities available for sale	$	(81	)	$	(2	)	Net gain on sale of available for sale investment securities
		29			(1	)	Less: income tax expense

	$	(52	)	$	(1	)	Net of income tax

*Unfunded pension liability:*
Amortization of net loss included in net periodic pension costs*	$	248		$	927		Employee benefits
Amortization of prior service cost included in net periodic pension costs*		7			7		Employee benefits
Amortization of transition obligation included in net periodic pension costs*		—			—		Employee benefits
Gain on curtailment of SERP II		—			(690	)	Net gain on curtailment of nonqualified pension plan

		255			244		Total expense before income tax benefit
		89			85		Less: income tax benefit

	$	166		$	159		Net of income tax

*Accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10—Pension and Other Post-Retirement Benefit Plans

Page 28

Note 14 - Shareholders’ Equity

Dividend

On July 24, 2014, the Corporation’s Board of Directors declared a regular quarterly dividend of $0.19 per share payable September 1, 2014 to shareholders of record as of August 5, 2014. During the second quarter of 2014, the Corporation declared and paid a regular quarterly dividend of $0.18 per share. This payment totaled $2.5 million, based on outstanding shares at May 13, 2014 of 13,780,630. During the first quarter of 2014, the Corporation declared and paid a regular quarterly dividend of $0.18 per share. This payment totaled $2.5 million, based on outstanding shares at February 10, 2014 of 13,649,305.

S-3 Shelf Registration Statement and Offerings Thereunder

In April 2012, the Corporation filed a shelf registration statement (the “Shelf Registration Statement”) to replace its 2009 Shelf Registration Statement, which was set to expire in June 2012. This new 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 $150,000,000, in the aggregate.

The Corporation has in place under its Shelf Registration Statement a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), which was amended and restated on April 27, 2012, primarily to increase the number of shares which can be issued by the Corporation from 850,000 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.

The Plan is intended to allow both existing shareholders and new investors to easily and conveniently increase their investment in the Corporation without incurring many of the fees and commissions normally associated with brokerage transactions. For the six months ended June 30, 2014, the Corporation issued 1,159 shares and raised $32 thousand through the Plan.

Options

In addition to shares issued through the Plan, the Corporation also issues shares through the exercise of stock options. During the six months ended June 30, 2014, 69,200 shares were issued pursuant to the exercise of stock options, increasing shareholders’ equity by $1.4 million.

Note 15 - Accounting for Uncertainty in Income Taxes

The Corporation recognizes the financial statement benefit of a tax position only after determining that the Corporation would be more likely than not to sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the relevant tax authority.

The Corporation is subject to income taxes in the United States federal jurisdiction and multiple state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examination by taxing authorities for years before 2011.

The Corporation’s policy is to record interest and penalties on uncertain tax positions as income tax expense. No interest or penalties were accrued for the three or six month periods ended June 30, 2014 or 2013.

Note 16 - Fair Value Measurement

The following disclosures are made in conjunction with the application of fair value measurements.

FASB ASC 820 “Fair Value Measurement” establishes a fair value hierarchy based on the nature of data inputs for fair value determinations, under which the Corporation is required to value each asset using assumptions that market participants would utilize to value that asset. When the Corporation uses its own assumptions, it is required to disclose additional information about the assumptions used and the effect of the measurement on earnings or the net change in assets for the period.

The Corporation’s investment securities available for sale, which generally include state and municipal securities, U.S. government agency securities and mortgage-related securities, are reported at fair value. These securities are valued by an independent third party. The third party’s evaluations are based on market data. They utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities, additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.

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U.S. Government agency securities are evaluated and priced using multi-dimensional relational models and option-adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage-related securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other available for sale investments are evaluated using a broker-quote based application, including quotes from issuers. The Corporation has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of available for sale investments to enable management to maintain an appropriate system of internal control.

The value of the investment portfolio is determined using three broad levels of inputs:

Level 1 – Quoted prices in active markets for identical securities.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Instruments whose significant value drivers are unobservable.

These levels are not necessarily an indication of the risks or liquidity associated with these investments. The following tables summarize the assets at June 30, 2014 and December 31, 2013 that are recognized on the Corporation’s balance sheet using fair value measurement determined based on the differing levels of input.

The following table sets forth the fair value of assets measured on a recurring and non-recurring basis as of June 30, 2014:


(dollars in millions)	Total		Level 1		Level 2		Level 3
Assets Measured at Fair Value on a Recurring Basis:
Investment securities (available for sale and trading):
U.S. Treasury securities	$	0.1	$	0.1	$	—	$	—
Obligations of the U.S. government agency securities		63.3		—		63.3		—
Obligations of state & political subdivisions		36.0		—		36.0		—
Mortgage-backed securities		111.0		—		111.0		—
Collateralized mortgage obligations		39.8		—		39.8		—
Mutual funds		17.9		17.9		—		—
Other debt securities		1.9		—		1.9		—

Total assets measured on a recurring basis at fair value	$	270.0	$	18.0	$	252.0	$	—

Assets Measured at Fair Value on a Non-Recurring Basis
Mortgage servicing rights	$	5.6	$	—	$	—	$	5.6
Impaired loans and leases		14.0		—		—		14.0
Other real estate owned (“OREO”)		0.9		—		—		0.9

Total assets measured on a non-recurring basis at fair value	$	20.5	$	—	$	—	$	20.5

The following table sets forth the fair value of assets measured on a recurring and non-recurring basis as of December 31, 2013:


(dollars in millions)	Total		Level 1		Level 2		Level 3
Assets Measured at Fair Value on a Recurring Basis:
Investment securities (available for sale and trading):
U.S. Treasury securities	$	0.1	$	0.1	$	—	$	—
Obligations of the U.S. government agency securities		69.5		—		69.5		—
Obligations of state & political subdivisions		37.0		—		37.0		—
Mortgage-backed securities		119.4		—		119.4		—
Collateralized mortgage obligations		44.2		—		44.2		—
Mutual funds		17.1		17.1		—		—
Other debt securities		1.9		—		1.9		—

Total assets measured on a recurring basis at fair value	$	289.2	$	17.2	$	272.0	$	—

Assets Measured at Fair Value on a Non-Recurring Basis
Mortgage servicing rights	$	4.9	$	—	$	—	$	4.9
Impaired loans and leases		16.1		—		—		16.1
OREO		0.9		—		—		0.9

Total assets measured on a non-recurring basis at fair value	$	21.9	$	—	$	—	$	21.9

Page 30

During the three and six months ended June 30, 2014 a net increase of $78 thousand and a net decrease of $68 thousand, respectively, were recorded in the Allowance as a result of adjusting the carrying value and estimated fair value of the impaired loans in the above tables. As it relates to the fair values of assets measured on a recurring basis, there have been no transfers between levels during the six months ended June 30, 2014.

Impaired Loans

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

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

Other Real Estate Owned

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

Mortgage Servicing Rights

MSRs do not trade in an active, open market with readily observable prices. Accordingly, the Corporation obtains the fair value of the MSRs using a third-party pricing provider. The provider determines the fair value by discounting projected net servicing cash flows of the remaining servicing portfolio. The valuation model used by the provider considers market loan prepayment predictions and other economic factors which the Corporation considers to be significant unobservable inputs. The fair value of MSRs is mostly affected by changes in mortgage interest rates since rate changes cause the loan prepayment acceleration factors to increase or decrease. All assumptions are market driven. The Corporation has a sufficient understanding of the third party service’s valuation models, assumptions and inputs used in determining the fair value of MSRs to enable management to maintain an appropriate system of internal control. Mortgage servicing rights are classified within Level 3 of the fair value hierarchy as the valuation is model driven and primarily based on unobservable inputs.

Note 17 - Fair Value of Financial Instruments

FASB ASC 825, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Corporation.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values.

Investment Securities

Estimated fair values for investment securities are generally valued by an independent third party based on market data, utilizing pricing models that vary by asset and incorporate available trade, bid and other market information. Management reviews, annually, the process utilized by its independent third-party valuation experts. On a quarterly basis, Management tests the validity of the prices provided by the third party by selecting a representative sample of the portfolio and obtaining actual trade results, or if actual trade results are not available, competitive broker pricing. See Note 3 of the Notes to Consolidated Financial Statements for more information.

Page 31

Loans Held for Sale

The fair value of loans held for sale is based on pricing obtained from secondary markets.

Net Portfolio Loans and Leases

For variable-rate loans that re-price frequently and which have no significant change in credit risk, estimated fair values are based on carrying values. Fair values of certain mortgage loans and consumer loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and is indicative of an entry price. The estimated fair value of nonperforming loans is based on discounted estimated cash flows as determined by the internal loan review of the Bank or the appraised market value of the underlying collateral, as determined by independent third party appraisers. This technique does not reflect an exit price.

