Bryn Mawr Bank 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities and Exchange Act of 1934.
For Quarter ended June 30, 2010
Commission File Number 0-15261
Bryn Mawr Bank Corporation
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code (610) 525-1700
Former name, former address and fiscal year, if changed since last report.
Indicate by checkmark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers class of common stock, as of the latest practicable date.
QUARTER ENDED June 30, 2010
ITEM 1. Financial Statements
Consolidated Statements of Income - Unaudited
The accompanying notes are an integral part of the unaudited consolidated financial statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
The accompanying notes are an integral part of the unaudited consolidated financial statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of the unaudited consolidated financial statements.
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders Equity
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
The accompanying notes are an integral part of the unaudited consolidated financial statements.
Notes to Consolidated Financial Statements
June 30, 2010 and 2009
1. Basis of Presentation:
The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of Bryn Mawr Bank Corporations (the Corporation) Management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Corporations 2009 Annual Report on Form 10-K (2009 Annual Report). The Corporations consolidated financial condition and results of operations consist almost entirely of The Bryn Mawr Trust Companys (the Bank) financial condition and results of operations.
The results of operations for the three month and six month periods ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.
Previous Quarter Adjustments:
The consolidated statement of cash flows for the six months ended June 30, 2009 has been revised from the presentation of that statement in our June 30, 2009 Form 10-Q. Our decision to make this immaterial correction of a prior period error was disclosed in our September 30, 2009 Form 10-Q. This revision is a result of the incorrect classification of the Purchase of trading securities line item within the Net cash used in investing activities section of the initially filed June 30, 2009 consolidated cash flow statement. This error resulted from a misclassification between investing activities and operating activities related to the Corporations purchase of a trading security during the second quarter of 2009. The following table outlines the corrections to the cash flow statement for the six month period ended June 30, 2009 (dollars in thousands).
The Corporation presented these revised amounts in the June 30, 2009 cash flow information presented in this Form 10-Q for the quarter ending June 30, 2010. This error was not deemed to be material.
2. Earnings Per Common Share:
Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution, computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. All weighted average shares, actual shares and per share information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits.
3. Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision for loan and lease losses charged as an expense. Loans are charged against the allowance for loan and lease losses when the Corporation believes that such amounts are uncollectible. The allowance for loan and lease losses is maintained at a level that the Corporation believes is sufficient to absorb estimated probable credit losses. Note 1 Summary of Significant Accounting Policies Allowance for Loan and Lease Losses, included in the Corporations 2009 Annual Report contains additional information relative to the Corporations determination of the adequacy of the allowance for loan and lease losses.
4. Investment Securities
The amortized cost and estimated fair value of investments, all of which were classified as available for sale, are as follows:
As of June 30, 2010
As of December 31, 2009
The following table shows the amount of securities that were in an unrealized loss position:
As of June 30, 2010
As of December 31, 2009
The Corporation evaluates debt securities in the investment portfolio, which include U.S. Government agencies, Government sponsored agencies, municipalities and other issuers, for other-than-temporary impairment and considers current economic conditions, the length of time and the extent to which the fair value has been less than cost, interest rates and the bond rating of each security. All of the debt securities in the investment portfolio are highly rated as investment grade and the Corporation believes that it will not incur any material losses with respect to such securities. The unrealized losses presented in the table above are temporary in nature as they are primarily related to market interest rates and are not related to the underlying credit quality of the issuers within the Corporations investment portfolio. None of the investments in the tables above is believed to be other-than-temporarily impaired. The Corporation intends to hold the securities and does not believe it will be required to sell the securities before recovery occurs.
At June 30, 2010, securities having an amortized cost of $76.7 million were specifically pledged as collateral for public funds, trust deposits, the Federal Reserve Bank (FRB) discount window program, Federal Home Loan Bank of Pittsburgh (FHLB-P) borrowings and other purposes. The FHLB-P has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Banks borrowing agreement with the FHLB-P.
The amortized cost and estimated fair value of available for sale investment securities at June 30, 2010 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Included in the investment portfolio, but not in the table above are bond mutual funds with a fair value of $39.1 million and an amortized cost of $38.6 million which do not have a final stated maturity or a constant stated coupon rate.
5. Stock Based Compensation
Stock based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period. The fair value of stock option grants is determined using the Black-Scholes pricing model. The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk free interest rate and annual dividend yield.
