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BMTC > SEC Filings for BMTC > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for BRYN MAWR BANK CORP


8-Nov-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 their 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 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 were 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. Two of the three contingent payments were made on November 14, 2012 and May 14, 2013, each in the amount of $1.05 million. The third, and final, contingent payment will be made on November 14, 2013 in the amount of $1.05 million.

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 and nine months ended September 30, 2013, as compared to the same periods in 2012, and the changes in its financial condition as of September 30, 2013 as compared to December 31, 2012. More detailed information related to these highlights can be found in the sections that follow.

Impact of Recent Acquisitions

In general, the results of operations for the three and nine months ended September 30, 2013, as compared to the same periods in 2012 were impacted by the November 2012 FBD Transaction and the May 2012 acquisition of DTC.

Three Month Results

Net income for the three months ended September 30, 2013 was $6.4 million, an increase of $976 thousand as compared to net income of $5.4 million for the same period in 2012. Diluted earnings per share of $0.47 for the three months ended September 30, 2013 was $0.06 increase from the same period in 2012.

Return on average equity ("ROE") and return on average assets ("ROA") for the three months ended September 30, 2013 were 11.92% and 1.29%, respectively, as compared to ROE and ROA of 10.93% and 1.18%, respectively, for the same period in 2012.

Tax-equivalent net interest income increased $2.6 million, or 16.2%, to $18.6 million for the three months ended September 30, 2013, as compared to $16.0 million for the same period in 2012.

The provision for loan and lease losses (the "Provision") for the three months ended September 30, 2013 was $959 thousand as compared to $1.0 million for the same period in 2012.

Non-interest income of $11.4 million for the three months ended September 30, 2013 decreased $861 thousand, or 7.0%, as compared to $12.2 million for the same period in 2012.

Included in non-interest income, fees for wealth management services of $8.6 million for the three months ended September 30, 2013 increased $642 thousand, or 8.0%, as compared to $8.0 million for the same period in 2012. Also, gains on sale of residential mortgage loans and investment securities available for sale declined by $1.3 million and $416 thousand, respectively, between the periods.

Non-interest expense of $19.3 million for the three months ended September 30, 2013 increased $434 thousand, or 2.3%, as compared to $18.9 million for the same period in 2012.

Nine Month Results

Net income for the nine months ended September 30, 2013 was $18.0 million, an increase of $2.1 million as compared to net income of $15.8 million for the same period in 2012. Diluted earnings per share of $1.33 for the nine months ended September 30, 2013 was a $0.13 increase from the same period in 2012.

ROE and ROA for the nine months ended September 30, 2013 were 11.48% and 1.21%, respectively, as compared to ROE and ROA of 11.06% and 1.17%, respectively, for the same period in 2012.

Tax-equivalent net interest income increased $6.1 million, or 12.7%, to $54.2 million for the nine months ended September 30, 2013, as compared to $48.1 million for the same period in 2012.

The Provision for the nine months ended September 30, 2013 was $2.8 million, a decrease of $240 thousand from the same period in 2012.

Non-interest income of $36.1 million for the nine months ended September 30, 2013 increased $2.9 million, or 8.7%, as compared to $33.2 million for the same period in 2012.

Included in non-interest income, fees for wealth management services of $26.1 million for the nine months ended September 30, 2013 increased $4.6 million, or 21.7%, as compared to $21.4 million for the same period in 2012. Also, gains on sale of residential mortgage loans and investment securities available for sale declined by $723 thousand and $1.1 million, respectively, between the periods.

Non-interest expense of $60.1 million for the nine months ended September 30, 2013 increased $6.3 million, or 11.7%, as compared to $53.8 million for the same period in 2012.


Table of Contents

Changes in Financial Condition

Total assets of $2.06 billion as of September 30, 2013 decreased $23.1 million from $2.04 billion as of December 31, 2012.

Shareholders' equity of $217.8 million as of September 30, 2013 increased $14.2 million from $203.6 million as of December 31, 2012.

Total portfolio loans and leases as of September 30, 2013 were $1.50 billion, an increase of $101.6 million from the December 31, 2012 balance.

Total non-performing loans and leases of $10.6 million represented 0.71% of portfolio loans and leases as of September 30, 2013 as compared to $14.8 million, or 1.06% of portfolio loans and leases as of December 31, 2012.

The $15.0 million Allowance, as of September 30, 2013, represented 1.00% of portfolio loans and leases, as compared to $14.4 million, or 1.03% of portfolio loans as of December 31, 2012.

Total deposits of $1.55 billion as of September 30, 2013 decreased $84.0 million, or 5.1%, from $1.63 billion as of December 31, 2012.

