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BMTC > SEC Filings for BMTC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for BRYN MAWR BANK CORP

Form 10-Q for BRYN MAWR BANK CORP


9-May-2014

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.

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 on Form 10-K.

Executive Overview

The following items highlight the Corporation's results of operations for the three months ended March 31, 2014, as compared to the same periods in 2013, and the changes in its financial condition as of March 31, 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 March 31, 2014 was $6.7 million, an increase of $1.4 million as compared to net income of $5.3 million for the same period in 2013. Diluted earnings per share of $0.49 for the three months ended March 31, 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 March 31, 2014 were 11.71% and 1.32%, respectively, as compared to ROE and ROA of 10.56% and 1.08%, respectively, for the same period in 2013.

Tax-equivalent net interest income increased $1.3 million, or 7.6%, to $18.8 million for the three months ended March 31, 2014, as compared to $17.5 million for the same period in 2013.


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The provision for loan and lease losses (the "Provision") for the three months ended March 31, 2014 was $750 thousand, a decrease of $54 thousand, or 6.7%, from the $804 thousand recorded for the same period in 2013.

Non-interest income of $11.1 million for the three months ended March 31, 2014 decreased $651 thousand, or 5.5%, as compared to $11.8 million for the same period in 2013.

Included in non-interest income, fees for Wealth Management services of $8.9 million for the three months ended March 31, 2014 increased $564 thousand, or 6.8%, as compared to $8.3 million for the same period in 2013.

Non-interest expense of $18.9 million for the three months ended March 31, 2014 decreased $1.3 million, or 6.6%, as compared to $20.2 million for the same period in 2013.

Changes in Financial Condition

Total assets of $2.06 billion as of March 31, 2014 remained relatively unchanged from December 31, 2013.

Shareholders' equity of $235.5 million as of March 31, 2014 increased $5.6 million from $229.9 million as of December 31, 2013.

Total portfolio loans and leases as of March 31, 2014 were $1.57 billion, an increase of $18.6 million from the December 31, 2013 balance.

Total non-performing loans and leases of $10.2 million represented 0.65% of portfolio loans and leases as of March 31, 2014 as compared to $10.5 million, or 0.68% of portfolio loans and leases as of December 31, 2013.

The $15.8 million Allowance, as of March 31, 2014, represented 1.01% of portfolio loans and leases, an increase of $255 thousand from December 31, 2013.

Total deposits of $1.58 billion as of March 31, 2014 decreased $11.8 million, or 0.7%, from $1.59 billion as of December 31, 2013.

Wealth Management assets under management, administration, supervision and brokerage as of March 31, 2014 were $7.36 billion, an increase of $93.7 million from December 31, 2013.

Other Recent Developments

As announced on May 5, 2014, the Corporation and Continental Bank Holdings, Inc. ("CBH"), the parent company of Continental Bank ("CB"), entered into an Agreement and Plan of Merger pursuant to which CBH will merge with and into the Corporation (the "Merger"). Concurrent with the Merger, it is expected that CB will merge with and into the Bank. The aggregate value of the transaction is approximately $109 million and is subject to customary closing conditions including the receipt of regulatory approvals and shareholder approval from both the Corporation and CBH shareholders. The Merger is expected to close late in the fourth quarter of 2014.

Key Performance Ratios

Key financial performance ratios for the three months ended March 31, 2014 and
2013 are shown in the table below:



                                               Three Months Ended March 31,
                                                2014                  2013
     Annualized return on average equity           11.71  %               10.56 %
     Annualized return on average assets             1.32 %                1.08 %
     Efficiency ratio *                              63.3 %                69.3 %
     Tax equivalent net interest margin              4.02 %                3.85 %
     Diluted earnings per share            $         0.49         $        0.40
     Dividend per share                    $         0.18         $        0.17

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


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

                                                        March 31,             December 31,
(dollars in millions, except per share amounts)            2014                   2013
Book value per share                                  $        17.24         $        16.84
Tangible book value per share                         $        13.47         $        13.02
Allowance as a percentage of loans and leases                   1.01 %                 1.00 %
Tier I capital to risk weighted assets                         11.71 %                11.57 %
Tangible common equity ratio                                    9.23 %                 8.92 %
Loan to deposit ratio                                           99.2 %                 97.3 %
Wealth assets under management, administration,
supervision and brokerage                             $      7,362.0         $      7,268.3
Portfolio loans and leases                            $      1,565.8         $      1,547.2
Total assets                                          $      2,059.8         $      2,061.7
Shareholders' equity                                  $        235.5         $        229.9

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

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, 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 $18.8 million for the three months ended March 31, 2014 increased $1.3 million, as compared to the same period in 2013. The increase in net interest income between the periods was related to a $56.5 million increase in average interest-earning assets which was partially offset by a $6.3 million increase in average interest-bearing liabilities. The increase in average interest-earning assets was comprised of a $146.0 million increase in average loans, partially offset by a $41.7 million decrease in average available for sale investment securities. Although the tax-equivalent yield earned on loans declined by 16 basis points between the periods, the tax-equivalent yield earned on available for sale securities increased by 35 basis points. In addition, average interest-bearing deposits with other banks declined by $58.5 million, as the cash was utilized to fund the loan growth.