The following table provides information about options outstanding for the three-months ended June 30, 2010:
The following table provides information about unvested options for the three-months ended June 30, 2010:
The following table provides information about options outstanding for the six months ended June 30, 2010:
The following table provides information about unvested options for the six-months ended June 30, 2010:
The total not-yet-recognized compensation expense of unvested stock options is $1.2 million. This expense will be recognized over a weighted average period of 40 months.
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised during the six months ended June 30, 2010 and 2009 were as follows:
The following table provides information about options outstanding and exercisable options at June 30, 2010:
For the six months ended June 30, 2010 there were no options granted. See Subsequent Event Footnote 16 for additional information.
6. Pension and Other Post-Retirement Benefit Plans
The Corporation sponsors two pension plans; the qualified defined benefit pension plan (QDBP) and the non-qualified defined benefit pension plan (SERP). In addition, the Corporation also sponsors a post-retirement benefit plan (PRBP).
On February 12, 2008 the Corporation amended the QDBP to cease further accruals of benefits effective March 31, 2008, and amended the 401(K) Plan to provide for a new class of immediately vested discretionary, non-matching employer contributions effective April 1, 2008. Additionally, the Corporation amended the SERP to expand the class of eligible participants to include certain officers of the Bank and to provide that each participants accrued benefit shall be reduced by the actuarially equivalent value of the immediately vested discretionary, non-matching employer contribution to the 401(K) Plan made on his or her behalf.
The following table provides a reconciliation of the components of the net periodic benefits cost (benefit) for the three months ended June 30, 2010 and 2009:
The following table provides a reconciliation of the components of the net periodic benefits cost (benefit) for the six months ended June 30, 2010 and 2009:
QDBP: As stated in the Corporations 2009 Annual Report, the Corporation does not have any minimum funding requirements for its QDBP for 2010. As of June 30, 2010 no contributions have been made to the QDBP.
SERP: The Corporation contributed $34 thousand during the second quarter of 2010 and it is expected to contribute an additional $68 thousand to the SERP for the remaining six months of 2010.
PRBP: In 2005 the Corporation capped the maximum payment under the PBRP at 120% of the 2005 benefit. In 2010 the cost is at the cap.
7. Segment Information
The Corporation aggregates certain of its operations and has identified four segments as follows: Banking, Wealth Management, Mortgage Banking, and All Other. Footnote 28 Segment Information, in the Notes to the Consolidated Financial Statements in the Corporations 2009 Annual Report provides additional descriptions of the identified segments.
Segment information for the quarter ended June 30, 2010 is as follows:
Segment information for the quarter ended June 30, 2009 is as follows:
Segment information for the six months ended June 30, 2010 is as follows:
Segment information for the six months ended June 30, 2009 is as follows:
Wealth Management Segment Activity
Mortgage Segment Activity
8. Mortgage Servicing Rights
The following summarizes the Corporations activity related to mortgage servicing rights (MSRs) for the six months ended June 30, 2010 and 2009:
At June 30, 2010 key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10 and 20 percent adverse changes in those assumptions are as follows:
These assumptions and sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which could magnify or counteract the sensitivities.
9. Impaired Loans and Leases
The following summarizes the Corporations impaired loans and leases for the periods indicated:
The period end impaired lease balances were $1.9 million, $2.2 million and $2.4 million as of June 30, 2010, December 31, 2009 and June 30, 2009, respectively. Net charge-offs on impaired leases for the six month, twelve month and six month periods ended June 30, 2010, December 31, 2009 and June 30, 2009 were $1.1 million, $4.4 million and $2.6 million, respectively. The troubled debt restructurings (TDRs) included in the lease portfolio as of June 30, 2010 and December 31, 2009 and June 30, 2009 were $1.6 million, $1.8 million and $1.7 million, respectively.
The allowance for impaired loans of $373 thousand, $317 thousand and $58 thousand at June 30, 2010, December 31, 2009 and June 30, 2009, respectively, is included in the Corporations allowance for loan and lease losses for each period.
10. Goodwill and Other Intangibles
The goodwill and intangible balances presented below resulted from the acquisition of Lau Associates LLC (Lau) in the third quarter of 2008. For further information on the goodwill and other intangible assets associated with the acquisition of Lau, please refer to Footnote 2 in the Corporations 2009 Annual Report.