Impaired Loans

Mortgage Servicing Rights

The fair value of the MSRs for these periods was determined using a proprietary third-party valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Due to the proprietary nature of the valuation model used, the Corporation classifies the value of MSRs as using Level 3 inputs.

Other Assets

The carrying amount of accrued interest receivable, income taxes receivable and other investments approximates fair value.

Deposits

The estimated fair values disclosed for noninterest-bearing demand deposits, savings, NOW accounts, and market rate accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on the certificate of deposit. FASB Codification 825 defines the fair value of demand deposits as the amount payable on demand as of the reporting date and prohibits adjusting estimated fair value from any value derived from retaining those deposits for an expected future period of time.

Short-term borrowings

The carrying amount of short-term borrowings, which include overnight repurchase agreements, fed funds and FHLB advances with original maturity of one year or less, approximates their fair value.

Long-term FHLB Advances and Other Borrowings

The fair value of long-term FHLB advances (with original maturities of greater than one year) and other borrowings, which include a $5.4 million term loan, is established using a discounted cash flow calculation that applies interest rates currently being offered on mid-term and long term borrowings.

Other Liabilities

The carrying amounts of accrued interest payable and other accrued payables approximate fair value.

Off-Balance Sheet Instruments

Estimated fair values of the Corporation’s commitments to extend credit, standby letters of credit and financial guarantees are not included in the table below as their carrying values generally approximate their fair values. These instruments generate fees that approximate those currently charged to originate similar commitments.

Page 32

As of the dates indicated, the carrying amount and estimated fair value of the Corporation’s financial instruments are as follows:


		As of June 30, 2014				As of December 31 2013
(dollars in thousands)	Fair Value Hierarchy Level*	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	102,964	$	102,964	$	81,071	$	81,071
Investment securities, available for sale	See Note 16		266,402		266,402		285,808		285,808
Investment securities, trading	Level 2		3,597		3,597		3,437		3,437
Loans held for sale	Level 2		1,631		1,631		1,350		1,350
Net portfolio loans and leases	Level 3		1,600,072		1,616,762		1,531,670		1,534,631
Mortgage servicing rights	Level 3		4,760		5,552		4,750		5,733
Other assets	Level 3		22,808		22,808		21,819		21,819

Total financial assets		$	2,002,234	$	2,019,716	$	1,929,905	$	1,933,849

Financial liabilities:
Deposits	Level 2	$	1,619,932	$	1,619,636	$	1,591,347	$	1,591,215
Short-term borrowings	Level 2		13,320		13,320		10,891		10,891
Long-term FHLB advances and other borrowings	Level 2		233,132		233,363		205,644		205,149
Other liabilities	Level 2		21,470		21,470		23,885		23,885

Total financial liabilities		$	1,887,854	$	1,887,789	$	1,831,767	$	1,831,140

*	See Note 16 for a description of fair value hierarchy levels.

Note 18 - New Accounting Pronouncements

FASB ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects.”

Issued in January 2014, ASU 2014-01 provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in this update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The Corporation is evaluating the impact of the adoption of this guidance. However, it is not expected to have a significant impact on the presentation of the Corporation’s consolidated financial statements.

FASB ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).”

Issued in January 2014, ASU 2014-04 clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loans, such that all or a portion of the loan should be derecognized and the real estate property recognized. ASU 2014-04 states that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments of ASU 2014-04 are effective for interim and annual periods beginning after December 15, 2014, and may be applied using either a modified retrospective transition method or a prospective transition method as described in ASU 2014-04. The adoption of ASU 2014-04 will be a change in presentation only, for the newly required disclosures, and is not expected to have a significant impact to the Corporation’s consolidated financial statements.

Page 33

FASB ASU 2014-06, “Technical Corrections and Improvements Related to Glossary Terms.”

Issued in March 2014, ASU 2014-06 clarifies the Master Glossary of the Codification, consolidate multiple instances of the same term into a single definition, or make minor improvements to the Master Glossary that are not expected to result in substantive changes to the application of existing guidance or create a significant administrative cost to most entities. Additionally, the amendments will make the Master Glossary easier to understand, as well as reduce the number of terms appearing in the Master Glossary. The amendments in this update do not have transition guidance and will be effective upon issuance for both public entities and nonpublic entities. The amendments in this update are not expected to result in substantive changes to the application of existing guidance. Additionally, the amendments are not expected to create any new differences between U.S. GAAP and IFRS. The Corporation adopted the provisions of this guidance during the three months ended March 31, 2014 and noted no impact to the consolidated financial statements related to this guidance.

FASB ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360).”

Issued in April 2014, ASU 2014-08 changes the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. The amendments in this update improve the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments in this update also require expanded disclosures for discontinued operations. A public business entity and a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market should apply the amendments in this update prospectively to both of the following: (1) All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years; (2) All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. An entity should not apply the amendments in this update to a component of an entity, or a business or nonprofit activity that is classified as held for sale before the effective date even if the component of an entity, or business or nonprofit activity, is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Corporation does not anticipate a significant impact on its consolidated financial statements related to this guidance.

FASB ASU 2014-09, “Revenue from Contracts with Customers”

Issued on May 28, 2014, ASU No. 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Corporation on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Corporation is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Corporation has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

FASB ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”

Issued on June 19, 2014, ASU 2014-12 requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. A reporting entity should apply FASB ASC Topic 718, Compensation—Stock Compensation, to awards with performance conditions that affect vesting. A performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB ASC 718 and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the compensation cost of the award should be recognized prospectively over the remaining service period. For all entities, ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The Corporation is evaluating the impact of the adoption of this guidance. However, it is not expected to have a significant impact on its results of operations.

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

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

Brief History of the Corporation

The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the “Corporation”) was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation and its subsidiaries provide community banking, business banking, residential mortgage lending, consumer and commercial lending and insurance services to customers through its 19 full-service branches and seven limited-hour retirement community offices located throughout the Montgomery, Delaware and Chester counties of Pennsylvania and New Castle county in Delaware. The Corporation and its subsidiaries also provide wealth management services through its network of Wealth Management offices located in Bryn Mawr, Devon and Hershey, Pennsylvania as well as Greenville, Delaware. The Corporation’s stock trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC. The goal of the Corporation is to become the preeminent community bank and wealth management organization in the Philadelphia area.

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 Board and the Pennsylvania Department of Banking and Securities.

Critical Accounting Policies, Judgments and Estimates

The accounting and reporting policies of the Corporation and its subsidiaries conform with U.S. generally accepted accounting principles (“GAAP”). All inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous year’s financial statements to the current year’s presentation. In preparing the consolidated financial statements, the Corporation is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. However, there are uncertainties inherent in making these estimates and actual results could differ from these estimates. The Corporation has identified certain areas that require estimates and assumptions, which include the allowance for loan and lease losses (the “Allowance”), the valuation of goodwill and intangible assets, the fair value of investment securities, valuation of mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation.

These critical accounting policies, along with other significant accounting policies, are presented in Footnote 1 – Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in the Corporation’s 2013 Annual Report.

Executive Overview

The following items highlight the Corporation’s results of operations for the three and six months ended June 30, 2014, as compared to the same periods in 2013, and the changes in its financial condition as of June 30, 2014 as compared to December 31, 2013. More detailed information related to these highlights can be found in the sections that follow.

Three Month Results

•

Net income for the three months ended June 30, 2014 was $7.6 million, an increase of $1.4 million as compared to net income of $6.3 million for the same period in 2013. Diluted earnings per share of $0.55 for the three months ended June 30, 2014 was a $0.09 increase from the same period in 2013.

•

Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended June 30, 2014 were 12.80% and 1.45%, respectively, as compared to ROE and ROA of 11.90% and 1.28%, respectively, for the same period in 2013.

•

Tax-equivalent net interest income increased $1.5 million, or 8.5%, to $19.6 million for the three months ended June 30, 2014, as compared to $18.0 million for the same period in 2013.

•

The Corporation recorded a negative provision for loan and lease losses (the “Provision”), or a release from the allowance for loan and lease losses (the “Allowance”) of $100 thousand for the three months ended June 30, 2014, a decrease of $1.1 million from the $1.0 million recorded for the same period in 2013.

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•

Non-interest income of $12.8 million for the three months ended June 30, 2014 decreased $186 thousand, or 1.4%, as compared to $12.9 million for the same period in 2013.