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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,
                                                           2014                                          2013
                                                                         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     $    67,809      $      37          0.22 %    $   117,372      $      69          0.24 %
Investment securities - available for
sale:
Taxable                                      245,006            972          1.61 %        289,097            889          1.25 %
Non-taxable(3)                                36,566            153          1.70 %         34,150            125          1.48 %

Total investment securities -
available for sale                           281,572          1,125          1.62 %        323,247          1,014          1.27 %
Investment securities - trading                3,438              7          0.83 %          1,695             16          3.83 %
Loans and leases(1)(2)(3)                  1,549,665         19,107          5.00 %      1,403,683         17,854          5.16 %

Total interest-earning assets              1,902,484         20,276          4.32 %      1,845,997         18,953          4.16 %
Cash and due from banks                       12,302                                        13,287
Allowance for loan and lease losses          (15,761 )                                     (14,693 )
Other assets                                 154,311                                       149,963

Total assets                             $ 2,053,336                                   $ 1,994,554

Liabilities:
Savings, NOW, and market rate accounts   $   946,532            405          0.17 %    $   975,464            479          0.20 %
Wholesale non-maturity deposits               41,828             29          0.28 %         38,683             35          0.37 %
Wholesale time deposits                       35,133             85          0.98 %         11,495             19          0.67 %
Time deposits                                134,574            170          0.51 %        190,937            242          0.51 %

Total interest-bearing deposits            1,158,067            689          0.24 %      1,216,579            775          0.26 %

Short-term borrowings                         13,090              3          0.09 %         11,978              4          0.14 %
Long-term FHLB advances and other
borrowings                                   212,405            746          1.42 %        148,699            667          1.82 %

Total borrowings                             225,495            749          1.35 %        160,677            671          1.69 %

Total interest-bearing liabilities         1,383,562          1,438          0.42 %      1,377,256          1,446          0.43 %
Non-interest-bearing deposits                415,514                                       386,881
Other liabilities                             22,546                                        26,123

Total non-interest-bearing liabilities       438,060                                       413,004

Total liabilities                          1,821,622                                     1,790,260
Shareholders' equity                         231,714                                       204,294

Total liabilities and shareholders'
equity                                   $ 2,053,336                                   $ 1,994,554

Net interest spread                                                          3.90 %                                        3.73 %
Effect of non-interest-bearing
liabilities                                                                  0.12 %                                        0.12 %

Tax equivalent net interest income and
margin on earning assets(3)                               $  18,838          4.02 %                     $  17,507          3.85 %

Tax-equivalent adjustment(3)                              $     115          0.03 %                     $      98          0.03 %

(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 months ended March 31, 2014 as compared to the same period 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 March 31
                                                  Volume           Rate        Total
    Interest income
    Interest-bearing deposits with other banks   $     (29 )      $   (3 )    $   (32 )
    Investment securities                             (110 )         212          102
    Loans and leases                                 1,862          (609 )      1,253

    Total interest income                        $   1,723          (400 )    $ 1,323

    Interest expense:
    Savings, NOW and market rate accounts        $     (12 )      $  (62 )    $   (74 )
    Wholesale non-maturity deposits                      3            47           50
    Time deposits                                      (72 )          -           (72 )
    Wholesale time deposits                             39           (29 )         10
    Borrowed funds**                                   286          (208 )         78

    Total interest expense                             244          (252 )         (8 )

    Interest differential                        $   1,479        $ (148 )    $ 1,331

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

** Borrowed funds include short-term borrowings and long-term 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 17 basis points to 4.02% for the three months ended March 31, 2014, from 3.85% for the same period in 2013. Average interest-earning assets increased $56.5 million, while average interest-bearing liabilities increased by $6.3 million. A significant portion of the increase in average interest-earning assets between periods was a $146.0 million increase in average loans. This loan increase was partially offset by decreases of $49.6 million in average interest-earning deposits with other banks, as well as a $41.7 million decrease in average available for sale investment securities. The yield on loans for the three months ended March 31, 2014 declined by 16 basis points from 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 the periods, as rising interest rates significantly reduced prepayments associated with mortgage-related securities.

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 2014              4.32%              0.42%              3.90%              0.12%              4.02%
     4th Quarter 2013              4.33%              0.40%              3.93%              0.10%              4.03%
     3rd Quarter 2013              4.33%              0.38%              3.95%              0.10%              4.05%
     2nd Quarter 2013              4.27%              0.39%              3.88%              0.10%              3.98%
     1st Quarter 2013              4.16%              0.43%              3.73%              0.12%              3.85%

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               Change in Net Interest Income
                                         Over the Twelve Months                      Over the Twelve Months
                                            Beginning After                             Beginning After
                                             March 31, 2014                            December 31, 2013
                                      Amount              Percentage              Amount              Percentage
+300 basis points                 $        2,000                  2.68 %      $        6,289                  8.19 %
+200 basis points                 $          719                  0.96 %      $        3,537                  4.61 %
+100 basis points                 $         (224 )               (0.30 )%     $        1,146                  1.49 %
-100 basis points                 $       (1,785 )               (2.39 )%     $       (1,868 )               (2.43 )%

The above interest rate simulation suggests that the Corporation's balance sheet is slightly liability sensitive as of March 31, 2014 in the +100 basis point scenario, demonstrating that a 100 basis point increase in interest rates would have a negative impact on net interest income over the next 12 months. However, the +100 basis point scenario is directionally inconsistent with the other rate increase and rate decrease scenarios. The primary reason for this inconsistency is related to the Corporation's internal prime rate floor, which is set at 3.99%, or 74 basis points above the Wall Street Journal Prime Rate of 3.25%. The effect of this rate floor is to lessen the impact of the initial 100 basis point increase, as it only results in a 26 basis point increase on the Corporation's prime rate-indexed loans. As the other rate increase and decrease scenarios demonstrate, the Corporation's balance sheet is asset sensitive. It should be noted, however, that the balance sheet is less asset sensitive as of March 31, 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 aggressive 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.


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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 . . .

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