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BMTC > SEC Filings for BMTC > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for BRYN MAWR BANK CORP


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS ("MD&A")

Brief History of the Corporation

The Bryn Mawr Trust Company (the "Bank") received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the "Corporation") was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. The Corporation and its subsidiaries offer a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 19 full-service branches and seven limited-hour, retirement community offices throughout Montgomery, Delaware and Chester counties of Pennsylvania and New Castle county in Delaware. The common stock of the Corporation trades on the NASDAQ Stock Market ("NASDAQ") under the symbol BMTC.

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

During the three years ended December 31, 2012, the Corporation completed the following transactions:

First Bank of Delaware

On November 17, 2012, the acquisition of $70.3 million of deposits, $76.6 million of loans and a branch location from First Bank of Delaware ("FBD"), by the Corporation was completed. The transaction, which was accounted for as a business combination, enabled the Corporation to expand its banking arm into the Delaware market by opening its first full-service branch there, complementing its existing wealth management operations in the state.

Davidson Trust Company

On May 15, 2012, the acquisition of Davidson Trust Company ("DTC") by the Corporation was completed. The transaction was accounted for as a business combination. The acquisition of DTC initially increased the Corporation's wealth management division assets under management by $1.0 billion. The structure of the Corporation's existing wealth management segment allowed for the immediate integration of DTC and was able to take advantage of the various synergies that exist between the two companies.

The Private Wealth Management Group of The Hershey Trust Company

On May 27, 2011, the acquisition of the Private Wealth Management Group of the Hershey Trust Company ("PWMG") by the Corporation was completed. The transaction was accounted for as a business combination. The acquisition of PWMG initially increased the Corporation's wealth management division assets under management by $1.1 billion. The acquisition of PWMG allowed the Corporation to establish a presence in central Pennsylvania by maintaining the former PWMG offices in Hershey, Pennsylvania.

First Keystone Financial, Inc.

On July 1, 2010, the merger of First Keystone Financial, Inc. ("FKF") with and into the Corporation, and the two step merger of FKF's wholly-owned subsidiary, First Keystone Bank with and into the Bank, were completed.

The transaction was accounted for as a business combination. The merger with FKF, a federally chartered thrift institution with assets of approximately $480 million, enabled the Corporation to increase its regional footprint


with the addition of eight full service branch locations, primarily in Delaware County, Pennsylvania. The geographic locations of the acquired branches were such that it was not necessary to close any of the former FKF branches. By expanding into these new areas within Delaware County, Pennsylvania, the Corporation has been able to extend its successful sales culture as well as offer its reputable wealth management products and other value-added services to a wider segment of the region's population.

Results of Operations

The following is Management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements. The Corporation's consolidated financial condition and results of operations are comprised primarily of the Bank's financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future. For more information on the factors that could affect performance, see "Special Cautionary Notice Regarding Forward Looking Statements" on page 57 of this Item.

Critical Accounting Policies, Judgments and Estimates

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

The allowance for loan and lease losses (the "Allowance") involves a higher degree of judgment and complexity than other significant accounting policies. The allowance for loan and lease losses is calculated with the objective of maintaining a reserve level believed by the Corporation to be sufficient to absorb estimated probable credit losses. The Corporation's determination of the adequacy of the allowance is based on periodic evaluations of the loan and lease portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, expected loan commitment usage, the amounts and timing of expected future cash flows on impaired loans and leases, value of collateral, estimated losses on consumer loans and residential mortgages and general amounts for historical loss experience. The process also considers economic conditions and inherent risks in the loan and lease portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from the Corporation's estimates, additional provision for loan and lease losses (the "Provision") may be required that would adversely impact earnings in future periods. See the section of this document titled Asset Quality and Analysis of Credit Risk for additional information.

Other significant accounting policies are presented in Note 1 in the accompanying financial statements. The Corporation's Summary of Significant Accounting Policies has not substantively changed any aspect of its overall approach in the application of the foregoing policies.

Overview of General Economic, Regulatory and Governmental Environment

Despite the uncertainty surrounding the ultimate outcome of the nation's remaining budgetary agreement, the general economic outlook is showing slow but steady improvement. Unemployment rates are moving lower and consumer balance sheets have improved to a level of quality not seen since the early 1990's. Debt levels have been reduced and asset levels recouped much of the losses from the "Great Recession." Throughout the last four years, consumers have reduced the amount of disposable personal income that has been committed to meeting total financial obligations (auto, mortgage, insurance and taxes) from a historically high level of 19% to slightly below 16% representing the healthiest level in more than 20 years.