•

Included in non-interest income, fees for Wealth Management services of $9.5 million for the three months ended June 30, 2014 increased $405 thousand, or 4.5%, as compared to $9.1 million for the same period in 2013.

•

Non-interest expense of $20.6 million for the three months ended June 30, 2014 decreased $102 thousand, or 0.5%, as compared to $20.5 million for the same period in 2013.

Six Month Results

•

Net income for the six months ended June 30, 2014 was $14.3 million, an increase of $2.7 million as compared to net income of $11.6 million for the same period in 2013. Diluted earnings per share of $1.03 for the six months ended June 30, 2014 was an $0.18 increase from the same period in 2013.

•

ROE and ROA for the six months ended June 30, 2014 were 12.26% and 1.39%, respectively, as compared to ROE and ROA of 11.25% and 1.18%, respectively, for the same period in 2013.

•

Tax-equivalent net interest income increased $2.9 million, or 8.0%, to $38.4 million for the six months ended June 30, 2014, as compared to $35.5 million for the same period in 2013.

•

The provision for loan and lease losses of $650 thousand for the six months ended June 30, 2014 was a decrease of $1.2 million, or 64.0%, as compared to $1.8 million for the same period in 2013.

•

Non-interest income of $23.9 million for the six months ended June 30, 2014 decreased $837 thousand, or 3.4%, as compared to $24.7 million for the same period in 2013.

•

Included in non-interest income, fees for Wealth Management services of $18.4 million for the six months ended June 30, 2014 increased $969 thousand, or 5.6%, as compared to $17.4 million for the same period in 2013.

•

Non-interest expense of $39.5 million for the six months ended June 30, 2014 decreased $1.2 million, or 3.0%, as compared to $40.8 million for the same period in 2013.

Changes in Financial Condition

•

Total assets of $2.13 billion as of June 30, 2014 increased $69.6 million from December 31, 2013.

•

Shareholders’ equity of $243.4 million as of June 30, 2014 increased $13.5 million from $229.9 million as of December 31, 2013.

•

Total portfolio loans and leases as of June 30, 2014 were $1.62 billion, an increase of $68.4 million from the December 31, 2013 balance.

•

Total non-performing loans and leases of $8.4 million represented 0.52% of portfolio loans and leases as of June 30, 2014 as compared to $10.5 million, or 0.68% of portfolio loans and leases as of December 31, 2013.

•

The $15.5 million Allowance, as of June 30, 2014, represented 0.96% of portfolio loans and leases, as compared to $15.5 million, or 1.00% of portfolio loans as of December 31, 2013.

•

Total deposits of $1.62 billion as of June 30, 2014 increased $28.6 million, or 1.8%, from $1.59 billion as of December 31, 2013.

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•

Wealth Management assets under management, administration, supervision and brokerage as of June 30, 2014 were $7.57 billion, an increase of $301.6 million from December 31, 2013.

Key Performance Ratios

Key financial performance ratios for the three and six months ended June 30, 2014 and 2013 are shown in the table below:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Annualized return on average equity		12.80	%		11.90	%		12.26	%		11.25	%
Annualized return on average assets		1.45	%		1.28	%		1.39	%		1.18	%
Efficiency ratio¹		64.06	%		66.49	%		63.69	%		67.86	%
Tax-equivalent net interest margin		4.03	%		3.98	%		4.02	%		3.91	%
Basic earnings per share	$	0.56		$	0.47		$	1.06		$	0.87
Diluted earnings per share	$	0.55		$	0.46		$	1.03		$	0.86
Dividend per share	$	0.18		$	0.17		$	0.36		$	0.34
Dividend declared per share to net income per basic common share		32.1	%		36.2	%		34.0	%		39.1	%

¹	The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.

The following table presents certain key period-end balances and ratios as of June 30, 2014 and December 31, 2013:


(dollars in millions, except per share amounts)	June 30, 2014			December 31, 2013
Book value per share	$	17.74		$	16.84
Tangible book value per share	$	14.03		$	13.02
Allowance as a percentage of loans and leases		0.96	%		1.00	%
Tier I capital to risk weighted assets		11.85	%		11.57	%
Tangible common equity ratio		9.32	%		8.92	%
Loan to deposit ratio		99.8	%		97.3	%
Wealth assets under management, administration, supervision and brokerage	$	7,569.8		$	7,268.3
Portfolio loans and leases	$	1,615.5		$	1,547.2
Total assets	$	2,131.2		$	2,061.7
Shareholders’ equity	$	243.4		$	229.9

The following sections discuss, in detail, the Corporation’s results of operations for the three and six months ended June 30, 2014, as compared to the same period in 2013, and the changes in its financial condition as of June 30, 2014 as compared to December 31, 2013.

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, gains and losses from the sale of residential mortgage loans, gains and losses from the sale of investment securities available for sale 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 and other operating expenses; and

•

Income Taxes, which include state and federal jurisdictions.

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TAX-EQUIVALENT NET INTEREST INCOME

Net interest income is the primary source of the Corporation’s revenue. The below tables present a summary, for the three and six months ended June 30, 2014 and 2013, of the Corporation’s average balances and tax-equivalent yields earned on its interest-earning assets and the tax-equivalent rate paid on its interest-bearing liabilities. The tax-equivalent net interest margin is the tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread is the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of noninterest-bearing liabilities represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity.

Tax-equivalent net interest income of $19.6 million for the three months ended June 30, 2014 increased $1.5 million, as compared to the same period in 2013. The increase in net interest income between the periods was primarily driven by volume increases, with average loan balances increasing by $172.3 million, which was partially offset by a $53.9 million decrease in average available for sale investment securities. The net increase in average interest-earning assets was partially offset by a $82.3 million increase in average interest-bearing liabilities between periods.

For the six months ended June 30, 2014, tax-equivalent net interest income of $38.4 million was a $2.9 million increase from the same period in 2013. Average interest-earning assets for the six months ended June 30, 2014 increased $93.7 million, while interest-bearing liabilities increased by $44.5 million from the same period in 2013. The tax-equivalent yield earned on assets increased by 11 basis points and the tax-equivalent rate paid on interest-bearing liabilities increased by 1 basis point.

Analyses of Interest Rates and Interest Differential

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


	For the Three Months Ended June 30,
	2014								2013
(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid			Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid
Assets:
Interest-bearing deposits with banks	$	70,775		$	44		0.25	%	$	59,981		$	41		0.27	%
Investment securities—available for sale:
Taxable		235,853			903		1.54	%		287,287			846		1.18	%
Non-taxable⁽³⁾		35,977			151		1.68	%		38,442			146		1.52	%

Total investment securities—available for sale		271,830			1,054		1.56	%		325,729			922		1.22	%
Investment securities—trading		3,518			17		1.94	%		2,168			13		2.41	%
Loans and leases^(1)(2)(3)		1,600,384			19,936		5.00	%		1,428,069			18,277		5.13	%

Total interest-earning assets		1,946,507			21,051		4.34	%		1,815,947			19,323		4.27	%
Cash and due from banks		12,067								12,876
Allowance for loan and lease losses		(16,073	)							(14,625	)
Other assets		153,990								151,933

Total assets	$	2,096,491							$	1,966,131

Liabilities:
Savings, NOW, and market rate accounts	$	963,746			420		0.17	%	$	969,654			445		0.18	%
Wholesale deposits		91,761			147		0.64	%		42,734			44		0.41	%
Time deposits		127,167			146		0.46	%		164,247			205		0.50	%

Total interest-bearing deposits		1,182,674			713		0.24	%		1,176,635			694		0.24	%
Short-term borrowings		17,220			5		0.12	%		13,358			4		0.12	%
Long-term FHLB advances and other borrowings		222,851			781		1.41	%		150,468			596		1.59	%

Total borrowings		240,071			786		1.31	%		163,826			600		1.47	%

Total interest-bearing liabilities		1,422,745			1,499		0.42	%		1,340,461			1,294		0.39	%
Non-interest-bearing deposits		416,104								391,387
Other liabilities		19,368								23,617

Total non-interest-bearing liabilities		435,472								415,004

Total liabilities		1,858,217								1,755,465
Shareholders’ equity		238,274								210,666

Total liabilities and shareholders’ equity	$	2,096,491							$	1,966,131

Net interest spread							3.92	%							3.88	%
Effect of non-interest-bearing liabilities							0.11	%							0.10	%

Tax equivalent net interest income and margin on earning assets⁽³⁾				$	19,552		4.03	%				$	18,029		3.98	%

Tax-equivalent adjustment⁽³⁾				$	110		0.02	%				$	106		0.02	%

⁽¹⁾

Nonaccrual loans have been included in average loan balances, but interest on nonaccrual loans has been excluded for purposes of determining interest income.

