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Bryn Mawr Bank 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Bryn Mawr Bank Corporation -- Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Under Section 13 or 15 (d) of

the Securities and Exchange Act of 1934.

For Quarter ended September 30, 2012

Commission File Number 0-15261

 

 

Bryn Mawr Bank Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   23-2434506

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

identification No.)

801 Lancaster Avenue, Bryn Mawr, Pennsylvania   19010
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (610) 525-1700

Not Applicable

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  x    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 issuer’s class of common stock, as of the latest practicable date.

 

Class

 

Outstanding at November 5, 2012

Common Stock, par value $1   13,399,313

 

 

 


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED September 30, 2012

Index

 

PART I –   

FINANCIAL INFORMATION

  
ITEM 1.   

Financial Statements (unaudited)

  
  

Consolidated Financial Statements

     Page 3   
  

Notes to Consolidated Financial Statements

     Page 8   
ITEM 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Page 34   
ITEM 3.   

Quantitative and Qualitative Disclosures About Market Risk

     Page 53   
ITEM 4.   

Controls and Procedures

     Page 53   
PART II –   

OTHER INFORMATION

     Page 53   
ITEM 1.   

Legal Proceedings

     Page 53   
ITEM 1A.   

Risk Factors

     Page 53   
ITEM 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     Page 53   
ITEM 3.   

Defaults Upon Senior Securities

     Page 53   
ITEM 4.   

Mine Safety Disclosures

     Page 54   
ITEM 5.   

Other Information

     Page 54   
ITEM 6.   

Exhibits

     Page 54   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets - Unaudited

 

(dollars in thousands)    (unaudited)
September 30,
2012
    December 31,
2011
 

Assets

    

Cash and due from banks

   $ 13,526      $ 11,771   

Interest bearing deposits with banks

     23,559        57,369   
  

 

 

   

 

 

 

Cash and cash equivalents

     37,085        69,140   

Investment securities available for sale, at fair value (amortized cost of $310,973 and $271,065 as of September 30, 2012 and December 31, 2011 respectively)

     316,644        273,822   

Trading securities

     1,399        1,436   

Loans held for sale

     3,420        1,588   

Portfolio loans and leases

     1,313,713        1,295,392   

Less: Allowance for loan and lease losses

     (13,638     (12,753
  

 

 

   

 

 

 

Net portfolio loans and leases

     1,300,075        1,282,639   

Premises and equipment, net

     29,238        29,328   

Accrued interest receivable

     5,963        6,061   

Deferred income taxes

     11,478        13,845   

Mortgage servicing rights

     4,257        4,041   

Bank owned life insurance

     19,765        19,434   

FHLB stock

     10,717        11,588   

Goodwill

     29,588        24,689   

Intangible assets

     22,351        18,014   

Other investments

     4,438        4,107   

Other assets

     18,111        13,641   
  

 

 

   

 

 

 

Total assets

   $ 1,814,529      $ 1,773,373   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Non-interest-bearing

   $ 327,214      $ 326,409   

Interest-bearing

     1,071,335        1,055,960   
  

 

 

   

 

 

 

Total deposits

     1,398,549        1,382,369   
  

 

 

   

 

 

 

Short-term borrowings

     19,029        12,863   

FHLB advances and other borrowings

     155,416        147,795   

Subordinated debentures

     15,000        22,500   

Accrued interest payable

     982        1,592   

Other liabilities

     24,298        21,875   
  

 

 

   

 

 

 

Total liabilities

     1,613,274        1,588,994   
  

 

 

   

 

 

 

Shareholders’ equity

    

Common stock, par value $1; authorized 100,000,000 shares; issued 16,389,289 and 16,103,981 shares as of September 30, 2012 and December 31, 2011, respectively, and outstanding of 13,399,635 and 13,106,353 as of September 30, 2012 and December 31, 2011, respectively

     16,389        16,104   

Paid-in capital in excess of par value

     88,744        84,425   

Less: Common stock in treasury at cost – 2,989,654 and 2,997,628 shares as of September 30, 2012 and December 31, 2011, respectively

     (30,924     (31,027

Accumulated other comprehensive loss, net of tax benefit

     (8,655     (11,365

Retained earnings

     135,701        126,242   
  

 

 

   

 

 

 

Total shareholders’ equity

     201,255        184,379   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,814,529      $ 1,773,373   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

3


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income - Unaudited

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
(dollars in thousands, except share and per share data)    2012     2011      2012     2011  

Interest income:

         

Interest and fees on loans and leases

   $ 17,027      $ 17,471       $ 51,233      $ 51,705   

Interest on cash and cash equivalents

     34        29         86        88   

Interest on investment securities:

         

Taxable

     937        1,132         3,088        3,475   

Non-taxable

     56        16         139        203   

Dividends

     27        43         95        365   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     18,081        18,691         54,641        55,836   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense on:

         

Deposits

     937        1,493         3,128        4,434   

Short-term borrowings

     5        7         14        19   

FHLB advances and other borrowings

     918        968         2,808        2,787   

Subordinated debentures

     270        279         852        835   

Junior subordinated debentures

     0        271         0        814   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     2,130        3,018         6,802        8,889   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     15,951        15,673         47,839        46,947   

Provision for loan and lease losses

     1,000        1,828         3,003        5,032   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     14,951        13,845         44,836        41,915   

Non-interest income:

         