The changes in the carrying amount of goodwill and intangibles were as follows:
The Corporation performed the annual review of goodwill and identifiable intangible assets at December 31, 2009 in accordance with ASC 350, Intangibles Goodwill and Other. The Corporation determined there was no impairment of goodwill and other intangible assets.
11. Shareholders Equity and Regulatory Capital
The Corporation declared and paid a regular dividend of $0.14 per share during both the first and second quarters of 2010. These payments totaled $2.5 million. On July 16, 2010, the Corporations Board of Directors declared a regular quarterly dividend of $0.14 per share payable September 1, 2010 to shareholders of record as of August 2, 2010.
Dividend Reinvestment and Stock Purchase Plan
On July 20, 2009, the Corporation filed with the Securities and Exchange Commission a prospectus supplement (Prospectus Supplement) pursuant to Section 424(b)(2) of the Securities Act of 1933, as amended (Securities Act) in order to issue up to 850,000 shares of common stock under its shelf registration statement in connection with a Dividend Reinvestment and Stock Purchase Plan (the DRIP). The DRIP is intended to allow both existing shareholders and new investors to increase their investment in the Corporation without incurring many of the fees and commissions normally associated with brokerage transactions. For the six months ended June 30, 2010 the DRIP had total purchases of $1.9 million or 115,156 shares.
Registered Direct Offering
On May 18, 2010, the Corporation completed the registration and sale of 1,548,167 shares of common stock, par value $1.00, at a price of $17.00 per share under the Shelf Registration Statement. The Corporation received net proceeds of $24.7 million after deducting placement agents fees and other offering expenses, which the Corporation expects to use for regulatory capital purposes, funding asset growth and financing possible mergers or acquisitions.
Consolidated shareholders equity of the Corporation was $134.2 million or 10.5% of total assets as of June 30, 2010, compared to $103.9 million or 8.4% of total assets as of December 31, 2009. This increase is primarily due to the registered direct offering discussed above. The following table presents the Corporations and Banks capital ratios and the minimum capital requirements to be considered Well Capitalized by regulators as of June 30, 2010 and December 31, 2009.
Both the Corporation and the Bank exceed the required capital levels to be considered Well Capitalized by their respective regulators at the end of each period presented. Neither the Corporation nor the Bank are under any agreement with regulatory authorities, nor is Management aware of any current recommendations by the regulatory authorities, which, if such recommendations were implemented, would have a material effect on liquidity, capital resources or operations of the Corporation.
12. Accounting for Uncertainty in Income Taxes
The Corporation recognizes the financial statement benefit of a tax position only after determining that the Corporation would be more likely than not to sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the relevant tax authority.
The Corporation is subject to income taxes in the United States federal jurisdiction and multiple state jurisdictions. The Corporation is no longer subject to U.S. Federal income tax examination by taxing authorities for years before 2008.
The Corporations policy is to record interest and penalties on uncertain tax positions as income tax expense. No interest or penalties were accrued in the second quarter of 2010. There were no significant liabilities accrued during the first six months of 2010.
13. Fair Value Measurement
The following disclosures are made in conjunction with the application of fair value measurements.
FASB ASC 820, Fair Value Measurement, establishes a fair value hierarchy based on the nature of data inputs for fair value determinations, under which the Corporation is required to value each asset using assumptions that market participants would utilize to value that asset. When the Corporation uses its own assumptions, it is required to disclose additional information about the assumptions used and the effect of the measurement on earnings or the net change in assets for the period.
The value of the Corporations investment securities which generally includes state and municipal securities, U.S. Treasury securities, U.S. government agencies and mortgage backed securities are reported at fair value. These securities are valued by an independent third party. The third partys evaluations are based on market data and utilize evaluated pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis their pricing applications apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities, additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions.
Trading securities are evaluated using quoted prices in active markets. U.S. Government agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks.
The investment securities classified as available for sale are shown below.
The value of the investment portfolio is determined using three broad levels of inputs:
Level 1 Quoted prices in active markets for identical securities;
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Instruments whose significant value drivers are unobservable.
These levels are not necessarily an indication of the risks or liquidity associated with these investments. The following table summarizes the assets at June 30, 2010 that are recognized on the Corporations balance sheet using fair value measurement determined based on the differing levels of input.
There have been no transfers between categories during the six months ended June 30, 2010 as compared to the period ended December 31, 2009.