Wealth Management assets under management, administration, supervision and brokerage as of September 30, 2013 were $7.08 billion, an increase of $419.7 million from December 31, 2012.

Key Performance Indicators

Key financial performance indicators for the three and nine months ended
September 30, 2013 and 2012 are shown in the table below:



                                                   Three Months Ended               Nine Months Ended
                                                      September 30,                   September 30,
                                                  2013             2012            2013            2012
Annualized return on average equity                 11.92 %         10.93 %          11.48 %        11.06 %
Annualized return on average assets                  1.29 %          1.18 %           1.21 %         1.17 %
Efficiency ratio1                                   64.58 %         66.98 %          66.77 %        66.39 %
Efficiency ratio1, excluding due diligence
and merger-related expenses                         63.49 %         65.86 %          64.85 %        64.61 %
Tax-equivalent net interest margin                   4.05 %          3.78 %           3.96 %         3.84 %
Diluted earnings per share                      $    0.47         $  0.41        $    1.33        $  1.20
Dividend per share                              $    0.17         $  0.16        $    0.51        $  0.48
Dividend payout ratio2                              36.00 %         39.52 %          38.27 %        40.30 %

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

2 The dividend payout ratio is calculated by dividing dividends paid (or accrued) by net income.

The following table presents certain key period-end balances and ratios as of September 30, 2013 and December 31, 2012:

                                                       September 30,            December 31,
(dollars in millions, except per share amounts)            2013                     2012
Book value per share                                  $         16.07          $        15.17
Tangible book value per share                         $         12.17          $        11.08
Allowance as a percentage of loans and leases                    1.00 %                  1.03 %
Tier I capital to risk weighted assets                          11.33 %                 11.02 %
Tangible common equity ratio                                     8.30 %                  7.60 %
Loan to deposit ratio                                            96.8 %                  85.8 %
Wealth assets under management, administration,
supervision and brokerage                             $       7,082.9          $      6,663.2
Portfolio loans and leases                            $       1,500.0          $      1,398.5
Total assets                                          $       2,059.0          $      2,035.9
Shareholders' equity                                  $         217.8          $        203.6


Table of Contents

The following sections discuss, in detail, the Corporation's results of operations for the three and nine months ended September 30, 2013, as compared to the same period in 2012, and the changes in its financial condition as of September 30, 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.

NET INTEREST INCOME

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 nine month periods ended September 30, 2013 and 2012, of the Corporation's average balances and tax-equivalent yields earned on its interest-earning assets and the tax-equivalent rates paid on its interest-bearing liabilities. The tax-equivalent net interest margin is the tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread is the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of noninterest-bearing liabilities represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders' equity.

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 indicated, along with interest income,
interest expense and key rates and yields.



                                                                    For the Three Months Ended September 30,
                                                             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       $    35,589      $      21          0.23 %        $    53,767      $      34          0.25 %
Investment securities - available for
sale:
Taxable                                        284,558            988          1.38 %            309,570            960          1.23 %
Non-taxable(3)                                  39,860            159          1.58 %             18,481             82          1.77 %

Total investment securities - available
for sale                                       324,418          1,147          1.40 %            328,051          1,042          1.26 %
Investment securities - trading                  2,182              7          1.27 %              1,343              5          1.48 %
Loans and leases(1)(2)(3)                    1,464,359         18,755          5.08 %          1,303,783         17,089          5.21 %

Total interest-earning assets                1,826,548         19,930          4.33 %          1,686,944         18,170          4.28 %
Cash and due from banks                         12,497                                            12,922
Allowance for loan and lease losses            (14,653 )                                         (13,337 )
Other assets                                   151,204                                           146,274

Total assets                               $ 1,975,596                                       $ 1,832,803

Liabilities:
Savings, NOW, and market rate accounts     $   944,963            419          0.18 %        $   849,966            567          0.27 %
Wholesale deposits                              58,715             55          0.37 %             49,765             55          0.44 %
Time deposits                                  152,788            165          0.43 %            178,711            315          0.70 %

Total interest-bearing deposits              1,156,466            639          0.22 %          1,078,442            937          0.35 %
Subordinated debentures                             -              -             -  %             21,114            270          5.09 %
Short-term borrowings                           14,995              5          0.13 %             13,273              5          0.15 %
Long-term FHLB advances and other
borrowings                                     163,818            643          1.56 %            167,251            918          2.18 %

Total borrowings                               178,813            648          1.44 %            201,638          1,193          2.35 %

Total interest-bearing liabilities           1,335,279          1,287          0.38 %          1,280,080          2,130          0.66 %
Non-interest-bearing deposits                  402,292                                           330,179
Other liabilities                               24,904                                            25,100

Total non-interest-bearing liabilities         427,196                                           355,279