Fees for wealth management services

     7,993        6,098         21,433        15,363   

Service charges on deposits

     634        646         1,823        1,841   

Loan servicing and other fees

     432        449         1,303        1,370   

Net gain on sale of residential mortgage loans

     1,837        764         4,311        1,818   

Net gain on sale of available for sale securities

     416        343         1,132        1,410   

Net loss (gain) on sale of other real estate owned (“OREO”)

     (45     70         (86     (59

Bank owned life insurance (“BOLI”) income

     108        115         331        348   

Other operating income

     873        779         2,969        2,497   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest income

     12,248        9,264         33,216        24,588   

Non-interest expenses:

         

Salaries and wages

     8,703        7,639         24,283        20,680   

Employee benefits

     1,903        1,674         6,086        5,000   

Occupancy and bank premises

     1,488        1,225         4,258        3,752   

Furniture, fixtures, and equipment

     935        865         2,766        2,571   

Advertising

     267        204         946        909   

Amortization of mortgage servicing rights

     243        197         718        524   

Net (recovery) impairment of mortgage servicing rights

     105        468         82        672   

Amortization of intangible assets

     669        541         1,738        968   

FDIC insurance

     262        238         715        968   

Due diligence and merger-related expenses

     316        135         1,439        616   

Professional fees

     609        516         1,837        1,664   

Other operating expenses

     3,389        1,970         8,944        6,666   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest expenses

     18,889        15,672         53,812        44,990   

Income before income taxes

     8,310        7,437         24,240        21,513   

Income tax expense

     2,885        2,207         8,397        6,915   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 5,425      $ 5,230       $ 15,843      $ 14,598   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per common share

   $ 0.41      $ 0.41       $ 1.21      $ 1.16   

Diluted earnings per common share

   $ 0.41      $ 0.41       $ 1.20      $ 1.16   

Dividends declared per share

   $ 0.16      $ 0.15       $ 0.48      $ 0.45   

Weighted-average basic shares outstanding

     13,149,050        12,862,382         13,067,551        12,578,460   

Dilutive shares

     146,377        36,306         133,799        35,080   
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted weighted-average diluted shares

     13,295,427        12,898,688         13,201,350        12,613,540   
  

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

4


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income - Unaudited

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
(dollars in thousands)    2012     2011     2012     2011  

Net income

   $ 5,425      $ 5,230      $ 15,843      $ 14,598   

Other comprehensive income (loss):

        

Net unrealized gains (losses) arising during the period, net of tax expense (benefit) of $312, $173, $1,416 and $1,002, respectively

     578        321        2,630        1,861   

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $146, $120, $396 and $494, respectively

     (270     (223     (736     (916
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized investment gains (losses), net of tax expense (benefit) of $166, $53, $1,020 and $508, respectively

     308        98        1,894        945   

Change in unfunded pension liability, net of tax expense of $146, $123, $438 and $369, respectively

     272        228        816        685   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     580        326        2,710        1,630   

Total comprehensive income

   $ 6,005      $ 5,556      $ 18,553      $ 16,228   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

5


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows - Unaudited

 

     Nine Months Ended September 30,  
(dollars in thousands)    2012     2011  

Operating activities:

    

Net Income

   $ 15,843      $ 14,598   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan and lease losses

     3,003        5,032   

Provision for depreciation and amortization

     4,894        4,043   

Net gain on sale of available for sale securities

     (1,132     (1,410

Net gain on sale of residential mortgages

     (4,311     (1,818

Stock based compensation cost

     1,019        600   

Amortization and net impairment of mortgage servicing rights

     800        1,196   

Net accretion of fair value adjustments

     (979     (1,553

Amortization of intangible assets

     1,738        968   

Impairment of other real estate owned (“OREO”)

     0        127   

Loss on sale of OREO

     86        59   

Net increase in cash surrender value of bank owned life insurance (“BOLI”)

     (331     (348

Other, net

     (940     (716

Loans originated for resale

     (132,642     (59,434

Proceeds from loans sold

     134,105        60,756   

Provision for deferred income taxes

     (433     (78

Change in income taxes payable/receivable

     3,976        1,274   

Change in accrued interest receivable

     98        395   

Change in accrued interest payable

     (610     (868
  

 

 

   

 

 

 

Net cash provided by operating activities

     24,184        22,823   
  

 

 

   

 

 

 

Investing activities:

    

Purchases of investment securities

     (180,744     (150,510

Proceeds from maturity of investment securities and paydowns of mortgage-related securities

     33,379        25,132   

Proceeds from sale of investment securities available for sale

     31,714        70,799   

Proceeds from redemptions of FHLB stock

     871        2,029   

Proceeds from calls of investment securities

     67,692        96,400   

Net change in other investments

     (331     (36

Net portfolio loan and lease originations

     (19,809     (85,145

Purchases of premises and equipment

     (1,890     (2,196

Acquisitions, net of cash acquired

     (7,845     (13,367

Capitalize costs to OREO

     (61     0   

Proceeds from sale of OREO

     565        2,045   
  

 

 

   

 

 

 

Net cash used by investing activities

     (76,459     (54,849
  

 

 

   

 

 

 

Financing activities:

    

Change in deposits

     16,440        10,159   

Change in short-term borrowings

     6,166        12,484   

Dividends paid

     (6,384     (5,714

Change in FHLB advances and other borrowings

     7,956        (19,171

Change in subordinated debt

     (7,500     0   

Tax benefit from exercise of stock options

     107        141   

Proceeds from issuance of common stock

     2,072        6,789   

Proceeds from exercise of stock options

     1,363        966   
  

 

 

   