⁽²⁾

Loans include portfolio loans and leases and loans held for sale.

⁽³⁾

Tax rate used for tax-equivalent calculations is 35%.

Page 38


	For the Six Months Ended June 30,
	2014								2013
(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid			Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid
Assets:
Interest-bearing deposits with banks	$	69,300		$	81		0.24	%	$	88,518		$	110		0.25	%
Investment securities—available for sale:
Taxable		240,404			1,875		1.57	%		288,187			1,735		1.21	%
Non-taxable⁽³⁾		36,270			304		1.69	%		36,308			269		1.49	%

Total investment securities—available for sale		276,674			2,179		1.59	%		324,495			2,004		1.24	%
Investment securities—trading		3,478			24		1.39	%		1,933			15		1.56	%
Loans and leases^(1)(2)(3)		1,575,165			39,043		5.00	%		1,415,944			36,147		5.15	%

Total interest-earning assets		1,924,617			41,327		4.33	%		1,830,890			38,276		4.22	%
Cash and due from banks		12,184								13,080
Allowance for loan and lease losses		(15,918	)							(14,659	)
Other assets		154,150								150,953

Total assets	$	2,075,033							$	1,980,264

Liabilities:
Savings, NOW, and market rate accounts	$	955,186			824		0.17	%	$	972,544			924		0.19	%
Wholesale deposits		84,402			262		0.63	%		46,435			98		0.43	%
Time deposits		130,850			316		0.49	%		177,518			447		0.51	%

Total interest-bearing deposits		1,170,438			1,402		0.24	%		1,196,497			1,469		0.25	%
Short-term borrowings		15,167			8		0.11	%		12,672			7		0.13	%
Long-term FHLB advances and other borrowings		217,657			1,527		1.41	%		149,573			1,264		1.70	%

Total borrowings		232,824			1,535		1.33	%		162,245			1,271		1.58	%

Total interest-bearing liabilities		1,403,262			2,937		0.42	%		1,358,742			2,740		0.41	%
Non-interest-bearing deposits		415,810								389,146
Other liabilities		20,948								24,878

Total non-interest-bearing liabilities		436,758								414,024

Total liabilities		1,840,020								1,772,766
Shareholders’ equity		235,013								207,498

Total liabilities and shareholders’ equity	$	2,075,033							$	1,980,264

Net interest spread							3.91	%							3.81	%
Effect of non-interest-bearing liabilities							0.11	%							0.10	%

Tax equivalent net interest income and margin on earning assets⁽³⁾				$	38,390		4.02	%				$	35,536		3.91	%

Tax-equivalent adjustment⁽³⁾				$	225		0.02	%				$	204		0.02	%

⁽¹⁾

Nonaccrual loans have been included in average loan balances, but interest on nonaccrual loans has been excluded for purposes of determining interest income.

⁽²⁾

Loans include portfolio loans and leases and loans held for sale.

⁽³⁾

Tax rate used for tax-equivalent calculations is 35%.

Rate/Volume Analysis (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 three and six months ended June 30, 2014 as compared to the same periods in 2013, allocated by rate and volume. The change in interest income and/or expense due to both volume and rate has been allocated to changes in volume.


	2014 Compared to 2013
	Three Months Ended June 30,									Six Months Ended June 30,
	Volume			Rate			Total			Volume			Rate			Total
Interest income
Interest-bearing deposits with other banks	$	7		$	(4	)	$	3		$	(26	)	$	(3	)	$	(28	)
Investment securities		(154	)		220			66			(276	)		460			184
Loans and leases		2,183			(524	)		1,659			4,068			(1,172	)		2,896

Total interest income	$	2,036		$	(308	)	$	1,728		$	3,766		$	(715	)	$	3,051

Interest expense:
Savings, NOW and market rate accounts	$	(3	)	$	(22	)	$	(25	)	$	(14	)	$	(86	)	$	(100	)
Wholesale non-maturity deposits		9			(2	)		7			14			(12	)		2
Time deposits		(46	)		(13	)		(59	)		(118	)		(13	)		(131	)
Wholesale time deposits		61			35			96			100			62			162
Borrowed funds**		287			(101	)		186			578			(314	)		264

Total interest expense		308			(103	)		205			560			(363	)		197

Interest differential	$	1,728		$	205		$	1,523		$	3,206		$	(352	)	$	2,854

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

**	Borrowed funds include subordinated debentures, short-term borrowings and Federal Home Loan Bank (“FHLB”) advances and other borrowings.

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Tax Equivalent Net Interest Margin

The Corporation’s tax-equivalent net interest margin increased 5 basis points to 4.03% for the three months ended June 30, 2014, from 3.98% for the same period in 2013. The increase in the tax-equivalent net interest margin was primarily driven by volume increases in interest-earning assets. Average interest-earning assets increased $130.6 million, while average interest-bearing liabilities increased by $82.3 million. The increase in average interest-earning assets between periods was largely related to a $172.3 million increase in average portfolio loans, partially offset by a $53.9 million decrease in available for sale investment securities. The yield on loans for the three months ended June 30, 2014 declined by 13 basis points from the same period in 2013, while the yield on available for sale investment securities increased by 34 basis points increase in between the three month periods ended June 30, 2013 and June 30, 2014. The increase in rate paid on average interest-bearing liabilities was primarily related to a $76.2 million increase in average borrowings. The increase in long-term borrowings as well as the cash flows from available for sale investment securities were used to fund loan growth.

The Corporation’s tax-equivalent net interest margin increased 11 basis points to 4.02% for the six months ended June 30, 2014, from 3.91% for the same period in 2013. Average interest-earning assets increased $93.7 million, while average interest-bearing liabilities increased by $44.5 million. The increase in average interest-earning assets between periods was largely related to a $159.2 million increase in average portfolio loans, partially offset by a $47.8 million decrease in available for sale investment securities. The yield on loans for the six months ended June 30, 2014 declined by 15 basis points compared to the same period in 2013. However, this reduction was offset by a 35 basis point increase in yield on available for sale investment securities between six month periods ended June 30, 2013 and June 30, 2014.

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


Quarter	Interest- Earning Asset Yield			Interest-Bearing Liability Cost			Net Interest Spread			Effect of Non- Interest Bearing Sources			Net Interest Margin
2^nd Quarter 2014		4.34	%		0.42	%		3.92	%		0.11	%		4.03	%
1^st Quarter 2014		4.32	%		0.42	%		3.90	%		0.12	%		4.02	%
4^th Quarter 2013		4.33	%		0.40	%		3.93	%		0.10	%		4.03	%
3^rd Quarter 2013		4.33	%		0.38	%		3.95	%		0.10	%		4.05	%
2^nd Quarter 2013		4.27	%		0.39	%		3.88	%		0.10	%		3.98	%

Interest Rate Sensitivity

The Corporation 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, through the management of its investment portfolio, its offerings of loan and selected deposit terms and through wholesale funding. Wholesale funding consists of multiple sources including borrowings from the FHLB, the Federal Reserve Bank of Philadelphia’s discount window, certificates of deposit from institutional brokers, Certificate of Deposit Account Registry Service (“CDARS”), Insured Network Deposit (“IND”) Program, Charity Deposits Corporation (“CDC”), Insured Cash Sweep (“ICS”) and Pennsylvania Local Government Investment Trust (“PLGIT”).

The Corporation uses several tools to manage its interest rate risk including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios and tax-equivalent net interest margin reports. 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 the Corporation’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. The changes to net interest income shown below are in compliance with the Corporation’s policy guidelines.

Summary of Interest Rate Simulation


	Change in Net Interest Income Over the Twelve Months Beginning After June 30, 2014						Change in Net Interest Income Over the Twelve Months Beginning After December 31, 2013
	Amount			Percentage			Amount			Percentage
+300 basis points	$	4,804			6.35	%	$	6,289			8.19	%
+200 basis points	$	1,531			4.21	%	$	3,537			4.61	%
+100 basis points	$	191			0.25	%	$	1,146			1.49	%
-100 basis points	$	(2,051	)		(2.71	)%	$	(1,868	)		(2.43	)%

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The above interest rate simulation suggests that the Corporation’s balance sheet is slightly asset sensitive as of June 30, 2014 in the +100 basis point scenario, demonstrating that a 100 basis point increase in interest rates would have a small, but positive impact on net interest income over the next 12 months. The Corporation’s balance sheet is more asset sensitive in the other rate increase and decrease scenarios. It should be noted, however, that the balance sheet is less asset sensitive, in a rising-rate environment, as of June 30, 2014 than it was as of December 31, 2013. This change in sensitivity is primarily related to a revision in the assumptions used for determining interest rate increases on non-maturity deposits in a rising-rate environment. The ALCO reviewed the model’s assumptions during the first quarter of 2014 and determined that a more reactive approach to adjusting deposit rates in rising-rate scenarios was appropriate, as the ongoing low-rate environment may have impacted customer behavior by heightening their sensitivity to rising rates.