The housing market has been showing a gradual improvement over the last few quarters, as measured by new building permits as well as an improvement in new and existing home sales. This improvement has occurred amid a favorable backdrop of historically low mortgage rates. In addition to the forecasted improvement in the housing market, consumer spending on durable goods should also show a marked improvement as we move through the year. Improvement in consumers' balance sheets has been met by a banking industry now adequately capitalized and willing to make credit available at very attractive rates.

The initial reaction to the "American Taxpayer Relief Act of 2012" has been positive for the markets since many of the individual tax policy uncertainties have been settled. The Bush-era personal income tax rates have been made permanent for those individuals making under $400,000 and capital gains, dividend income, and estate tax rates have been set going forward with unemployment benefits having been extended for another year. However, many uncertainties remain to be addressed in the areas of corporate tax rates and incentives as well as the required governmental spending reductions that will become necessary to reduce the deficit.

The Federal Reserve's continued efforts to maintain low interest rates during the months ahead, coupled with relatively high unemployment rates and low capacity utilization rates, should continue to contain the underlying inflationary pressure over the near to intermediate term. In the long term however, the magnitude of future inflationary pressure will depend on the government's resolve in completing the actions that are necessary to restore a climate of fiscal discipline by reducing the size of the fiscal budget deficit. Through the next few years, economic growth is likely to remain under historically average trends given the expected impact of a combination of government spending reductions and revenue increases needed to reduce the level of our ongoing federal deficit. This deleveraging would likely moderate the underlying growth potential of the United States as well as many of the other major economies over the next five to seven years.

Executive Overview

2012 Compared to 2011

Income Statement

The Corporation reported net income of $21.1 million or $1.60 diluted earnings per share for the twelve months ended December 31, 2012, as compared to $19.6 million, or $1.54 diluted earnings per share, for the same period in 2011. Return on average equity ("ROE") and return on average assets ("ROA") for the twelve months ended December 31, 2012, were 10.91% and 1.15%, respectively, as compared to 11.08% and 1.14%, respectively, for the same period in 2011. The increase in net income for the twelve months ended December 31, 2012, as compared to the same period in 2011, was largely related to a $12.3 million increase in non-interest income, comprised primarily of increases in wealth management revenue and gains on sale of residential mortgage loans. Also contributing to the net income increase was a $1.8 million increase in net interest income and a $2.1 million decrease in Provision between the periods. These improvements were substantially offset by a $13.2 million increase in non-interest expense and a $1.5 million increase in income tax expense for the twelve months ended December 31, 2012, as compared to the same period in 2011.

The $1.8 million, or 2.9% increase in the Corporation's tax-equivalent net interest income for the twelve months ended December 31, 2012, as compared to the same period in 2011, was attributed to a $3.1 million, or 26.4%, decrease in tax-equivalent interest expense offset by a $1.2 million, or 1.6%, decrease in tax-equivalent interest income for the twelve months ended December 31, 2012, as compared to the same period in 2011. The Corporation's tax-equivalent net interest margin declined to 3.85% for the twelve months ended December 31, 2012 from 3.96% for the same period in 2011.

For the twelve months ended December 31, 2012, the provision for loan and lease losses of $4.0 million was a decrease of $2.1 million from the $6.1 million for the same period in 2011. This decrease was partially the result of a $1.3 million, or 35.4%, decline in net loan charge-offs for the twelve months ended December 31, 2012, as compared to the same period in 2011. The decrease in net loan charge-offs was concentrated in the commercial mortgage, leasing and residential mortgage segments of the portfolio.


Non-interest income for the twelve months ended December 31, 2012 was $46.4 million, an increase of $12.3 million, or 36.2%, as compared to the same period in 2011. Largely contributing to the increase in non-interest income was an $8.1 million, or 37.5%, increase in fees for wealth management services, as the additions of PWMG in May 2011 and DTC in May 2012 had a significant impact on wealth management revenue. Augmenting the wealth management revenue increase was a $4.2 million, or 167.6%, increase in the gain on sale of residential mortgage loans for the twelve months ended December 31, 2012, as compared to the same period in 2010. During 2012, the Corporation experienced a surge in the volume of residential mortgage loan originations, as the low interest rate climate spurred on another refinancing boom.

Non-interest expense for the twelve months ended December 31, 2012, was $74.9 million, an increase of $13.2 million, or 21.3%, as compared to the same period in 2011. Contributing to this increase were a $6.3 million increase in salaries and employee benefits and a $2.1 million increase in due diligence and merger-related expenses. During 2012, the Corporation completed two transactions which not only accounted for the due diligence and merger-related expense increase, but also added overhead costs in the form of salaries and employee benefits as well as occupancy costs related to the new employees and facilities.