 

 

 

Net cash provided by financing activities

     20,220        5,654   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (32,055     (26,372

Cash and cash equivalents at beginning of period

     69,140        89,484   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 37,085      $ 63,112   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid during the year for:

    

Income taxes

   $ 4,758      $ 5,506   

Interest

     7,412        9,757   

Supplemental cash flow information:

    

Available for sale securities sold, not settled

   $ 5,577      $ 0   

Change in other comprehensive income

     4,168        2,507   

Change in deferred tax due to change in comprehensive income

     1,458        877   

Transfer of loans to other real estate owned

     453        1,005   

Issuance of shares and options for acquisitions

     0        6,661   

Acquisition of noncash assets and liabilities:

    

Assets acquired

     12,078        18,411   

Liabilities assumed

     6,161        0   

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

6


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity - Unaudited

 

     For the Nine Months Ended September 30, 2012  
(dollars in thousands, except share information)    Shares of
Common
Stock Issued
     Common
Stock
     Paid-in
Capital
     Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
    Total
Shareholders’
Equity
 

Balance December 31, 2011

     16,103,981       $ 16,104       $ 84,425       $ (29,833   $ (11,365   $ 126,582      $ 185,913   

Cumulative effect of correction of immaterial accounting error

     0         0         0         (1,194     0        (340     (1,534
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted balance, December 31, 2011

     16,103,981         16,104         84,425         (31,027     (11,365     126,242        184,379   

Net income

     0         0         0         0        0        15,843        15,843   

Dividends declared, $0.48 per share

     0         0         0         0        0        (6,384     (6,384

Other comprehensive income, net of tax expense of $1,458

     0         0         0         0        2,710        0        2,710   

Stock based compensation

     0         0         1,019         0        0        0        1,019   

Tax benefit from gains on stock option exercise

     0         0         107         0        0        0        107   

Retirement of treasury stock

     0         0         0         103        0        0        103   

Common stock issued:

                 

Dividend Reinvestment and Stock Purchase Plan

     106,737         107         1,965         0        0        0        2,072   

Share-based awards and options exercises

     178,571         178         1,228         0        0        0        1,406   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2012

     16,389,289       $ 16,389       $ 88,744       $ (30,924   $ (8,655   $ 135,701      $ 201,255   

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

7


Table of Contents

BRYN MAWR BANK CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In the opinion of Bryn Mawr Bank Corporation’s (the “Corporation”) Management, all 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 Corporation’s 2011 Annual Report on Form 10-K (the “2011 Annual Report”).

The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year.

Correction of an Immaterial Accounting Error

In September 2012, the Corporation identified an immaterial accounting error related to two of its deferred compensation plans. The provisions of the deferred compensation plans enabled certain executives and directors to have bonus payments and director’s fees deferred, and allowed the participants to direct the investment of these deferred amounts. One of the investment choices offered to the participants was the Corporation’s common stock, and this stock, along with the participants’ other investment choices, were placed in a trust which was owned by the Corporation. The carrying value of this trust was periodically adjusted to reflect changes in its fair market value. The portion of this trust comprised of the Corporation’s common stock was incorrectly reported as an asset on the Corporation’s balance sheet. The stock held in the trust should have been classified as treasury stock and reported in the shareholders’ equity section of the Corporation’s balance sheet, at cost.

The resulting corrections involved adjustments to assets and shareholders’ equity, as well as adjustments to other operating expense, as changes in the fair market value of the Corporation’s common stock held in the trust are charged to deferred compensation expense, a component of other operating expense.

In addition to the reclassification between assets and shareholders’ equity, there were immaterial reclassifications within assets related to the deferred compensation trust and other trusts that had previously been classified as other assets and other investments and are now classified as trading securities and available-for-sale investment securities. An immaterial reclassification to interest income on investment securities was related to this reclassification of investments. All periods presented in the tables accompanying this report have been revised to reflect these corrections.

The following tables detail the revisions to the previously reported information:

 

     For the Three Months Ended September 30, 2011  

(dollars in thousands, except per share data)

   Revised Amount      Originally
Reported
Amount
     Adjustment  

Interest on investment securities – taxable

   $ 1,132       $ 1,113       $ 19   

Other operating income

   $ 779       $ 791       $ (12

Other operating expense

   $ 1,970       $ 2,284       $ (314

Income before income taxes

   $ 7,437       $ 7,117       $ 320   

Income tax expense

   $ 2,207       $ 2,095       $ 112   

Net income

   $ 5,230       $ 5,022       $ 208   

Weighted-average basic shares outstanding

     12,862,382         12,948,979         (86,597

Weighted-average diluted shares outstanding

     12,898,688         12,985,285         (86,597

Basic earnings per common share

   $ 0.41       $ 0.39       $ 0.02   

Diluted earnings per common share

   $ 0.41       $ 0.39       $ 0.02   

 

8


Table of Contents
     For the Nine Months Ended September 30, 2011  

(dollars in thousands, except per share data)

   Revised Amount      Originally
Reported
Amount
     Adjustment  

Interest on investment securities – taxable

   $ 3,475       $ 3,388       $ 87   

Other operating income

   $ 2,497       $ 2,560       $ (63

Other operating expense

   $ 6,666       $ 6,727       $ (61

Income before income taxes

   $ 21,513       $ 21,428       $ 85   

Income tax expense

   $ 6,915       $ 6,885       $ 30   

Net income

   $ 14,598       $ 14,543       $ 55   

Weighted-average basic shares outstanding

     12,578,460         12,664,704         (86,244

Weighted-average diluted shares outstanding

     12,613,540         12,699,784         (86,244

Basic earnings per common share

   $ 1.16       $ 1.15       $ 0.01   

Diluted earnings per common share

   $ 1.16       $ 1.15       $ 0.01   

 