Other Real Estate Owned and Other Repossessed Property:
Other real estate owned (OREO) consists of properties acquired as a result of deed in-lieu-of foreclosure and foreclosures. Properties or other assets are classified as OREO and are reported at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. The Corporation had $2.0 million in OREO assets at June 30, 2010. During the first quarter of 2010 the Corporation sold $1.0 million of OREO property. There was a $152 thousand loss recognized on this transaction. During the second quarter of 2010 the Corporation foreclosed on a $460 thousand construction loan which was secured by two newly constructed homes and a $1.4 million commercial loan secured by a restaurant and hotel. The Corporation has a signed agreement of sale for one of the constructed homes with an anticipated settlement date in August 2010.
14. Fair Value of Financial Instruments
Disclosure about fair value of financial instruments requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values.
Estimated fair values for investment securities are valued by an independent third party based on market data utilizing pricing models that vary by asset and incorporate available trade, bid and other market information.
Loans and Leases
For variable rate loans that reprice frequently and which have no significant change in credit risk, estimated fair values are based on carrying values. Fair values of certain mortgage loans and consumer loans are estimated using discounted cash flow analyses, interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and is indicative of an exit price. The estimated fair value of nonperforming loans is based on discounted estimated cash flows as determined by the internal loan review of the Bank or the appraised market value of the underlying collateral, as determined by independent third party appraisers. The resulting estimate of the fair value of loans does not represent an exit price.
The fair value of the MSRs for these periods was determined using a third-party valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.
The estimated fair values disclosed for noninterest-bearing demand deposits, savings, NOW accounts, and Market Rate accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on the certificate of deposit.
The fair value of borrowed funds is established using a discounted cash flow calculation that applies interest rates currently being offered on borrowings with an equivalent maturity.
The fair value of subordinated debt is established using a discounted cash flow calculation that applies interest rates currently being offered on comparable borrowings.
The fair value of the mortgage payable is established using a discounted cash flow calculation that applies interest rates currently being offered on comparable borrowings.
Off-Balance Sheet Instruments
Estimated fair values of the Corporations off-balance sheet instruments (standby letters of credit and loan commitments) are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and estimated fair values of off-balance sheet instruments.
The carrying amount and estimated fair value of the Corporations financial instruments as of the dates indicated are as follows:
Off-balance sheet instruments do not have a carrying amount, but have a notional amount of $347,018 and $348,900 as of June 30, 2010 and December 31, 2009, respectively.
15. New Accounting Pronouncements
FASB ASC 860 Transfers and Servicing
In June 2009, the FASB issued ASC 860 related to accounting for transfers of financial assets. The standard amends the derecognition guidance in previous regulatory guidance and eliminates the concept of a qualifying special-purpose entities (QSPEs). The standard is effective for fiscal years and interim periods beginning after November 15, 2009. Early adoption of the standard is prohibited. The Corporation adopted the standard on January 1, 2010 and the adoption of this statement did not have an impact on the Corporations financial statements.
FASB ASC 810 Consolidation Variable Interest Entities
In June 2009, the FASB issued ASC 810 related to amendments to FASB interpretation No. 46(R) (ASC 810) which amends the consolidation guidance applicable to variable interest entities (VIEs). An entity would consolidate a VIE, as the primary beneficiary, when the entity has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entitys economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE is required. ASC 810 amends Interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE. ASC 810 is effective for fiscal years and interim periods beginning after November 15, 2009. The Corporation adopted the standard on January 1, 2010 and the adoption of this statement did not have an impact on the Corporations financial statements.
FASB ASC 820 Fair Value Measurements and Disclosures
Accounting Standards Update No. 2010-6 Improving Disclosures about Fair Value Measurements (ASU 2010-06) was issued in January 2010 to update ASC 820 Fair Value Measurements and Disclosures. ASU 2010-06 requires new disclosures (1) for significant transfers in and out of Level 1 and Level 2 including a description of the reason for the transfers and (2) in the reconciliation of Level 3 presenting sales, issuances and settlements gross rather than one net number. ASU 2010-06 also requires clarification of existing disclosures requiring (1) measurement disclosures for each class of assets and liabilities (a class being a subset of assets and liabilities within one line item in the statement of financial position) using judgment in determining the appropriate classes and (2) disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3. The new disclosures and clarifications of existing disclosures were effective for interim and reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of Level 3 activity which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Corporation made these required disclosures in this Form 10-Q.