Balance Sheet

Asset quality remained relatively stable as of December 31, 2012. The allowance for loan and lease losses of $14.4 million was 1.03% of portfolio loans and leases, as of December 31, 2012, as compared to $12.8 million, or 0.98% of portfolio loans and leases, at December 31, 2011. The increase in the Allowance as of December 31, 2012, as compared to December 31, 2011, is reflective of the increase in the balance of loan portfolio between the dates.

Total portfolio loans and leases of $1.40 billion at December 31, 2012 increased $103.1 million, or 8.0%, as compared to $1.30 billion at December 31, 2011. The loan growth was concentrated in the commercial mortgage and commercial and industrial segments of the portfolio and was largely related to the $76.6 million of loans acquired from FBD.

The Corporation's investment portfolio at December 31, 2012 had a fair market value of $316.6 million, as compared to $273.8 million at December 31, 2011, as cash inflows from maturities, calls and pay downs as well as deposit inflows were reinvested.

Deposits of $1.63 billion, as of December 31, 2012, increased $252.3 million from December 31, 2011. The 18.3% increase was partially the result of the $70.3 million of deposits acquired from FBD, along with significant organic growth concentrated in the money market segment of the portfolio.

2011 Compared to 2010

Income Statement

In general, the differences in the results of operations for the twelve months ended December 31, 2011, as compared to the same period in 2010, were significantly impacted by the July 1, 2010 merger with FKF and the May 27, 2011 acquisition of PWMG. The Corporation reported net income of $19.6 million or $1.54 diluted earnings per share for the twelve months ended December 31, 2011, as compared to $9.0 million, or $0.85 diluted earnings per share, for the same period in 2010. ROE and ROA for the twelve months ended December 31, 2011, were 11.08% and 1.14%, respectively, as compared to 6.72% and 0.61%, respectively, for the same period in 2010. The increase in net income and, in turn, ROE and ROA for the twelve months ended December 31, 2011, as compared to the same period in 2010, was primarily related to a $10.7 million increase in net interest income, a $4.8 million increase in non-interest income and a $3.8 million decrease in Provision. These improvements were partially offset by a $3.5 million increase in non-interest expense and a $5.1 million increase in income tax expense for the twelve months ended December 31, 2011, as compared to the same period in 2010


The $10.4 million, or 19.6% increase in the Corporation's tax-equivalent net interest income for the twelve months ended December 31, 2011, as compared to the same period in 2010, was largely attributed to a $9.4 million, or 14.3%, increase in tax-equivalent interest income for the twelve months ended December 31, 2011, as compared to the same period in 2010 which was primarily the result of a $209.0 million increase in average portfolio loans between the periods. The Corporation's tax-equivalent net interest margin increased to 3.96% for the twelve months ended December 31, 2011 from 3.79% for the same period in 2010.

For the twelve months ended December 31, 2011, the provision for loan and lease losses of $6.1 million was a decrease of $3.8 million, or 38.2%, from the $9.9 million for the same period in 2010. This decrease resulted from the $6.4 million, or 63.9%, decline in net loan charge-offs for the twelve months ended December 31, 2011, as compared to the same period in 2010. The decrease in net loan charge-offs was primarily related to the $6.7 million decrease in net charge-offs of commercial and industrial loans between the periods. Increases in non-performing loans, primarily related to two residential construction loan relationships which became non-performing during 2011, required additional Provision, partially offsetting the charge-off declines.

Non-interest income for the twelve months ended December 31, 2011 was $34.1 million, an increase of $4.8 million, or 16.2%, as compared to the same period in 2010. Largely contributing to the increase in non-interest income for the twelve months ended December 31, 2011 was a $6.2 million, or 39.8%, increase in fees for wealth management services. This increase was primarily attributable to the May 27, 2011 acquisition of PWMG, which initially added $1.1 billion to the Corporation's assets under management, administration, supervision and brokerage. Partially offsetting the increase in wealth management revenues was a $2.2 million decrease in the gain on sale of residential mortgage loans for the twelve months ended December 31, 2011, as compared to the same period in 2010. During 2011, the Corporation experienced a decline in the volume of residential mortgage loan originations, as the refinancing boom of 2010 dropped off and did not continue into 2011. In addition, the Corporation elected to retain a larger portion of the originated residential loans in its portfolio.