     As of December 31,2011  

(dollars in thousands)

   Revised Amount      Originally
Reported
Amount
     Adjustment  

Investment securities available for sale, at fair value

   $ 273,822       $ 272,317       $ 1,505   

Investment securities available for sale, at amortized cost

   $ 271,065       $ 269,611       $ 1,454   

Trading securities

   $ 1,436       $ 0       $ 1,436   

Deferred income taxes

   $ 13,845       $ 13,662       $ 183   

Other investments

   $ 4,107       $ 5,612       $ (1,505

Other assets

   $ 13,641       $ 16,794       $ (3,153

Retained earnings

   $ 126,242       $ 126,582       $ (340

Common stock held in treasury, at cost

   $ 31,027       $ 29,833       $ 1,194   

Shares of common stock held in treasury

         2,997,628             2,909,542           88,086   

For the three and six months ended June 30, 2012 and the three months ended March 31, 2012, there were immaterial adjustments to net income.

2. Business Combinations

Davidson Trust Company

The acquisition of the Davidson Trust Company (“DTC”) by the Corporation was completed on May 15, 2012. In addition to cash paid at closing, three separate contingent payments, each of which is not to exceed one-third of the amount indicated in the table below, are payable on each of November 14, 2012, May 14, 2013 and November 14, 2013. These contingent payments are subject to certain post-closing contingencies relating to the assets under management.

The Davidson Trust Company has long been recognized as one of the premier trust and investment firms in the nation. The addition of DTC will allow the Corporation to expand its range of services and will bring deeper market penetration in our core market area. The structure of the Corporation’s existing Wealth Management segment will allow for the immediate integration of DTC and will take advantage of the various synergies that exist between the two companies. The acquisition of DTC initially increased the Corporation’s Wealth Management Division assets under management by $1.0 billion.

The acquisition of DTC was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess of consideration paid over the fair value of net assets acquired was recorded as goodwill. The Corporation allocated the total balance of goodwill to its Wealth Management segment. The Corporation also recorded an intangible asset for customer relationships, which will be amortized over a ten-year period using a straight-line method, an intangible asset for restrictive covenant agreements, which will be amortized over a five-year period using a straight-line method and an intangible asset for trade name which will not be amortized.

As of September 30, 2012, the Corporation finalized its fair value estimates related to the acquisition of DTC.

 

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Table of Contents

In connection with the DTC acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:

 

(dollars in thousands)

      

Consideration paid:

  

Cash paid at closing

   $ 7,350   

Contingent payment liability

     3,150   
  

 

 

 

Value of consideration

     10,500   

Assets acquired:

  

Cash operating accounts

     1,433   

Other assets

     201   

Intangible asset – customer relationships

     3,720   

Intangible asset – noncompetition agreements

     1,385   

Intangible asset – brand

     970   

Premises and equipment

     117   

Deferred tax asset

     785   
  

 

 

 

Total assets

     8,611   

Liabilities assumed:

  

Deferred tax liability

     2,125   

Miscellaneous liabilities

     885   
  

 

 

 

Total liabilities

     3,010   

Net assets acquired

     5,601   
  

 

 

 

Goodwill resulting from acquisition of DTC

   $ 4,899   
  

 

 

 

Regarding the acquisition of DTC, the following table details the effect on goodwill of the changes in estimates of the fair values of the assets acquired and liabilities assumed from the amounts originally reported on the Form 10-Q for the quarter ended June 30, 2012:

 

Goodwill resulting from the acquisition of DTC reported on Form 10-Q for the quarter ended June 30, 2012

   $ 5,064   

Effect of adjustments to:

  

Intangible asset – customer relationships

     (165
  

 

 

 

Adjusted goodwill resulting from the acquisition of DTC as of September 30, 2012

   $ 4,899   
  

 

 

 

Private Wealth Management Group of the Hershey Trust Company

The acquisition of the Private Wealth Management Group (“PWMG”) of the Hershey Trust Company (“HTC”) by the Corporation was completed on May 27, 2011. In addition to cash paid at closing, cash was placed in escrow to be released in three equal installments, each of which is not to exceed one-third of the amount indicated in the table below, on the 6-, 12- and 18-month anniversaries of February 17, 2011, subject to certain post-closing contingencies relating to the assets under management. As of September 30, 2012, all escrowed funds have been released.

The acquisition of PWMG initially increased the Corporation’s Wealth Management Division assets under management by $1.1 billion.

The acquisition of PWMG was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess of consideration paid over the fair value of net assets acquired was recorded as goodwill, which will not be amortizable. The Corporation allocated the total balance of goodwill to its Wealth Management segment. The Corporation also recorded an intangible asset for customer relationships, which will be amortized over a 15 year period using an accelerated method and an intangible asset for restrictive covenant agreements, which will be amortized over a five-and-a-half year period using a straight-line method.