Total liabilities                            1,762,475                                         1,635,359
Shareholders' equity                           213,121                                           197,444

Total liabilities and shareholders'
equity                                     $ 1,975,596                                       $ 1,832,803

Net interest spread                                                            3.95 %                                            3.62 %
Effect of non-interest-bearing
liabilities                                                                    0.10 %                                            0.16 %

Tax equivalent net interest income and
margin on earning assets(3)                                 $  18,643          4.05 %                         $  16,039          3.78 %

Tax-equivalent adjustment(3)                                $     110          0.02 %                         $      88          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

Tax-equivalent net interest income of $18.6 million for the three months ended September 30, 2013 increased $2.6 million, as compared to the same period in 2012. The increase in net interest income between the periods was largely related to a $160.6 million, or 12.3%, increase in average loans and leases. This increase was partially related to the acquisition of loans from FBD, which totaled $76.6 million at the time of the transaction, along with organic growth in the Corporation's loan portfolio. This growth was concentrated in the commercial mortgage, commercial and industrial, and construction segments of the portfolio. In addition, the prepayments of $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, which resulted in a 91 basis point decline in rate paid on borrowings, coupled with the 13 basis point decline in rate paid on deposits, accounted for the $843 thousand decrease in interest expense for the three months ended September 30, 2013, as compared to the same period in 2012.

                                                                    For the Nine Months Ended September 30,
                                                             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       $    70,681      $     131          0.25 %        $    50,033      $      86          0.23 %
Investment securities - available for
sale:
Taxable                                        286,964          2,721          1.27 %            303,865          3,166          1.39 %
Non-taxable(3)                                  37,505            429          1.53 %             14,067            198          1.88 %

Total investment securities - available
for sale                                       324,469          3,150          1.30 %            317,932          3,364          1.41 %
Investment securities - trading                  2,017             23          1.52 %              1,442             21          1.94 %
Loans and leases(1)(2)(3)                    1,432,260         54,902          5.13 %          1,299,135         51,419          5.27 %

Total interest-earning assets                1,829,427         58,206          4.25 %          1,668,542         54,890          4.38 %
Cash and due from banks                         12,884                                            12,242
Allowance for loan and lease losses            (14,657 )                                         (13,270 )
Other assets                                   151,038                                           143,563

Total assets                               $ 1,978,692                                       $ 1,811,077

Liabilities:
Savings, NOW, and market rate accounts     $   963,249          1,343          0.19 %        $   807,874          1,712          0.28 %
Wholesale deposits                              50,575            153          0.40 %             68,922            199          0.38 %
Time deposits                                  169,184            613          0.48 %            197,607          1,217          0.82 %

Total interest-bearing deposits              1,183,008          2,109          0.24 %          1,074,403          3,128          0.39 %
Subordinated debentures                             -              -             -  %             22,035            852          5.15 %
Short-term borrowings                           13,455             12          0.12 %             13,244             14          0.14 %
Long-term FHLB advances and other
borrowings                                     154,386          1,906          1.65 %            165,717          2,808          2.26 %

Total borrowings                               167,841          1,918          1.53 %            200,996          3,674          2.43 %

Total interest-bearing liabilities           1,350,849          4,027          0.40 %          1,275,399          6,802          0.71 %
Non-interest-bearing deposits                  393,576                                           319,767
Other liabilities                               24,874                                            24,508

Total non-interest-bearing liabilities         418,450                                           344,275

Total liabilities                            1,769,299                                         1,619,674
Shareholders' equity                           209,393                                           191,403

Total liabilities and shareholders'
equity                                     $ 1,978,692                                       $ 1,811,077

Net interest spread                                                            3.85 %                                            3.67 %
Effect of non-interest-bearing
liabilities                                                                    0.11 %                                            0.17 %

Tax equivalent net interest income and
margin on earning assets(3)                                 $  54,179          3.96 %                         $  48,088          3.84 %

Tax-equivalent adjustment(3)                                $     314          0.02 %                         $     248          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%.

Tax-equivalent net interest income of $54.2 million for the nine months ended September 30, 2013 increased $6.1 million, as compared to the same period in 2012. The increase in net interest income between the periods was largely related to a $133.1 million, or 10.3%, increase in average loans and leases. This increase was partially related to the acquisition of loans from FBD, which totaled $76.6 million at the time of the transaction, along with organic growth in the Corporation's loan portfolio. This growth was concentrated in the commercial mortgage, commercial and industrial, and construction segments of the portfolio. In addition, the prepayments of $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, which resulted in a 90 basis point decline in rate paid on borrowings, coupled with the 15 basis point decline in rate paid on deposits, accounted for the $2.8 million decrease in interest expense for the nine months ended September 30, 2013, as compared to the same period in 2012.

. . .

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