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 the Corporation’s assumptions in the interest rate simulation model is more uncertain than in other periods. Actual customer behavior may be significantly different than expected behavior, which could cause an unexpected outcome and may result in lower net interest income.

Gap Analysis

The interest sensitivity, or gap analysis, shows interest rate risk by identifying re-pricing gaps in the Corporation’s balance sheet. All assets and liabilities are categorized in the following table according to their behavioral sensitivity, which is usually the earliest of either: re-pricing, 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 the Corporation. Non-rate-sensitive assets and liabilities are placed in a separate period. Capital is spread over time periods to reflect the Corporation’s view of the maturity of these funds.

The following table presents the Corporation’s interest rate sensitivity position or gap analysis as of June 30, 2014:


(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	$	85.9		$	—		$	—		$	—		$	—		$	85.9
Investment securities – available for sale		40.8			62.4			116.0			47.2			—			266.4
Investment securities – trading		3.6			—			—			—			—			3.6
Loans and leases⁽¹⁾		484.0			190.6			696.4			246.1			—			1,617.1
Allowance for loan and lease losses		—			—			—			—			(15.5	)		(15.5	)
Cash and due from banks		—			—			—			—			17.0			17.0
Other assets		—			—			—			—			156.7			156.7

Total assets	$	614.3		$	253.0		$	812.4		$	293.3		$	158.2		$	2,131.2

Liabilities and shareholders’ equity:
Demand, non-interest-bearing	$	27.2		$	81.6		$	116.9		$	211.0		$	—		$	436.7
Savings, NOW and market rate		68.4			205.3			476.0			217.9			—			967.6
Time deposits		34.9			61.5			27.2			—			—			123.6
Wholesale non-maturity deposits		41.8			—			—			—			—			41.8
Wholesale time deposits		3.1			1.0			46.1			—			—			50.2
Short-term borrowings		13.3			—			—			—			—			13.3
Long-term FHLB advances and other borrowings		50.8			10.9			166.0			5.4			—			233.1
Other liabilities		—			—			—			—			21.5			21.5
Shareholders’ equity		8.7			26.1			139.1			69.5			—			243.4

Total liabilities and shareholders’ equity	$	248.2		$	386.4		$	971.3		$	503.8		$	21.5		$	2,131.2

Interest-earning assets	$	614.3		$	253.0		$	812.4		$	293.3		$	—		$	1,973.0
Interest-bearing liabilities		212.3			278.7			715.3			223.3			—			1,429.6

Difference between interest-earning assets and interest-bearing liabilities	$	402.0		$	(25.7	)	$	97.1		$	70.0		$	—		$	543.4

Cumulative difference between interest earning assets and interest-bearing liabilities	$	402.0		$	376.3		$	473.4		$	543.4		$	—		$	543.4

Cumulative earning assets as a % of cumulative interest bearing liabilities		289	%		177	%		139	%		139	%

⁽¹⁾

Loans include portfolio loans and leases and loans held for sale.

The table above indicates that the Corporation is asset-sensitive in the immediate to 90-day time frame and may experience an increase in net interest income during that time period if rates rise. Conversely, if rates decline, net interest income may decline. It should be noted that the gap analysis is only one tool used to measure interest rate sensitivity and should be used in conjunction with other measures such as the interest rate simulation discussed above. The gap analysis measures the timing of changes in rate, but not the true weighting of any specific component of the Corporation’s balance sheet. The asset-sensitive position reflected in this gap analysis is similar to the Corporation’s position at March 31, 2014 and December 31, 2013.

PROVISION FOR LOAN AND LEASE LOSSES

For the three months ended June 30, 2014, the Corporation recorded a $100 thousand release from Allowance as compared to a $1 million Provision for the same period in 2013. For the six months ended June 30, 2014, the Corporation recorded a $650 thousand

Page 41

Provision as compared to $1.8 million for the same period in 2013. Lower net charge-offs, reductions in nonperforming loans, upgrades of internally-assigned risk ratings of the Corporation’s loan portfolio as well as improvements to certain qualitative factors considered in the calculation of the Allowance contributed to the decreases in the Provision between the respective periods. For a general discussion of the allowance for loan and lease losses, and our policies related thereto, refer to page 41 of the Corporation’s 2013 Annual Report.

Asset Quality and Analysis of Credit Risk

As of June 30, 2014, total nonperforming loans and leases decreased by $2.1 million, to $8.4 million, representing 0.52% of portfolio loans and leases, as compared to $10.5 million, or 0.68% of portfolio loans and leases as of December 31, 2013. The decrease was comprised of a $744 thousand decrease in nonperforming residential mortgage loans, an $810 decrease in nonperforming commercial and industrial loans, a $361 thousand decrease in nonperforming construction loans and a $182 thousand decrease in nonperforming commercial mortgages. The decrease in nonperforming loans and leases was comprised of payoffs and returns to performing status of $2.6 million, full and partial charge-offs of $199 thousand, and foreclosure of loans to OREO of $875 thousand. These decreases were partially offset by $1.5 million of loans and leases that became non-performing during the period.

As of June 30, 2014, the Allowance of $15.5 million represented 0.96% of portfolio loans and leases, a 4 basis point decrease from 1.00% as of December 31, 2013.

As of June 30, 2014, the Corporation had OREO valued at $853 thousand, as compared to $855 thousand as of December 31, 2013. The balance as of June 30, 2014 was comprised of four residential properties. All properties are recorded at the lower of cost or fair value less cost to sell. Proceeds from the sale of OREO properties totaled $1.1 million for both the three and six months ended June 30, 2014. Gain on sale of OREO properties totaled $220 thousand for both the three and six months ended June 30, 2014.

As of June 30, 2014, the Corporation had $9.1 million of troubled debt restructurings (“TDRs”), of which $7.5 million were in compliance with the modified terms, and hence, excluded from non-performing loans and leases. As of December 31, 2013, the Corporation had $9.0 million of TDRs, of which $7.3 million were in compliance with the modified terms, and as such, were excluded from non-performing loans and leases.

As of June 30, 2014, the Corporation had a recorded investment of $15.7 million of impaired loans and leases which included $9.1 million of TDRs. Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases. Impaired loans and leases as of December 31, 2013 totaled $17.6 million, which included $9.0 million of TDRs. Refer to Note 4H in the Notes to Consolidated Financial Statements for more information regarding the Corporation’s impaired loans and leases.

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

Nonperforming Assets and Related Ratios


(dollars in thousands)	June 30, 2014			December 31, 2013
Non-Performing Assets:
Non-accrual loans and leases	$	8,388		$	10,530
Other real estate owned		853			855

Total non-performing assets	$	9,241		$	11,385

Troubled Debt Restructures:
TDRs included in non-performing loans	$	1,597		$	1,699
TDRs in compliance with modified terms		7,487			7,277

Total TDRs	$	9,084		$	8,976

Loan and Lease quality indicators:
Allowance for loan and lease losses to non-performing loans and leases		184.4	%		147.3	%
Non-performing loans and leases to total portfolio loans and leases		0.52	%		0.68	%
Allowance for loan and lease losses to total portfolio loans and leases		0.96	%		1.00	%
Non-performing assets to total assets		0.43	%		0.55	%
Total portfolio loans and leases	$	1,615,542		$	1,547,185
Allowance for loan and lease losses	$	15,470		$	15,515

NON-INTEREST INCOME

Three Months Ended June 30, 2014 Compared to the Same Period in 2013

Non-interest income for the three months ended June 30, 2014 was $12.8 million, a decrease of $186 thousand from the same period in 2013. The decrease was largely related to the $955 thousand, or 64.0%, decrease in gain on sale of residential mortgage loans between the three month periods ended June 30, 2014 and June 30, 2013. During the three months ended June 30, 2014, the volume of residential mortgage loans sold to the secondary market decreased, with residential mortgages sold totaling $15.2 million, as compared

Page 42

to $46.5 million during the same period in 2013, a 67.3% decrease. This decline was a result of the end of the mortgage refinancing boom which wound down during the first half of 2013. Partially offsetting this decrease in non-interest income was a $405 thousand increase in revenue from wealth management services for the three months ended June 30, 2014 as compared to the same period in 2013. Wealth Management Division assets under management, administration, supervision and brokerage as of June 30, 2014 were $7.6 billion, an increase of $715 million, or 10.4%, from June 30, 2013. The increase was driven by organic growth related to strategic initiatives within the division, along with market appreciation and other new business between the dates. Also contributing to non-interest income for the three months ended June 30, 2014 was $220 thousand in gain on sale of OREO, an increase of $361 thousand from the same period in 2013, in which a loss of $141 thousand was recorded. Four properties were sold during the second quarter of 2014.