 

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In connection with the PWMG acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:

 

(dollars in thousands)

      

Consideration paid:

  

Common shares issued (322,101 shares)

   $ 6,661   

Cash paid at closing

     8,150   

Cash placed in escrow

     3,600   
  

 

 

 

Value of consideration

     18,411   

Assets acquired:

  

Intangible asset – customer relationships

     8,610   

Intangible asset – noncompetition agreements

     3,830   

Premises and equipment

     250   
  

 

 

 

Total assets

     12,690   

Liabilities assumed:

     0   

Net assets acquired

     12,690   
  

 

 

 

Goodwill resulting from acquisition of PWMG

   $ 5,721   
  

 

 

 

3. 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, as well as the effect of restricted and performance shares becoming unrestricted 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 anti-dilutive. 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.

 

     Three Months Ended
September 30,
    

Nine months Ended

September 30,

 

(dollars in thousands except per share data)

   2012      2011      2012      2011  

Numerator:

           

Net income available to common shareholders

   $ 5,425       $ 5,230       $ 15,843       $ 14,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for basic earnings per share – weighted average shares outstanding

     13,149,050         12,862,382         13,067,551         12,578,460   

Effect of dilutive common shares

     146,377         36,306         133,799         35,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share – adjusted weighted average shares outstanding

     13,295,427         12,898,688         13,201,350         12,613,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.41       $ 0.41       $ 1.21       $ 1.16   

Diluted earnings per share

   $ 0.41       $ 0.41       $ 1.20       $ 1.16   

Antidilutive shares excluded from computation of average dilutive earnings per share

     227,139         996,404         349,649         987,242   

4. Investment Securities

The amortized cost and estimated fair value of available for sale investment securities are as follows:

As of September 30, 2012

 

(dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

Obligations of U.S. government agencies

   $ 83,472       $ 907       $ (25   $ 84,354   

Obligations of state & political subdivisions

     19,240         218         (13     19,445   

Mortgage-backed securities

     125,573         3,845         (7     129,411   

Collateralized mortgage obligations

     65,168         542         (89     65,621   

Other investments

     17,520         293         0        17,813   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 310,973       $ 5,805       $ (134   $ 316,644   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

As of December 31, 2011

 

(dollars in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 

Obligations of U.S. government agencies

   $ 104,252       $ 397       $ (79   $ 104,570   

Obligations of state & political subdivisions

     8,210         158         (2     8,366   

Mortgage-backed securities

     95,713         2,160         (39     97,834   

Collateralized mortgage obligations

     32,418         251         (46     32,623   

Other investments

     30,472         264         (307     30,429   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 271,065       $ 3,230       $ (473   $ 273,822   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following table shows the amount of available for sale investment securities that were in an unrealized loss position:

As of September 30, 2012

 

     Less than 12
Months
    12 Months
or Longer
     Total  
(dollars in thousands)    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

Obligations of U.S. government agencies

   $ 11,438       $ (25   $ 0       $ 0       $ 11,438       $ (25

Obligations of state & political subdivisions

     4,408         (13     0         0         4,408         (13

Mortgage-backed securities

     5,257         (7     0         0         5,257         (7

Collateralized mortgage obligations

     16,987         (89     0         0         16,987         (89
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 38,090       $ (134   $ 0       $ 0       $ 38,090       $ (134
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the amount of available for sale investment securities that were in an unrealized loss position:

As of December 31, 2011

 

     Less than 12
Months
    12 Months
or Longer
    Total  
(dollars in thousands)    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

Obligations of U.S. government agencies

   $ 23,457       $ (79   $ 0       $ 0      $ 23,457       $ (79

Obligations of state & political subdivisions

     620         (2     0         0        620         (2

Mortgage-backed securities

     7,696         (22     4,886         (17     12,582         (39

Collateralized mortgage obligations

     7,440         (46     0         0        7,440         (46

Other investments

     15,596         (307     0         0        15,596         (307
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 54,809       $ (456   $ 4,886       $ (17   $ 59,695       $ (473
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Management evaluates the Corporation’s available for sale investment securities that are in an unrealized loss position in order to determine if the decline in market value is other than temporary. The available for sale investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state and local municipalities and other issuers. All fixed income investment securities in the Corporation’s available for sale investment portfolio are rated as investment grade. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, interest rates and the bond rating of each security. The unrealized losses presented in the tables above are temporary in nature and are primarily related to market interest rates rather than the underlying credit quality of the issuers. Management does not believe that these unrealized losses are other-than-temporary. The Corporation does not have the intent to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely than not that it will not have to sell these securities prior to their maturity or the recovery of their cost bases.

As of September 30, 2012 and December 31, 2011, securities having market values of $121.9 million and $135.3 million, respectively, were specifically pledged as collateral for public funds, trust deposits, the Federal Reserve Bank of Philadelphia discount window program, Federal Home Loan Bank of Pittsburgh (“FHLB”) borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Bank’s borrowing agreement with the FHLB.

 

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Table of Contents

The amortized cost and fair value of available for sale investment securities as of September 30, 2012 and December 31, 2011, by contractual maturity, are shown below:

 

     September 30, 2012      December 31,2011  
(dollars in thousands)    Amortized
Cost
    
Fair Value
     Amortized
Cost
    
Fair Value
 

Due in one year or less

   $ 6,166       $ 6,170       $ 900       $ 900   

Due after one year through five years

     27,916         28,122         54,046         54,349   

Due after five years through ten years

     49,913         50,237         48,210         48,354   

Due after ten years

     22,982         23,552         26,233         26,353   

Mortgage-related securities*

     190,741         195,032         128,131         130,457   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total maturing investments

     297,718         303,113         257,519         260,413   

Bond mutual funds and other non-maturity investments

     13,255         13,531         13,546         13,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 310,973       $ 316,644       $ 271,065       $ 273,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As of September 30, 2012 and December 31, 2011, the Corporation’s investment securities held in trading accounts were comprised of a deferred compensation trust which is invested in marketable securities whose diversification is at the discretion of the deferred compensation plan participants.

