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BMTC > SEC Filings for BMTC > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for BRYN MAWR BANK CORP


10-May-2013

Quarterly Report


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.

During 2012, the Corporation completed the following two transactions:

First Bank of Delaware Transaction

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 "FBD Transaction"). The consideration paid totaled $10.6 million. The FBD 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.

Acquisition of the Davidson Trust Company

On May 15, 2012, the Corporation acquired the Davidson Trust Company ("DTC") for $10.5 million, including $7.35 million cash paid at closing and $3.15 million of contingent cash payments that was to be paid November 14, 2012, May 14, 2013 and November 14, 2013, subject to certain post-closing contingencies relating to the assets under management. None of the three contingent cash payments was to exceed $1.05 million. The first of the three contingent payments was made on November 14, 2012, in the amount of $1.05 million. The Corporation expects to make the second contingent payment in the amount of $1.05 million on May 14, 2013

Pending Acquisition of MidCoast Community Bancorp, Inc.

As announced on March 29, 2013, the Corporation has entered into a definitive agreement and plan of merger with MidCoast Community Bancorp, Inc ("MCBI"), pursuant to which MCBI will merge with and into the Corporation. The transaction is expected to close late in the third quarter of 2013 and is subject to the normal regulatory and MCBI shareholder approvals.

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, 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 2012 Annual Report on Form 10-K.


Table of Contents

Executive Overview

The following items highlight the Corporation's results of operations for the three months ended March 31, 2013, as compared to the same periods in 2012, and the changes in its financial condition as of March 31, 2013 as compared to December 31, 2012. More detailed information related to these highlights can be found in the sections that follow.

Three Month Results

In general, the results for the three months ended March 31, 2013, as compared to the same period in 2012 were impacted by the May 2012 acquisition of DTC and the November 2012 FBD Transaction.

Net income for the three months ended March 31, 2013 was $5.3 million, an increase of $247 thousand as compared to net income of $5.1 million for the same period in 2012. Diluted earnings per share of $0.40 for the three months ended March 31, 2013 was $0.01 increase from the same period in 2012.

Return on average equity ("ROE") and return on average assets ("ROA") for the three months ended March 31, 2013 were 10.56% and 1.08%, as compared to ROE and ROA of 11.00% and 1.14%, respectively, for the same period in 2012.

Tax-equivalent net interest income increased $1.4 million, or 9.0%, to $17.5 million for the three months ended March 31, 2013, as compared to $16.1 million for the same period in 2012.

The provision for loan and lease losses (the "Provision") for the three months ended March 31, 2013 was $804 thousand, a decrease of $196 thousand, or 19.6%, from the $1.0 million recorded for the same period in 2012.

Non-interest income of $11.8 million for the three months ended March 31, 2013 increased $2.2 million, or 23.0%, as compared to $9.6 million for the same period in 2012.

Included in non-interest income, fees for Wealth Management services of $8.3 million for the three months ended March 31, 2013 increased $2.1 million, or 34.0%, as compared to $6.2 million for the same period in 2012.

Non-interest expense of $20.2 million for the three months ended March 31, 2013 increased $3.4 million, or 20.5%, as compared to $16.8 million for the same period in 2012.

Changes in Financial Condition

Total assets of $2.03 billion as of March 31, 2013 decreased $5.7 million from $2.04 billion as of December 31, 2012.

Shareholders' equity of $210.2 million as of March 31, 2013 increased $6.6 million from $203.6 million as of December 31, 2012.

Total portfolio loans and leases as of March 31, 2013 were $1.41 billion, an increase of $6.8 million from the December 31, 2012 balance.

Total non-performing loans and leases of $12.8 million represented 0.91% of portfolio loans and leases as of March 31, 2013 as compared to $14.8 million, or 1.06% of portfolio loans and leases as of December 31, 2012.

The $14.4 million Allowance, as of March 31, 2013, represented 1.03% of portfolio loans and leases, unchanged from December 31, 2012.

Total deposits of $1.61 billion as of March 31, 2013 decreased $24.0 million, or 1.5%, from $1.63 billion as of December 31, 2012.

Wealth Management assets under management, administration, supervision and brokerage as of March 31, 2013 were $6.99 billion, an increase of $324.8 million from December 31, 2012.


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Other Recent Developments

As announced on March 29, 2013, the Corporation has entered into a definitive agreement and plan of merger with MidCoast Community Bancorp, Inc ("MCBI"), pursuant to which MCBI will merge with and into the Corporation. The transaction is expected to close late in the third quarter of 2013 and is subject to the normal regulatory and MCBI shareholder approvals.