Six Months Ended June 30, 2014 Compared to the Same Period in 2013

Non-interest income for the six months ended June 30, 2014 was $23.9 million, a decrease of $837 thousand from the same period in 2013. The decrease was largely related to the $2.1 million, or 71.4%, decline in gain on sale of residential mortgage loans between the six month periods ended June 30, 2014 and June 30, 2013. Partially offsetting this decrease in non-interest income was a $969 thousand increase in revenue from wealth management services for the six months ended June 30, 2014 as compared to the same period in 2013. In addition, gain on sale of OREO increased by $413 thousand for the six months ended June 30, 2014, as compared to the same period in 2013, in which a loss of $193 thousand was recorded.

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


	As of or for the Three Months Ended June 30,						As of or for the Six Months Ended June 30,
(dollars in millions)	2014			2013			2014			2013
Residential mortgage loans held in portfolio	$	310.5		$	280.7		$	310.5		$	280.7
Mortgage originations	$	32.1		$	55.1		$	47.9		$	120.2
Mortgage loans sold:
Servicing retained	$	15.2		$	46.2		$	24.2		$	97.6
Servicing released		—			0.3			0.2			0.5

Total mortgage loans sold	$	15.2		$	46.5		$	24.4		$	98.1

Percent servicing-retained		100.0	%		99.3	%		99.4	%		99.5	%
Percent servicing-released		—	%		0.7	%		0.6	%		0.5	%
Percent of originated mortgage loans sold		47.2	%		84.6	%		50.9	%		81.6	%
Mortgage servicing rights (“MSRs”)	$	4.8		$	4.8		$	4.8		$	4.8
Net gain on sale of loans	$	0.5		$	1.5		$	0.9		$	3.0
Loan servicing and other fees	$	0.4		$	0.4		$	0.9		$	0.9
Amortization of MSRs	$	0.1		$	0.2		$	0.2		$	0.4
Net (recovery) impairment of MSRs	$	—		$	(0.1	)	$	—		$	0.0
Yield on loans sold (includes MSR income)		3.54	%		3.20	%		3.53	%		3.07	%
Loans serviced for others⁽¹⁾	$	622.8		$	623.5		$	622.8		$	623.5

⁽¹⁾	Includes residential mortgage, commercial mortgage, and commercial and industrial loans.

The following table provides details of other operating income for the three and six months ended June 30, 2014 and 2013:


(dollars in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2014		2013		2014		2013
Merchant interchange fees	$	236	$	205	$	449	$	395
Commissions and fees		166		165		304		203
Safe deposit box rentals		99		97		199		194
Insurance commissions		131		147		240		267
Other investment income		332		164		375		181
Title insurance income		—		44		—		194
Rental income		42		50		94		104
Miscellaneous other income		252		497		375		656

Other operating income	$	1,258	$	1,369	$	2,036	$	2,194

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NON-INTEREST EXPENSE

Three Months Ended June 30, 2014 Compared to the Same Period in 2013

Non-interest expense for the three months ended June 30, 2014 increased $102 thousand, to $20.6 million, as compared to $20.5 million for the same period in 2013. Contributing to this increase were increases of $608 thousand in salaries and $250 thousand in professional fees between the periods. The increase in salaries was related to increases in information services staffing, the establishment of two senior management level positions, and the payment of severance benefits and annual salary increases. The increase in professional fees was primarily related to the engagement of consultants to assist in connection with ongoing infrastructure enhancement projects. Offsetting these increases was a $403 thousand decrease in employee benefits expense, as better-than-expected returns on pension assets in 2013 along with an increase in the discount rate used to calculate periodic pension costs helped reduce costs associated with the Corporation’s retirement plans. In addition, due diligence and merger-related costs decreased $311 thousand between periods, as those merger-integration costs associated with the MidCoast Bancorp, Inc. merger transaction, which was terminated in August of 2013, were not present during the second quarter on 2014.

Six Months Ended June 30, 2014 Compared to the Same Period in 2013

Non-interest expense for the six months ended June 30, 2014 decreased $1.2 million, to $39.5 million, as compared to $40.8 million for the same period in 2013. Contributing to this decrease were decreases of $761 thousand in due diligence and merger-related costs, which had been associated with the MidCoast Bancorp, Inc. merger mentioned above, as well as the absence of early extinguishment of debt costs that had been incurred in 2013 related to early payment of certain FHLB borrowings and subordinated debt obligations. Partially offsetting these decreases were increases of $238 thousand in salaries and $268 thousand in professional fees related to the ongoing infrastructure enhancement projects discussed above.

The following table provides details of other operating expenses for the three and six months ended June 30, 2014 and 2013:


(dollars in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2014		2013		2014		2013
Information technology	$	697	$	732	$	1,346	$	1,513
Loan processing		122		281		361		602
Other taxes		24		17		36		37
Temporary help and recruiting		246		317		433		817
Telephone and data lines		353		364		656		783
Travel and entertainment		200		162		328		286
Stationary and supplies		127		119		232		271
Postage		133		103		261		261
Director fees		135		147		260		258
Investment portfolio maintenance		78		95		174		191
Dues and subscriptions		93		90		175		178
Insurance		191		177		395		369
Deferred compensation expense		174		69		183		234
Outsourced services		108		102		216		213
Miscellaneous other expense		509		462		1,119		911

Other operating expense	$	3,190	$	3,237	$	6,175	$	6,924

INCOME TAXES

Income tax expense for the three months ended June 30, 2014 was $4.1 million, as compared to $3.1 million for the same period in 2013, reflecting an increase in the effective tax rate from 33.1% for the second quarter of 2013 to 34.9% for the second quarter of 2014. The increase in effective tax rate was primarily related to a $152 thousand tax credit recorded in the three months ended June 30, 2013 in connection with a change-in-method election related to the Corporation’s deferred compensation plans.

Income tax expense for the six months ended June 30, 2014 was $7.6 million, as compared to $5.9 million for the same period in 2013, reflecting an increase in the effective tax rate from 33.9% for the six months ended June 30, 2013 to 34.7% for the same period in 2014. The 80 basis point increase in effective tax rate was primarily related to the tax credit recorded in the six months ended June 30, 2013 in connection with a change-in-method election related to the Corporation’s deferred compensation plans.

BALANCE SHEET ANALYSIS

Total assets as of June 30, 2014 of $2.13 billion increased $69.6 million, or 3.4%, from $2.06 billion as of December 31, 2013. Interest-bearing deposits with banks increased $18.3 million, or 27.1%, portfolio loans and leases increased $68.4 million, or 4.4%, available for sale investments decreased $19.4 million, or 6.8%, total deposits increased $28.6 million, or 1.8%, and long-term FHLB advances and other borrowings increased $27.5 million, or 13.4%, between the two dates. The increased loan demand was funded through redeployment of cash flows from the investment portfolio, as well as increases in long-term FHLB advances and deposit inflows.

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Loans and Leases

The table below compares the portfolio loans and leases outstanding at June 30, 2014 to December 31, 2013:


	June 30, 2014					December 31, 2013					Change
(dollars in thousands)	Balance		Percent of Portfolio			Balance		Percent of Portfolio			Amount			Percent
Commercial mortgage	$	666,924		41.3	%	$	625,341		40.4	%	$	41,583			6.6	%
Home equity lines & loans		185,593		11.5	%		189,571		12.3	%		(3,978	)		(2.1	)%
Residential mortgage		310,491		19.2	%		300,243		19.4	%		10,248			3.4	%
Construction		55,051		3.4	%		46,369		3.0	%		8,682			18.7	%
Commercial and industrial		334,474		20.7	%		328,459		21.2	%		6,015			1.8	%
Consumer		18,907		1.2	%		16,926		1.1	%		1,981			11.7	%
Leases		44,102		2.7	%		40,276		2.6	%		3,826			9.5	%

Total portfolio loans and leases		1,615,542		100.0	%		1,547,185		100.0	%		68,357			4.4	%
Loans held for sale		1,631					1,350					281			20.8	%

Total loans and leases	$	1,617,173				$	1,548,535				$	68,638			4.4	%

Overall, portfolio loans and leases increased by $68.4 million, or 4.4%, as of June 30, 2014 as compared to December 31, 2013. As detailed in the table above, the most significant increase was seen in the commercial mortgage and residential mortgage segments of the portfolio.