5. Loans and Leases

A. Loans and leases outstanding are detailed by category as follows:

 

     September 30,
2012
     December 31,
2011
 

Loans held for sale

   $ 3,420       $ 1,588   
  

 

 

    

 

 

 

Real estate loans:

     

Commercial mortgage

   $ 472,354       $ 419,130   

Home equity lines and loans

     195,315         207,917   

Residential mortgage

     301,054         306,478   

Construction

     22,161         52,844   
  

 

 

    

 

 

 

Total real estate loans

     990,884         986,369   

Commercial and industrial

     274,351         267,204   

Consumer

     17,342         11,429   

Leases

     31,136         30,390   
  

 

 

    

 

 

 

Total portfolio loans and leases

     1,313,713         1,295,392   
  

 

 

    

 

 

 

Total loans and leases

   $ 1,317,133       $ 1,296,980   
  

 

 

    

 

 

 

Loans with predetermined rates

   $ 642,271       $ 608,490   

Loans with adjustable or floating rates

     674,862         688,490   
  

 

 

    

 

 

 

Total loans and leases

   $ 1,317,313       $ 1,296,980   
  

 

 

    

 

 

 

Net deferred loan origination costs included in the above loan table

   $ 437       $ 563   
  

 

 

    

 

 

 

B. Components of the net investment in leases are detailed as follows:

 

(dollars in thousands)    September 30,
2012
    December 31,
2011
 

Minimum lease payments receivable

   $ 35,348      $ 34,143   

Unearned lease income

     (5,686     (5,080

Initial direct costs and deferred fees

     1,474        1,327   
  

 

 

   

 

 

 

Total

   $ 31,136      $ 30,390   
  

 

 

   

 

 

 

 

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Table of Contents

C. Troubled Debt Restructurings (“TDRs”):

The restructuring of a loan is considered a “troubled debt restructuring” if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

The following table presents the balance of TDRs as of the indicated dates:

 

(dollars in thousands)

   September 30,
2012
     December 31,
2011
 

TDRs included in nonperforming loans and leases

   $ 3,740       $ 4,300   

TDRs in compliance with modified terms

     8,379         7,166   
  

 

 

    

 

 

 

Total TDRs

   $ 12,119       $ 11,466   
  

 

 

    

 

 

 

The following table presents information regarding loan and lease modifications categorized as Troubled Debt Restructurings for the three and nine months ended September 30, 2012:

 

     For the Three Months Ended September 30, 2012  
(dollars in thousands)    Number of Contracts      Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Residential mortgage

     0       $ 0       $ 0   

Home equity lines and loans

     1         249         249   

Commercial and industrial

     0         0         0   

Leases

     2         29         29   
  

 

 

    

 

 

    

 

 

 

Total

     3       $    278       $    278   
  

 

 

    

 

 

    

 

 

 

 

     For the Nine Months Ended September 30, 2012  
(dollars in thousands)    Number of Contracts      Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 

Residential mortgage

     4       $ 1,364       $ 1,392   

Home equity lines and loans

     3         712         723   

Commercial and industrial

     1         39         39   

Leases

     7         70         70   
  

 

 

    

 

 

    

 

 

 

Total

     15       $ 2,185       $ 2,224   
  

 

 

    

 

 

    

 

 

 

The following table presents information regarding the types of loan and lease modifications made for the three and nine months ended September 30, 2012:

 

     Number of Contracts for the Three Months Ended September 30, 2012  
     Interest Rate
Change
     Loan Term
Extension
     Interest Rate
Change and Term
Extension
     Interest Rate
Change with
Interest-Only
Period
     Contractual
Payment
Reduction
(Leases only)
 

Residential mortgage

     0         0         0         0         0   

Home equity lines and loans

     0         0         1         0         0   

Commercial and industrial

     0         0         0         0         0   

Leases

     0         0         0         0         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0         0         1         0         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Number of Contracts for the Nine Months Ended September 30,  2012  
     Interest Rate
Change
     Loan Term
Extension
     Interest Rate
Change and Term
Extension
     Interest Rate
Change with
Interest-Only
Period
     Contractual
Payment
Reduction
(Leases only)
 

Residential mortgage

     0         2         2         0         0   

Home equity lines and loans

     1         0         2         0         0   

Commercial and industrial

     0         0         1         0         0   

Leases

     0         0         0         0         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1         2         5         0         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the three and nine months ended September 30, 2012, there were no defaults of loans or leases that had been previously modified to troubled debt restructurings.

D. Non-Performing Loans and Leases(1)

 

(dollars in thousands)    September 30,
2012
     December 31,
2011
 

Non-accrual loans and leases:

     

Commercial mortgage

   $ 488       $ 1,043   

Home equity lines and loans

     2,483         2,678   

Residential mortgage

     3,674         3,228   

Construction

     3,678         4,901   

Commercial and industrial

     3,454         2,305   

Consumer

     19         5   

Leases

     50         155   
  

 

 

    

 

 

 

Total nonperforming loans and leases

   $ 13,846       $ 14,315   
  

 

 

    

 

 

 

 

(1) 

Purchased credit-impaired loans, which have been recorded at their fair values at acquisition, and which are performing, are excluded from this table, with the exception of $364 thousand and $1.5 million of purchased credit-impaired loans as of September 30, 2012 and December 31, 2011, respectively, which became non-performing subsequent to acquisition.