Key Performance Ratios

Key financial performance ratios for the three months ended March 31, 2013 and
2012 are shown in the table below:



                                               Three Months Ended March 31,
                                                2013                  2012
      Annualized return on average equity           10.56 %               11.00 %
      Annualized return on average assets            1.08 %                1.14 %
      Efficiency ratio *                             69.3 %                65.7 %
      Tax equivalent net interest margin             3.85 %                3.93 %

Diluted earnings per share $ 0.40 $ 0.39 Dividend per share $ 0.40 $ 0.39

* 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 March 31, 2013 and December 31, 2012:

                                                        March 31,           December 31,
(dollars in millions, except per share amounts)            2013                 2012
Book value per share                                    $    15.57         $        15.17
Tangible book value per share                           $    11.55         $        11.08
Allowance as a percentage of loans and leases                 1.03 %                 1.03 %
Tier I capital to risk weighted assets                       11.33 %                11.02 %
Tangible common equity ratio                                  7.98 %                 7.60 %
Loan to deposit ratio                                         87.4 %                 85.8 %
Wealth assets under management, administration,
supervision and brokerage                               $  6,988.0         $      6,663.2
Portfolio loans and leases                              $  1,405.2         $      1,398.5
Total assets                                            $  2,030.2         $      2,035.9
Shareholders' equity                                    $    210.2         $        203.6

The following sections discuss, in detail, the Corporation's results of operations for the three months ended March 31, 2013, as compared to the same period in 2012, and the changes in its financial condition as of March 31, 2013 as compared to December 31, 2012.

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.

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 month periods ended March 31, 2013 and 2012, 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.


Table of Contents

Tax-equivalent net interest income of $17.5 million for the three months ended March 31, 2013 increased $1.4 million, as compared to the same period in 2012. The increase in net interest income between the periods was related to an 8.0% increase in average portfolio loans. This increase was primarily related to the acquisition of loans from FBD, which totaled $76.6 million at the time of the transaction. In addition, the Corporation's strategic decisions to prepay $22.5 million of subordinated debt during the third and fourth quarters of 2012 and $20.0 million of Federal Home Loan Bank ("FHLB") borrowings in January 2013, along with the 16 basis point decline in rate paid on deposits, contributed significantly to the $941 thousand decrease in interest expense for the three months ended March 31, 2013, as compared to the same period in 2012.

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 March 31,
                                                             2013                                          2012
                                                                           Average                                       Average
                                                            Interest        Rates                         Interest        Rates
                                             Average         Income/       Earned/         Average         Income/       Earned/
(dollars in thousands)                       Balance         Expense        Paid           Balance         Expense        Paid
Assets:
Interest-bearing deposits with banks       $   117,372      $      69          0.24 %    $    38,556      $      23          0.24 %
Investment securities - available for
sale:
Taxable                                        289,097            889          1.25 %        294,593          1,136          1.55 %
Non-taxable(3)                                  34,150            125          1.48 %          9,622             53          2.22 %

Total investment securities - available
for sale                                       323,247          1,014          1.27 %        304,215          1,189          1.57 %
Investment securities - trading                  1,695             16          3.83 %          1,437              4          1.12 %
Loans and leases(1)(2)(3)                    1,403,683         17,854          5.16 %      1,299,552         17,234          5.33 %

Total interest-earning assets                1,845,997         18,953          4.16 %      1,643,760         18,450          4.51 %
Cash and due from banks                         13,287                                        11,539
Allowance for loan and lease losses            (14,693 )                                     (13,089 )
Other assets                                   149,963                                       141,439

Total assets                               $ 1,994,554                                   $ 1,783,649

Liabilities:
Savings, NOW, and market rate accounts     $   975,464            479          0.20 %    $   767,240            559          0.29 %
Wholesale non-maturity deposits                 38,683             35          0.37 %         65,117             53          0.33 %
Wholesale time deposits                         11,495             19          0.67 %         22,354             24          0.43 %
Time deposits                                  190,937            242          0.51 %        210,973            490          0.93 %

Total interest-bearing deposits              1,216,579            775          0.26 %      1,065,684          1,126          0.42 %

Subordinated debentures                             -              -             -  %         22,500            291          5.20 %
Short-term borrowings                           11,978              4          0.14 %         13,885              6          0.22 %
Long-term FHLB advances and other
borrowings                                     148,699            667          1.82 %        165,402            964          2.34 %