FASB ASU Update 2010-18
Accounting StandardsUpdate No. 2010-18 Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a single Asset, a consensus of the FASB Emerging Issues Task Force (Issue No. 09-1) amends FASB ASC Subtopic 310-30, Receivables Loans and Debt Securities acquired with Deteriorated Credit Quality, so that modifications of loans that are accounted for within a pool under that Subtopic do not result in the removal of the loans from the pool even if the modifications of the loans would otherwise be considering a troubled debt restructuring. A one-time election to terminate accounting for loans in a pool, which may be made on a pool-by-pool basis, is provided upon adoption of the new guidance. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments are effective prospectively for modifications of loans accounted for within pools under subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early adoption is permitted. This ASU has no effect on the Corporations balance sheet or results of operations as the Corporation did not modify any loans that were pooled for accounting purposes as of June 30, 2010.
FASB ASU Update 2010-20
Accounting Standards Update No. 2010-20 Disclosures about Credit Quality of Financial Receivables and the Allowance for Credit Losses (ASU 2010-20) was issued July 2010. The ASU requires disclosure related to period-end information (i.e. credit quality information and the ending financing receivable balance segregated by impairment method) in all interim and annual reporting periods ending on or after December 15, 2010. Disclosures of activity that occur during a reporting period are required in interim or annual periods beginning on or after December 15, 2010. The Corporation will adopt ASU 2010-20 effective for periods on or after December 15, 2010 and will provide disclosures required by ASU 2010-20.
16. Subsequent Events
Post-Effective Amendment to Form S-4 Registration Statement on Form S-3 Registration Statement
Under the terms of the Agreement and Plan of Merger (Merger Agreement), dated November 3, 2009, by and between the Corporation and First Keystone Financial (FKF), the Corporation has assumed the First Keystone Financial, Inc. Amended and Restated 1998 Stock Option Plan, and all options granted thereunder to purchase shares of FKF common stock that were outstanding and unexercised immediately prior to the effective time of the Merger (FKF Options) became vested and immediately exercisable (to the extent not already vested) as options to purchase the Corporations common stock, par value $1.00 per share. On July 9, 2010, the Corporation registered up to 21,133 shares of its common stock for issuance upon the exercise of the outstanding FKF Options. The Corporation will receive the proceeds of the exercise price of FKF Options if and when such FKF Options are exercised, and currently intends to use such proceeds for working capital and general corporate purposes, which may include, but not be limited to, investments in the Bank and our other subsidiaries for regulatory capital purposes.
Form S-8 Registration Statement
On July 12, 2010 the Corporation registered the Bryn Mawr Bank Corporation 2010 Long-Term Incentive Plan (LTIP) that was approved by the Shareholders on April 28, 2010.
17. Acquisition of First Keystone Financial, Inc.
On July 1, 2010, the previously announced merger (Merger) of FKF with and into the Corporation, and the two step merger of First Keystone Bank (FKB) with and into the Bank, were completed. Shareholders of FKF received 0.6973 shares of the Corporations common stock plus $2.06 per share cash consideration for each share of FKF common stock they owned as of the effective date of the Merger. In accordance with the Merger Agreement, the aggregate consideration paid to FKF shareholders consisted of approximately $4.9 million and 1.6 million shares valued at approximately $27.4 million. The results of FKFs operations will be included in the Corporations Consolidated Statement of Income and Consolidated Balance Sheet beginning on July 1, 2010, the date of the acquisition.
Because the Corporation has not completed the measurement of fair value of assets acquired and liabilities assumed in the FKF acquisition the initial accounting for the business combination has not been completed at the time of the Corporations filing of this Form 10-Q. Consequently, the Corporation has not made certain disclosures as described in ASC 805-10-50-2, 805-20-50-1 and 805-30-50-1.
· ITEM 2 Managements Discussion and Analysis of Results of Operation and Financial Condition
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, PA, a western suburb of Philadelphia, PA. The Corporation and its subsidiaries provide wealth management, community banking, residential mortgage lending, insurance and business banking services to its customers through seventeen full service branches and seven limited-hour retirement community offices throughout Montgomery, Delaware and Chester counties. The Corporation trades on the NASDAQ Global 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 competes in a highly competitive market area and 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 regulatory agencies including the Securities and Exchange Committee (SEC), NASDAQ, Federal Deposit Insurance Corporation (FDIC), the FRB and the Pennsylvania Department of Banking.