E. Purchased Credit-Impaired Loans

The outstanding principal balance and related carrying amount of credit-impaired loans, for which the Bank applies ASC 310-30 to account for the interest earned, as of the dates indicated, are as follows:

 

(dollars in thousands)    September 30,
2012
     December 31,
2011
 

Outstanding principal balance

   $ 18,781       $ 22,749   

Carrying amount(1)

     11,928         13,991   

 

(1) Includes $462 thousand and $678 thousand purchased credit-impaired loans as of September 30, 2012 and December 31, 2011, respectively, for which the Bank could not estimate the timing or amount of expected cash flows to be collected at acquisition, and for which no accretable yield is recognized. Additionally, the table above includes $364 thousand and $1.5 million of purchased credit-impaired loans as of September 30, 2012 and December 31, 2011, respectively, that subsequently became non-performing, which are disclosed in Note 5D, above, and which also have no accretable yield.

The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Bank applies ASC 310-30, for the nine months ended September 30, 2012:

 

(dollars in thousands)    Accretable
Discount
 

Balance, December 31, 2011

   $ 9,537   

Accretion

     (983

Reclassifications from nonaccretable difference

     432   

Additions

     430   

Disposals

     (1,295
  

 

 

 

Balance, September 30, 2012

   $ 8,121   
  

 

 

 

 

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Table of Contents

F. Age Analysis of Past Due Loans and Leases

The following tables present an aging of the Corporation’s loan and lease portfolio as of September 30, 2012 and December 31, 2011:

 

(dollars in thousands)    30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     Over 89
Days
Past Due
     Total
Past Due
     Current      Total Loans
and Leases
 

As of September 30, 2012

                 

Commercial mortgage

   $ 556       $ 209       $ 649       $ 1,414       $ 470,940       $ 472,354   

Home equity lines and loans

     193         122         1,561         1,876         193,439         195,315   

Residential mortgage

     1,248         366         1,648         3,262         297,792         301,054   

Construction

     0         0         3,678         3,678         18,483         22,161   

Commercial and industrial

     101         193         2,631         2,925         271,426         274,351   

Consumer

     10         9         14         33         17,309         17,342   

Leases

     61         19         23         103         31,033         31,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,169       $    918       $ 10,204       $ 13,291       $ 1,300,422       $ 1,313,713   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(dollars in thousands)    30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     Over 89
Days
Past Due
     Total
Past Due
     Current      Total Loans
and Leases
 

As of December 31, 2011

                 

Commercial mortgage

   $ 193       $ 171       $ 1,311       $ 1,675       $ 417,455       $ 419,130   

Home equity lines and loans

     330         199         2,235         2,764         205,153         207,917   

Residential mortgage

     1,455         907         1,856         4,218         302,260         306,478   

Construction

     0         0         4,853         4,853         47,991         52,844   

Commercial and industrial

     279         1,513         2,089         3,881         263,323         267,204   

Consumer

     33         0         4         37         11,392         11,429   

Leases

     156         75         145         376         30,014         30,390   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,446       $ 2,865       $ 12,493       $ 17,804       $ 1,277,588       $ 1,295,392   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

G. Allowance for Loan and Lease Losses (the “Allowance”)

The following tables detail the roll-forward of the Corporation’s allowance for loan and lease losses, by loan category, for the three and nine months ended September 30, 2012:

 

(dollars in thousands)    Commercial
Mortgage
     Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction     Commercial
and
Industrial
     Consumer     Leases     Unallocated     Total  

Balance, June 30, 2012

   $ 3,384       $ 1,749      $ 1,636      $ 1,112      $ 3,789       $ 180      $ 535      $ 755      $ 13,140   

Charge-offs

     0         (315     (18     (197     0         (19     (69     0        (618

Recoveries

     4         0        0        0        25         1        86        0        116   

Provision for loan and lease losses

     235         244        3        109        766         38        (85     (310     1,000   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

   $ 3,623       $ 1,678      $ 1,621      $ 1,024      $ 4,580       $ 200      $ 467      $ 445      $ 13,638   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(dollars in thousands)    Commercial
Mortgage
    Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction     Commercial
and
Industrial
    Consumer     Leases     Unallocated      Total  

Balance, December 31, 2011

   $ 3,165      $ 1,707      $ 1,592      $ 1,384      $ 3,816      $ 119      $ 532      $ 438       $ 12,753   

Charge-offs

     (235     (328     (188     (896     (409     (61     (300     0         (2,417

Recoveries

     4        0        0        0        91        5        199        0         299   

Provision for loan and lease losses

     689        299        217        536        1,082        137        36        7         3,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2012

   $ 3,623      $ 1,678      $ 1,621      $ 1,024      $ 4,580      $ 200      $ 467      $ 445       $ 13,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

16


Table of Contents

The following table details the roll-forward of the Corporation’s allowance for loan and lease losses for the three and nine months ended September 30, 2011:

 

(dollars in thousands)    Commercial
Mortgage
    Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction     Commercial
and
Industrial
    Consumer     Leases     Unallocated      Total  

Balance, June 30, 2011

   $ 2,571      $ 1,476      $ 1,246      $ 1,409      $ 3,619      $ 129      $ 638      $ 253       $ 11,341   

Charge-offs

     (599     (56     (159     (812     (1     (7     (183     0         (1,817

Recoveries

     0        20        0        0        130        0        152        0         302   