The Corporation continues to focus its business development efforts on building banking relationships with local businesses, not-for-profit companies and strong credit quality individuals. The Corporation believes there are opportunities for new business with credit-worthy borrowers who are not satisfied with their current lender in the commercial real estate market within our primary trading area.

Cash and Investment Securities

As of June 30, 2014, liquidity remained strong as the Corporation had $71.0 million of cash balances at the Federal Reserve and $14.6 million in other interest-bearing accounts, along with significant borrowing capacity as discussed in the “Liquidity” section below.

Investment securities available for sale as of June 30, 2014 totaled $266.4 million, as compared to $285.8 million as of December 31, 2013, as cash flows from investment maturities were utilized to fund loan originations. The $19.4 million decrease in investment securities available for sale during the six months ended June 30, 2014 was concentrated in the mortgage-related and U.S. Government and agencies segments of the portfolio, which decreased $12.8 million and $6.2 million, respectively, between June 30, 2014 and December 31, 2013. The Corporation has remained focused on maintaining liquidity and reducing interest rate risk by favoring investments that have both strong credit quality and a reasonable yield, while still limiting extension risk.

Deposits and Borrowings

Deposits and borrowings as of June 30, 2014 and December 31, 2013 were as follows:


	June 30, 2014					December 31, 2013					Change
(dollars in thousands)	Balance		Percent of Deposits			Balance		Percent of Deposits			Amount			Percent
Interest-bearing checking	$	263,247		16.3	%	$	266,787		16.8	%	$	(3,540	)		(1.3	)%
Money market		559,070		34.5	%		544,310		34.2	%		14,760			2.7	%
Savings		145,312		9.0	%		135,240		8.5	%		10,072			7.4	%
Wholesale non-maturity deposits		41,840		2.6	%		42,936		2.7	%		(1,096	)		(2.6	)%
Wholesale time deposits		50,152		3.1	%		34,640		2.2	%		15,512			44.8	%
Retail time deposits		123,572		7.6	%		140,794		8.8	%		(17,222	)		(12.2	)%

Interest-bearing deposits		1,183,193		73.0	%		1,164,707		73.2	%		18,486			1.6	%
Non-interest-bearing deposits		436,739		27.0	%		426,640		26.8	%		10,099			2.4	%

Total deposits	$	1,619,932		100.0	%	$	1,591,347		100.0	%	$	28,585			1.8	%


	June 30, 2014					December 31, 2013					Change
(dollars in thousands)	Balance		Percent of Borrowings			Balance		Percent of Borrowings			Amount		Percent
Short-term borrowings	$	13,320		5.4	%	$	10,891		5.0	%	$	2,429		22.3	%
Long-term FHLB advances and other borrowings		233,132		94.6	%		205,644		95.0	%		27,488		13.4	%

Borrowed funds	$	246,452		100.0	%	$	216,535		100.0	%	$	29,917		13.8	%

Total deposits as of June 30, 2014 increased $28.6 million from the levels present as of December 31, 2013. As detailed in the table above, the most significant increases were in the money market, savings, wholesale time and non-interest-bearing deposit categories. These increases were partially offset by decreases in the retail time deposit and interest-bearing checking categories.

Long-term FHLB advances and other borrowings increased by $27.5 million during the six months ended June 30, 2014 as loan demand required increased borrowings to supplement the increase in deposits.

Page 45

Capital

Consolidated shareholder’s equity of the Corporation was $243.4 million, or 11.4% of total assets as of June 30, 2014, as compared to $229.9 million, or 11.2% of total assets as of December 31, 2013. The following table presents the Corporation’s and Bank’s capital ratios and the minimum capital requirements to be considered “Well Capitalized” by regulators as of June 30, 2014 and December 31, 2013:


	Actual					Minimum to be Well Capitalized
(dollars in thousands)	Amount		Ratio			Amount		Ratio
June 30, 2014:
Total (Tier II) capital to risk weighted assets
Corporation	$	213,267		12.79	%	$	166,750		10.00	%
Bank		209,959		12.62	%		166,354		10.00	%
Tier I capital to risk weighted assets
Corporation		197,638		11.85	%		100,050		6.00	%
Bank		194,330		11.68	%		99,812		6.00	%
Tier I Leverage ratio (Tier I capital to total quarterly average assets)
Corporation		197,638		9.66	%		102,294		5.00	%
Bank		194,330		9.51	%		102,202		5.00	%
Tangible common equity to tangible assets
Corporation		194,090		9.32	%
Bank		190,782		9.18	%

December 31, 2013:
Total (Tier II) capital to risk weighted assets
Corporation	$	200,667		12.55	%	$	159,924		10.00	%
Bank		197,463		12.38	%		159,493		10.00	%
Tier I capital to risk weighted assets
Corporation		185,022		11.57	%		95,954		6.00	%
Bank		181,818		11.40	%		95,696		6.00	%
Tier I leverage ratio (Tier I capital to total quarterly average assets)
Corporation		185,022		9.29	%		99,543		5.00	%
Bank		181,818		9.14	%		99,424		5.00	%
Tangible common equity to tangible assets
Corporation		179,457		8.92	%
Bank		176,254		8.78	%

Both the Corporation and the Bank exceed the capital levels to be considered “well capitalized” that are required by their respective regulators at the end of each period presented. The capital ratios as of June 30, 2014 for both the Bank and the Corporation have improved from their December 31, 2013 levels. These increases were the result of increases in retained earnings, issuance of shares (primarily through the exercise of stock options), and decreases in accumulated other comprehensive losses between the dates. Neither the Corporation nor the Bank is under any agreement with regulatory authorities which would have a material effect on liquidity, capital resources or operations of the Corporation or the Bank. However, the final rules approved by the Federal Reserve on July 2, 2013, related to the Basel III regulatory capital reforms, which are further discussed in our 2013 Annual Report.

There is no official regulatory guideline for the tangible common equity to tangible asset ratio.

Shelf Registration Statement

Dividend Reinvestment and Stock Purchase Plan

The Corporation has in place under its Shelf Registration Statement a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), which was amended and restated on April 27, 2012 primarily to increase the number of shares which can be issued by the Corporation from 850,000 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.

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Liquidity

The Corporation’s liquidity position is managed on a daily basis as part of the daily settlement function and continuously as part of the formal asset liability management process. The Bank’s liquidity is maintained by managing its core deposits as the primary source, purchasing federal funds, selling loans in the secondary market, borrowing from the FHLB and the Federal Reserve Bank, and purchasing and issuing wholesale certificates of deposit as its secondary sources.

Unused availability is detailed on the following table:


(dollars in millions)	Available Funds as of June 30, 2014		Percent of Total Borrowing Capacity			Available Funds as of December 31, 2013		Percent of Total Borrowing Capacity			Dollar Change			Percent Change
Federal Home Loan Bank of Pittsburgh	$	624.2		72.0	%	$	628.4		74.7	%	$	(4.2	)		(0.7	)%
Federal Reserve Bank of Philadelphia		84.0		100.0	%		73.3		100.0	%		10.7			14.6	%
Fed Funds Lines (six banks)		64.0		100.0	%		64.0		100.0	%		—			—	%
Revolving line of credit with correspondent bank		3.0		100.0	%		3.0		100.0	%		—			—	%

	$	775.2		76.2	%	$	768.7		78.3	%	$	6.5			0.9	%

Quarterly, the ALCO reviews the Corporation’s liquidity needs and reports its findings to the Risk Management Committee of the Corporation’s Board of Directors.

The Corporation has an agreement with CDC to provide up to $5 million, excluding accrued interest, of money market deposits at an agreed upon rate currently at 0.45%. The Corporation had $5.2 million in balances as of June 30, 2014 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, excluding accrued interest, of money market and NOW funds at an agreed upon interest rate equal to the current Fed Funds rate plus 20 basis points. The Corporation had $34.5 million in balances as of June 30, 2014 under this program.

The Corporation continually evaluates the cost and mix of its retail and wholesale funding sources relative to earning assets and expected future earning-asset growth. The Corporation believes that with its current branch network, along with the available borrowing capacity at FHLB and other sources, it has sufficient capacity available to fund expected earning-asset growth.

Discussion of Segments

The Corporation has two principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking and Wealth Management (see Note 10 in the accompanying Notes to Consolidated Financial Statements).