Non-interest expense for the twelve months ended December 31, 2011, was $61.7 million, an increase of $3.5 million, or 6.1%, as compared to the same period in 2010. Contributing to this increase were a $4.2 million increase in salaries and benefits expenses, a $1.7 million increase in occupancy-related expenses, a $756 thousand increase in impairment of mortgage servicing rights, a $1.5 million increase in other operating expenses and a $1.0 million increase in intangible asset amortization. These increases were substantially offset by a $5.2 million decrease in due diligence and merger-related expenses between the periods.

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 available for sale investment securities and other fees from loan and deposit services;

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

Income Taxes, which include state and federal jurisdictions.


Net Interest Income

Rate/Volume Analyses (Tax-equivalent Basis)*

The rate volume analysis in the table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the years 2012 as compared to 2011 and 2011 as compared to 2010, allocated by rate and volume. The change in interest income / expense due to both volume and rate has been allocated to changes in volume.

                                                                     Year Ended December 31,
(dollars in thousands)                         2012 Compared to 2011                        2011 Compared to 2010
increase/(decrease)                     Volume         Rate         Total             Volume         Rate         Total
Interest Income:
Interest-bearing deposits with banks    $    18      $     (6 )    $     12          $    (53 )    $    (11 )    $    (64 )
Investment securities - taxable             306        (1,109 )        (803 )             559          (304 )         255
Investment securities - nontaxable          207          (234 )         (27 )            (688 )         (88 )        (776 )
Loans and leases                          3,384        (3,798 )        (414 )          11,972        (1,997 )       9,975

Total interest income                     3,915        (5,147 )      (1,232 )          11,790        (2,400 )       9,390

Interest expense:
Savings, NOW and market rate accounts       444        (1,133 )        (689 )             646          (645 )           1
Wholesale non-maturity deposits             (69 )          14           (55 )              24          (101 )         (77 )
Wholesale time deposits                    (139 )         (94 )        (233 )            (134 )        (196 )        (330 )
Time deposits                              (361 )        (417 )        (778 )             339          (246 )          93
Borrowed funds - long-term                   88        (1,403 )      (1,315 )            (859 )         179          (680 )
Borrowed funds - short-term                   5            (8 )          (3 )              15            (7 )           8

Total interest expense                      (32 )      (3,041 )      (3,073 )              31        (1,016 )        (985 )

Interest differential                   $ 3,947      $ (2,106 )    $  1,841          $ 11,759      $ (1,384 )    $ 10,375

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


Analysis of Interest Rates and Interest Differential

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



                                                                                                         For the Year Ended December 31,
                                                                     2012                                              2011                                              2010
                                                                                   Average                                           Average                                           Average
                                                                    Interest        Rates                             Interest        Rates                             Interest        Rates
                                                     Average         Income/       Earned/             Average         Income/       Earned/             Average         Income/       Earned/
(dollars in thousands)                               Balance         Expense        Paid               Balance         Expense        Paid               Balance         Expense        Paid
Assets:
Interest-bearing deposits with banks               $    60,389      $     127          0.21 %        $    52,390      $     115          0.22 %        $    73,521      $     179          0.24 %
Investment securities - available for sale:
Taxable                                                299,598          4,060          1.36 %            281,970          4,868          1.73 %            251,318          4,620          1.84 %
Tax -Exempt                                             16,685            302          1.81 %             10,239            329          3.21 %             27,173          1,105          4.07 %

Total investment securities - available for sale       316,283          4,362          1.38 %            292,209          5,197          1.78 %            278,491          5,725          2.06 %
Investment securities - trading                          1,431             37          2.59 %              1,339             32          2.39 %              1,383             25          1.81 %
Loans and leases(1)(2)(3)                            1,310,883         69,140          5.27 %          1,250,071         69,554          5.56 %          1,041,109         59,579          5.72 %

Total interest-earning assets                        1,688,986         73,666          4.36 %          1,596,009         74,898          4.69 %          1,394,504         65,508          4.70 %
Cash and due from banks                                 12,890                                            12,078                                            11,750
Allowance for loan and lease losses                    (13,469 )                                         (11,397 )                                         (10,248 )
Other assets                                           144,594                                           134,996                                            96,145

Total assets                                       $ 1,833,001                                       $ 1,731,686                                       $ 1,492,151

Liabilities:
Savings, NOW, and market rate accounts             $   828,675          2,268          0.27 %        $   722,850          2,957          0.41 %        $   594,756      $   2,957          0.50 %
Wholesale non-maturity deposits                         46,815            169          0.36 %             67,793            224          0.33 %             62,875            301          0.48 %
Wholesale time deposits                                 17,256             88          0.51 %             30,429            321          1.05 %             38,379            651          1.70 %
Time deposits                                          195,778          1,507          0.77 %            232,084          2,285          0.98 %            201,947          2,192          1.09 %

. . .
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