Provision for loan and lease losses

     791        94        90        812        (103     9        (11     146         1,828   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2011

   $ 2,763      $ 1,534      $ 1,177      $ 1,409      $ 3,645      $ 131      $ 596      $ 399       $ 11,654   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(dollars in thousands)    Commercial
Mortgage
    Home Equity
Lines and
Loans
    Residential
Mortgage
    Construction     Commercial
and
Industrial
    Consumer     Leases     Unallocated      Total  

Balance, December 31, 2010

   $ 2,534      $ 1,563      $ 843      $ 633      $ 3,565      $ 115      $ 766      $ 256       $ 10,275   

Charge-offs

     (827     (506     (271     (1,172     (492     (76     (840     0         (4,184

Recoveries

     0        20        0        0        133        5        373        0         531   

Provision for loan and lease losses

     1,056        457        605        1,948        439        87        297        143         5,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2011

   $ 2,763      $ 1,534      $ 1,177      $ 1,409      $ 3,645      $ 131      $ 596      $ 399       $ 11,654   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following table details the allocation of the allowance for loan and lease losses by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2012 and December 31, 2011:

 

(dollars in thousands)    Commercial
Mortgage
     Home Equity
Lines and
Loans
     Residential
Mortgage
     Construction      Commercial
and
Industrial
     Consumer      Leases      Unallocated      Total  

As of September 30, 2012

                          

Allowance on loans and leases:

                          

Individually evaluated for impairment

   $ 0       $ 203       $ 229       $ 698       $ 771       $ 19       $ 0       $ 0       $ 1,920   

Collectively evaluated for impairment

     3,614         1,475         1,392         319         3,809         181         467         445         11,702   

Purchased credit- impaired(1)

     9         0         0         7         0         0         0         0         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,623       $ 1,678       $ 1,621       $ 1,024       $ 4,580       $ 200       $ 467       $ 445       $ 13,638   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                          

Allowance on loans and leases:

                          

Individually evaluated for impairment

   $ 0       $ 75       $ 358       $ 640       $ 248       $ 0       $ 0       $ 0       $ 1,321   

Collectively evaluated for impairment

     3,153         1,632         1,234         741         3,568         119         532         438         11,417   

Purchased credit- impaired(1)

     12         0         0         3         0         0         0         0         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,165       $ 1,707       $ 1,592       $ 1,384       $ 3,816       $ 119       $ 532       $ 438       $ 12,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Purchased credit-impaired loans are evaluated for impairment on an individual basis.

 

17


Table of Contents

The following table details the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2012 and December 31, 2011:

 

(dollars in thousands)    Commercial
Mortgage
     Home Equity
Lines and
Loans
     Residential
Mortgage
     Construction      Commercial
and
Industrial
     Consumer      Leases      Total  

As of September 30, 2012

                       

Carrying value of loans and leases:

                       

Individually evaluated for impairment

   $ 343       $ 2,879       $ 9,700       $ 4,995       $ 3,701       $ 19       $ 0       $ 21,637   

Collectively evaluated for impairment

     461,633         192,409         291,080         16,195         270,372         17,323         31,136         1,280,148   

Purchased credit-impaired(1)

     10,378         27         274         971         278         0         0         11,928   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 472,354       $ 195,315       $ 301,054       $ 22,161       $ 274,351       $ 17,342       $ 31,136       $ 1,313,713   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                       

Carrying value of loans and leases:

                       

Individually evaluated for impairment

   $ 0       $ 2,714       $ 8,146       $ 6,062       $ 2,393       $ 5       $ 0       $ 19,320   

Collectively evaluated for impairment

     407,095         205,172         298,018         45,696         264,286         11,424         30,390         1,262,081   

Purchased credit-impaired(1)

     12,035         31         314         1,086         525         0         0         13,991   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 419,130       $ 207,917       $ 306,478       $ 52,844       $ 267,204       $ 11,429       $ 30,390       $ 1,295,392   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Purchased credit-impaired loans are evaluated for impairment on an individual basis.

As part of the process of allocating the allowance to the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as external loan reviewers. The result of these reviews is reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

 

 

Pass – Loans considered satisfactory with no indications of deterioration.

 

 

Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

 

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

 

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

In addition, the remaining segments of the loan and lease portfolio, which include residential mortgage, home equity lines and loans, consumer, and leases, are allocated portions of the allowance based on their performance status.

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to allocate the allowance for loan and lease losses as of September 30, 2012 and December 31, 2011:

 

     Credit Risk Profile by Internally Assigned Grade  
     Commercial Mortgage      Construction      Commercial and Industrial      Total  
(dollars in thousands)    September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
 

Pass

   $ 462,604       $ 414,250       $ 14,219       $ 38,367       $ 263,571       $ 260,050       $ 740,394       $ 712,667   

Special Mention

     2,985         1,932         1,317         3,704         5,584         1,459         9,886         7,095   

Substandard

     6,765         2,948         6,625         10,521         5,196         5,523         18,586         18,992   

Doubtful(1)

     0         0         0         252         0         172         0         424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 472,354       $ 419,130       $ 22,161       $ 52,844       $ 274,351       $ 267,204       $ 768,866       $ 739,178   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Loans balances classified as “Doubtful” have been reduced by partial charge-offs, and are carried at their net realizable value.

 

18


Table of Contents
Credit Risk Profile by Payment Activity  
     Residential Mortgage      Home Equity Lines and
Loans
     Consumer      Leases      Total  
(dollars in
thousands)
   September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012