Acquisition of First Keystone Financial, Inc.
On July 1, 2010, the Merger of FKF with and into the Corporation, and the two step Merger of FKB with and into the Bank, as contemplated by the Merger Agreement, were completed. The 85% stock and 15% cash transaction is valued at $32.3 million based on the Corporations June 30, 2010, closing share price as listed on the NASDAQ Stock market of $16.78. In accordance with the merger agreement, the aggregate consideration paid to FKF shareholders consisted of $4.9 million cash and 1.6 million shares valued at $27.4 million. Shareholders of FKF received 0.6973 shares of the Corporations common stock plus $2.06 cash consideration for each share of FKF common stock they owned as of the effective date of the Merger. The Merger also enabled the Bank to increase its regional footprint with the addition of eight former FKB full service branches, primarily located in Delaware County.
Significant amounts of time and effort by Management and staff, along with certain external legal and financial consulting resources was spent on the legal, personnel, project management, banking systems, customer retention, compliance, credit, facilities, and financial aspects of the Merger. The integration process is expected to continue into the fourth quarter of 2010.
The Corporation was advised by the investment banking firm Keefe, Bruyette and Woods, as well as the law firm of Stradley Ronon Stevens & Young, LLP. FKF was advised by the investment banking firm of Sandler ONeill and Partners L.P. and the law firm of Elias, Matz, Tiernan & Herrick, L.L.P. See the Corporations Form 8-K filed with the SEC on November 4, 2009 for additional information regarding the Merger and the Merger Agreement, and Form 8-K filed with the SEC on July 1, 2010 for additional information regarding the completion of the Merger.
Results of Operations
The following is Managements discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for the Corporation. The Corporations consolidated financial condition and results of operations consist almost entirely of the Banks financial condition and results of operations. Current performance does not guarantee, and may not be indicative of similar performance in the future. These interim financial statements are unaudited.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Corporation and its subsidiaries conform with accounting principles generally accepted in the United States of America (US GAAP) applicable to the financial services industry. All significant inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous years financial statements to the current years 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 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 Management to be sufficient to absorb estimated probable credit losses. Managements 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, international events, 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 Management estimates, additional provisions for loan and lease losses 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 to the Corporations audited consolidated financial statements filed as part of the 2009 Annual Report and in the footnotes to the Corporations unaudited financial statements filed as part of this Form 10-Q. There have been no material changes in assumptions or estimation techniques utilized as compared to prior periods.
Three Months Results
The Corporation reported second quarter 2010 diluted earnings per share of $0.25 and net income of $2.4 million which includes $637 thousand of pre-tax merger-related expenses, compared to diluted earnings per share of $0.28 and net income of $2.4 million in the same period last year. Return on average equity (ROE) and return on average assets (ROA) for the quarter ended June 30, 2010 were 8.10% and 0.77%, respectively. ROE was 10.11% and ROA was 0.83% for the same period last year.
While earnings were the same for the quarter ended June 30, 2010 and 2009, the diluted earnings per share decrease of $0.03 in the three month period ending June 30, 2010, as compared to the same period in 2009, was due to an increase in the weighted average diluted shares of 985 thousand as a result of the issuance of shares of common stock in the Registered Direct Offering which was completed on May 18, 2010 (described in more detail below), and the issuance of shares of common stock under the DRIP during the first six months of 2010.
The ROE for the quarter ended June 30, 2010 declined 2.01% to 8.10% from 10.11% in the same period in 2009 due to the increase in equity related to the Registered Direct Offering and the DRIP.
On May 18, 2010, the Corporation completed the sale of 1,548,167 shares of common stock, par value $1.00, at a price of $17.00 per share under the Corporations Shelf Registration Statement. The Corporation received net proceeds of $24.7 million after deducting placement agents fees and other offering expenses, which the Corporation expects to use for regulatory capital purposes, funding asset growth and financing possible mergers and acquisitions.
The tax equivalent net interest income increased $1.2 million or 12.1% to $11.2 million for the quarter ended June 30, 2010 compared with $10.0 million for the same period in 2009. The increase is primarily due to a lower interest expense on interest-bearing liabilities. The net interest margin for the quarter ended June 30, 2010 was 3.80%, a 21 basis point increase, as compared to the same period in 2009. Average interest rates on earning assets fell 39 basis points, however the average rates on interest bearing liabilities fell 72 basis points due to competitive pricing and the low interest rate environment.