The Wealth Management segment, as discussed in the Non-Interest Income section above recorded a pre-tax segment profit (“PTSP”) of $3.9 million and $7.4 million for the three and six months ended June 30, 2014, respectively, as compared to PTSP of $3.5 million and $6.3 million for the respective periods in 2013. The Wealth Management segment provided 33.4% and 33.9% of the Corporation’s pre-tax profit for the three months ended June 30, 2014 and 2013, respectively and 36.9% and 36.0 % of the Corporation’s pre-tax profit for the six months ended June 30, 2014 and 2013, respectively.

The Banking Segment recorded a PTSP of $7.8 million and $14.5 million for the three and six months ended June 30, 2014, respectively, as compared to $5.9 million and $11.2 million for the respective periods in 2013. The Banking Segment provided 66.6% and 66.1% of the Corporation’s pre-tax profit for the three months ended June 30, 2014 and 2013, respectively and 63.1% and 64.0 % of the Corporation’s pre-tax profit for the six months ended June 30, 2014 and 2013, respectively.

Off Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at June 30, 2014 were $453.6 million, as compared to $405.3 million at December 31, 2013.

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 Corporation’s obligation under standby letters of credit at June 30, 2014 amounted to $23.7 million, as compared to $21.2 million at December 31, 2013.

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. 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.

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Contractual Cash Obligations of the Corporation as of June 30, 2014:


(dollars in millions)	Total		Within 1 Year		2 – 3 Years		4 – 5 Years		After 5 Years
Deposits without a stated maturity	$	1,446.2	$	1,446.2	$	—	$	—	$	—
Wholesale and retail time deposits		173.7		98.8		55.2		19.7		—
Short-term borrowings		13.3		13.3		—		—		—
Long-term FHLB advances and other borrowings		233.1		18.7		113.0		96.4		5.0
Operating leases		51.2		3.1		6.0		5.9		36.2
Purchase obligations		15.2		4.0		7.9		2.9		0.4
Non-discretionary pension contributions		0.1		0.1		—		—		—

Total	$	1,932.8	$	1,584.2	$	182.1	$	124.9		41.6

Other Information

Effects of Inflation

Inflation has some impact on the Corporation’s operating costs. Unlike many industrial companies, however, substantially all of the Corporation’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.

Effects of Government Monetary Policies

The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.

The Corporation is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Corporation’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation cannot be predicted.

Special Cautionary Notice Regarding Forward Looking Statements

Certain of the statements contained in this Quarterly Report on Form 10-Q, including, without limitation, this Item 2 of Part I, may constitute forward-looking statements for the purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Corporation to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. 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” and “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:

•

the effect of future economic conditions on the Corporation and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and savings patterns, the real estate market, and the Corporation’s interest rate risk exposure and credit risk;

•

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

•

any future downgrades in the credit rating of the U.S. Government and federal agencies;

•

governmental monetary and fiscal policies, as well as legislation and regulatory changes;

•

results of examinations by the Federal Reserve Board, including the possibility that the Federal Reserve Board may, among other things, require us to increase our allowance for loan losses or to write down assets;

•

changes in accounting requirements or interpretations;

•

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

Page 48

•

the risks of changes in interest rates on the level and composition of deposits, loan demand, and the value of loan collateral and securities, as well as interest rate risk;

•

the effects of competition from other commercial banks, thrifts, mortgage companies, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money-market and mutual funds and other institutions operating in the Corporation’s trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally and such competitors offering banking products and services by mail, telephone, computer and the Internet;

•

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

•

the Corporation’s need for capital;

•

the Corporation’s success in continuing to generate new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time;

•

the Corporation’s 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;

•

differences in the actual financial results, cost savings, and revenue enhancements associated with our acquisitions;

•

changes in consumer and business spending, borrowing and savings habits and demand for financial services in our investment products in a manner that meets customers’ needs;

•

the Corporation’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers;

•

the Corporation’s ability to originate, sell and service residential mortgage loans;

•

the accuracy of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, the market value of mortgage servicing rights and various financial assets and liabilities;

•

the Corporation’s ability to retain key members of the senior management team;

•

the ability of key third-party providers to perform their obligations to the Corporation and the Bank;

•

technological changes being more difficult or expensive than anticipated; and

•

the Corporation’s success in managing the risks involved in the foregoing.

All written or oral forward-looking statements attributed to the Corporation and the Bank are expressly qualified in their entirety by use of the foregoing cautionary statements. All forward-looking statements included in this Quarterly Report and incorporated documents are based upon the Corporation’s beliefs and assumptions as of the date of this Quarterly Report. The Corporation assumes no obligation to update any forward-looking statement. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this Quarterly Report or incorporated documents might not occur and you should not put undue reliance on any forward-looking statements.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risks

See Item 2 – “Management’s Discussion and Analysis of Results of Operations – Interest Rate Summary,” “Summary of Interest Rate Simulation,” and “Gap Analysis” for a discussion of the Corporation’s and Bank’s exposure to market risk since December 31, 2013. For further discussion of quantitative and qualitative disclosures about market risks, please also refer to the Corporation’s 2013 Annual Report.

ITEM 4. Controls and Procedures

As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer, Frederick C. Peters II, and Chief Financial Officer, J. Duncan Smith, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2014.

There have not been any changes in the Corporation’s internal controls over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Page 49

PART II OTHER INFORMATION.

ITEM 1. Legal Proceedings.

None.

ITEM 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” included within the 2013 Annual Report and subsequently filed Quarterly Reports on Form 10-Q. The risks described in the 2013 Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. See “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Cautionary Notice Regarding Forward Looking Statements.”

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

Share Repurchase

The following table presents the shares repurchased by the Corporation during the first quarter of 2014⁽¹⁾:


Period	Total Number of Shares Purchased^(2)(3)(4)		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
April 1, 2014 – April 30, 2014		3,283	$	27.96		—		195,705
May 1, 2014 – May 31, 2014		1,767	$	27.70		—		195,705
June 1, 2014 – June 30, 2014		—	$	—		—		195,705

Total		5,050	$	27.87		—		195,705

⁽¹⁾

On February 24, 2006, the Board of Directors of the Corporation adopted a stock repurchase program (the “2006 Program”) under which the Corporation may repurchase up to 450,000 shares of the Corporation’s common stock, not to exceed $10 million. The 2006 Program was publicly announced in a Press Release dated February 24, 2006. There is no expiration date on the 2006 Program and the Corporation has no plans for an early termination of the 2006 Program. All shares purchased through the 2006 Program were accomplished in open market transactions. As of June 30, 2014, the maximum number of shares that may yet be purchased under the 2006 Program was 195,705.

⁽²⁾

On April 1, 2014, 1,401 shares were purchased by the Corporation’s deferred compensation plans through open market transactions.

⁽³⁾

Between April 17, 2014 and April 22, 2014, the Corporation purchased 1,882 shares and retired them to treasury to satisfy statutory tax withholding requirements in connection with the exercise of stock option awards for certain of the Bank’s officers.

⁽⁴⁾

On May 15, 2014, 1,767 shares were purchased and retired to treasury to satisfy statutory tax withholding requirements in connection with the vesting of restricted stock awards for certain of the Bank’s officers.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures.

Not applicable.

ITEM 5. Other Information

None.

Page 50

ITEM 6. Exhibits


Exhibit No.		Description and References

2.1		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

3.1		Amended and Restated By-Laws, effective November 20, 2007, incorporated by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007

3.2		Amended and Restated Articles of Incorporation, effective November 21, 2007, incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007

10.1*		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

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith

10.2		Form of Director Letter Agreement, filed herewith

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

101.INS XBRL		Instance Document, furnished 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.

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Signatures

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


	Bryn Mawr Bank Corporation

Date: August 8, 2014	By:	/S/ FREDERICK C. PETERS II
		Frederick C. Peters II
		Chief Executive Officer

Date: August 8, 2014	By:	/S/ J. DUNCAN SMITH
		J. Duncan Smith
		Treasurer & Chief Financial Officer

Page 52

Form 10-Q

Index to Exhibits Furnished Herewith


Exhibit No.		Description and References

2.1		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

3.1		Amended and Restated By-Laws, effective November 20, 2007, incorporated by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007

3.2		Amended and Restated Articles of Incorporation, effective November 21, 2007, incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007

10.1*		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

10.2		Form of Director Letter Agreement, filed herewith

31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith

31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

101.INS XBRL		Instance Document, filed herewith

101.SCH XBRL		Taxonomy Extension Schema Document, filed herewith

101.CAL XBRL		Taxonomy Extension Calculation Linkbase Document, filed herewith

101.DEF XBRL		Taxonomy Extension Definition Linkbase Document, filed herewith

101.LAB XBRL		Taxonomy Extension Label Linkbase Document, filed herewith

101.PRE XBRL		Taxonomy Extension Presentation Linkbase Document, filed herewith

Page 53