Total borrowings                               160,677            671          1.69 %        201,787          1,261          2.51 %

Total interest-bearing liabilities           1,377,256          1,446          0.43 %      1,267,471          2,387          0.76 %

Non-interest-bearing deposits                  386,881                                       305,468
Other liabilities                               26,123                                        25,259

Total non-interest-bearing liabilities         413,004                                       330,727

Total liabilities                            1,790,260                                     1,598,198
Shareholders' equity                           204,294                                       185,451

Total liabilities and shareholders'
equity                                     $ 1,994,554                                   $ 1,783,649

Net interest spread                                                            3.73 %                                        3.75 %
Effect of non-interest-bearing
liabilities                                                                    0.12 %                                        0.18 %

Tax equivalent net interest income and
margin on earning assets(3)                                 $  17,507          3.85 %                     $  16,063          3.93 %

Tax-equivalent adjustment(3)                                $      98          0.03 %                     $      78          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%.


Table of Contents

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 months ended March 31, 2013 as compared to the same period in 2012, 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.

                                                        2013 Compared to 2012
                                                    Three Months Ended March 31,
                                                  Volume           Rate        Total
   Interest income
   Interest-bearing deposits with other banks   $       46        $   -       $    46
   Investment securities                               113          (276 )       (163 )
   Loans and leases                                  1,256          (636 )        620

   Total interest income                        $    1,415        $ (912 )    $   503

   Interest expense:
   Savings, NOW and market rate accounts        $      144        $ (224 )    $   (80 )
   Wholesale non-maturity deposits                     (22 )           4          (18 )
   Time deposits                                       (47 )        (201 )       (248 )
   Wholesale time deposits                             (12 )           7           (5 )
   Borrowed funds**                                   (263 )        (327 )       (590 )

   Total interest expense                             (200 )        (741 )       (941 )

   Interest differential                        $    1,615        $ (171 )    $ 1,444

* 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.

Tax Equivalent Net Interest Margin

The Corporation's tax-equivalent net interest margin decreased 8 basis points to 3.85% for the three months ended March 31, 2013, from 3.93% for the same period in 2012. Average interest-earning assets increased $202.2 million, while average interest-bearing liabilities increased by $109.8 million. A significant portion of the increase in average interest-earning assets between periods was a $78.8 million increase in interest-bearing deposits with other banks, primarily the Federal Reserve, earning an average yield of only 24 basis points. The increase in average interest-earning assets of $202.2 million between periods resulted in an increase in tax-equivalent net interest income of $1.4 million, representing an incremental tax-equivalent net interest margin of 2.90%.

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

                                      Interest-                                                             Effect of Non-
                                    Earning Asset          Interest-Bearing          Net Interest          Interest Bearing          Net Interest
Quarter                                 Yield               Liability Cost              Spread                 Sources                  Margin
1st Quarter 2013                              4.16 %                    0.43 %                3.73 %                    0.12 %                3.85 %
4th Quarter 2012                              4.27 %                    0.54 %                3.73 %                    0.13 %                3.86 %
3rd Quarter 2012                              4.28 %                    0.66 %                3.62 %                    0.16 %                3.78 %
2nd Quarter 2012                              4.39 %                    0.72 %                3.67 %                    0.17 %                3.84 %
1st Quarter 2012                              4.51 %                    0.76 %                3.75 %                    0.18 %                3.93 %

Interest Rate Sensitivity

The Corporation actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to minimize 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, Institutional Deposit Corporation ("IDC") 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.


Table of Contents

Summary of Interest Rate Simulation



                                             Change in Net Interest
                                                Income Over Next
                                              Twelve Months as of
            (dollars in thousands)               March 31, 2013
            Change in Interest Rates:      Amount            Percentage
            +300 basis points           $      6,889                9.60 %
            +200 basis points           $      3,976                5.54 %
            +100 basis points           $      1,435                2.00 %
            -100 basis points           $     (1,563 )             (2.18 )%

The interest rate simulation above suggests that the Corporation's balance sheet is asset sensitive as of March 31, 2013, demonstrating that an increase in interest rates will have a positive impact on net interest income over the next 12 months, while a decrease in interest rates will negatively impact net interest income. In this simulation, net interest income will increase if rates increase 100, 200 or 300 basis points. However, the 100-basis point-increase scenario indicates a less significant increase in net interest income over the next 12 months, than the other scenarios, as the Corporation has interest rate floors on many of its portfolio loans, and as such, those loans would not experience the full 100 basis point increase. In addition, the Corporation's . . .

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