Total portfolio loans and leases at June 30, 2010 were $899.3 million, an increase of $13.6 million or 1.5% from the December 31, 2009 balance of $885.7 million. Credit quality of the overall loan and lease portfolio is stable. Total non-performing loans and leases represented 111 basis points or $10.0 million of portfolio loans and leases at June 30, 2010. This compares with 78 basis points or $6.9 million at December 31, 2009. The level of non-performing loans and leases increased in the second quarter due to one large commercial relationship the Corporation has been monitoring which accounts for 64 basis points of total non-performing loans and leases.
The provision for loan and lease losses for the quarters ended June 30, 2010 and 2009 were $994 thousand and $1.7 million, respectively. At June 30, 2010, the allowance for loan and lease losses (the Allowance) of $9.8 million represents 1.09% of portfolio loans and leases compared with $10.4 million or 1.18% at December 31, 2010.
For the quarter ended June 30, 2010, non-interest income was $5.9 million, a decrease of $1.9 million compared with the $7.8 million for the same period last year attributable to the residential mortgage refinancing surge that took place during 2009. During the second quarter of 2010, fees for wealth management services were $3.9 million, and loan servicing and late fees were $379 thousand. The net gain on sale of residential mortgage loans of $606 thousand and other operating income of $519 thousand during the second quarter of 2010 declined from $2.5 million and $751 thousand, respectively, in the second quarter of 2009.
The increase in Wealth Management fees was attributed to the increase in wealth management assets under management, administration, supervision and brokerage as of June 30, 2010 which were $3.1 billion, as compared to $2.9 billion and $2.3 billion at December 31, 2009 and June 30, 2009, respectively. Additionally, success in the Wealth Management Division is also attributed to the success of new initiatives within this division, which includes the start-up of BMT Asset Management in the second quarter of 2009.
Six Months Results
The Corporation reported net income of $4.6 million or $0.50 diluted earnings per share for the six months ended June 30, 2010, which includes $985 thousand of pre-tax merger-related expenses. ROE and ROA for the six months ended June 30, 2010 were 8.33% and 0.76%, respectively, compared to 10.81% and 0.88%, respectively, for the same period last year.
The tax equivalent net interest margin was 3.93% for the six months ended June 30, 2010, up from 3.60% from the same period in 2009. The earning asset yield declined 35 basis points to 4.90% in the first six months of 2010 from 5.25% in the same period of 2009. At the same time, total funding costs declined 79 basis points from 2.04% for the first six months of 2009 to 1.25% for the same period in 2010. The increase in the margin to 3.93% for the six months ended June 30, 2010 from 3.60% for the same period in 2009 was primarily due to the lower balance in borrowed funds and an overall decrease in the cost of total interest-bearing liabilities cost from 2.04% for the six months ended June 30, 2009 to 1.25% for the same period in 2010.
The tax equivalent net interest income increased $2.8 million or 14.1% to $22.5 million during the first six months of 2010 from $19.7 million during the first six months of 2009 primarily due to the decrease in interest expense due to lower rates being paid on interest-bearing liabilities.
Non-interest income for the six months ended June 30, 2010 was $13.2 million, a decline of $2.1 million compared to the first half of 2009, mainly due to the strong residential mortgage refinancing surge that took place during 2009, resulting in the gain on sale of mortgage loans declining $3.3 million for the six month period ended June 30, 2010 as compared to the same period in 2009. This decline was offset by an increase in fees for wealth management services of $605 thousand or 8.5%, loan servicing and late fees of $127 thousand or 20.0% and service charges on deposits of $36 thousand or 3.8% as compared to the same period in 2009.
For the six months ended June 30, 2010, non-interest expense was $24.0 million, an increase of $253 thousand or 1.1% as compared to the same period in 2009. The increase was primarily due to merger-related expenses and the net loss on the sale of OREO that took place during the first six months of 2010, offset by a decrease in salaries and wages of $473 thousand due to a decline in mortgage origination compensation and the non-recurring FDIC special assessment of $540 thousand paid in the second quarter of 2009.
Key Performance Ratios
Key financial performance ratios for the three and six months ended June 30, 2010 and 2009 are shown in the table below:
Key period end ratios are shown in the table below:
Components of Net Income