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, 2005
Commission File Number 0-15261
Bryn Mawr Bank Corporation
(Exact name of registrant as specified in its charter)
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Pennsylvania | | 23-2434506 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer identification No.) |
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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 check 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x No ¨
Indicate by check 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.
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Class
| | Outstanding at October 31, 2005
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Common Stock, par value $1 | | 8,561,461 |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED September 30, 2005
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands*)
Unaudited
| | | | | | | | | | | | |
| | Three Months Ended September 30
| | Nine Months Ended September 30
|
| | 2005
| | 2004
| | 2005
| | 2004
|
Interest income: | | | | | | | | | | | | |
Interest and fees on loans | | $ | 9,438 | | $ | 7,641 | | $ | 26,648 | | $ | 22,187 |
Interest on federal funds sold | | | 64 | | | 73 | | | 125 | | | 106 |
Interest on interest bearing deposits with banks | | | 44 | | | 6 | | | 65 | | | 14 |
Interest and dividends on investment securities | | | 288 | | | 249 | | | 853 | | | 746 |
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Total interest and dividend income | | | 9,834 | | | 7,969 | | | 27,691 | | | 23,053 |
Interest expense on savings, NOW and market rate accounts | | | 770 | | | 524 | | | 1,980 | | | 1,481 |
Interest expense on time deposits | | | 1,013 | | | 631 | | | 2,614 | | | 1,830 |
Interest expense on borrowings | | | 5 | | | — | | | 41 | | | 10 |
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Total interest expense | | | 1,788 | | | 1,155 | | | 4,635 | | | 3,321 |
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Net interest income | | | 8,046 | | | 6,814 | | | 23,056 | | | 19,732 |
Loan loss provision | | | 209 | | | 187 | | | 589 | | | 562 |
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Net interest income after loan loss provision | | | 7,837 | | | 6,627 | | | 22,467 | | | 19,170 |
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Non-interest income: | | | | | | | | | | | | |
Fees for wealth management services | | | 2,972 | | | 2,490 | | | 8,593 | | | 7,789 |
Service charges on deposits | | | 408 | | | 444 | | | 1,201 | | | 1,398 |
Loan servicing and late fees | | | 321 | | | 361 | | | 999 | | | 1,272 |
Net gain on sale of loans | | | 456 | | | 494 | | | 1,378 | | | 2,568 |
Net gain on sale of mortgage servicing rights | | | — | | | — | | | — | | | 1,145 |
Other operating income | | | 568 | | | 471 | | | 1,688 | | | 1,501 |
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Total non-interest income | | | 4,725 | | | 4,260 | | | 13,859 | | | 15,673 |
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Non-interest expenses: | | | | | | | | | | | | |
Salaries and wages | | | 4,414 | | | 3,635 | | | 11,678 | | | 11,310 |
Employee benefits | | | 998 | | | 1,069 | | | 3,076 | | | 3,276 |
Occupancy | | | 564 | | | 531 | | | 1,701 | | | 1,622 |
Furniture, fixtures, and equipment | | | 488 | | | 427 | | | 1,446 | | | 1,310 |
Advertising | | | 195 | | | 264 | | | 683 | | | 705 |
Amortization of mortgage servicing rights | | | 115 | | | 152 | | | 513 | | | 646 |
Professional fees | | | 318 | | | 477 | | | 917 | | | 1,185 |
Other operating expenses | | | 1,095 | | | 1,173 | | | 3,421 | | | 3,756 |
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Total non-interest expenses | | | 8,187 | | | 7,728 | | | 23,435 | | | 23,810 |
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Income before income taxes | | | 4,375 | | | 3,159 | | | 12,891 | | | 11,033 |
Applicable income taxes | | | 1,499 | | | 1,050 | | | 4,425 | | | 3,775 |
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Net income | | | 2,876 | | | 2,109 | | | 8,466 | | | 7,258 |
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Basic earnings per share | | $ | 0.34 | | $ | 0.25 | | $ | 0.99 | | $ | 0.84 |
Diluted earnings per share | | $ | 0.33 | | $ | 0.24 | | $ | 0.97 | | $ | 0.83 |
Dividends declared per share | | $ | 0.11 | | $ | 0.10 | | $ | 0.31 | | $ | 0.30 |
Weighted-average basic shares outstanding | | | 8,555,037 | | | 8,595,229 | | | 8,565,311 | | | 8,614,631 |
Dilutive potential shares | | | 165,691 | | | 161,383 | | | 153,224 | | | 176,834 |
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Adjusted weighted-average shares | | | 8,720,728 | | | 8,756,612 | | | 8,718,535 | | | 8,791,465 |
The accompanying notes are an integral part of the consolidated financial statements.
* | Except for share and per share data. |
3
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
| | | | | | | | |
| | September 30, 2005 (Unaudited)
| | | December 31, 2004
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Assets | | | | | | | | |
Cash and due from banks | | $ | 30,976 | | | $ | 26,526 | |
Interest bearing deposits with banks | | | 8,075 | | | | 15,293 | |
Federal funds sold | | | — | | | | 13,423 | |
Investment securities available for sale, at market (amortized cost of $35,954 and $35,654 as of September 30, 2005 and December 31, 2004, respectively) | | | 35,442 | | | | 35,441 | |
Loans: | | | | | | | | |
Consumer | | | 8,791 | | | | 10,291 | |
Commercial | | | 172,115 | | | | 186,923 | |
Real estate | | | 401,487 | | | | 358,675 | |
Loans held for sale, at fair market value | | | 9,072 | | | | 8,708 | |
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Total loans | | | 591,465 | | | | 564,597 | |
Less: Allowance for loan losses | | | (7,392 | ) | | | (6,927 | ) |
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Net loans | | | 584,073 | | | | 557,670 | |
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Premises and equipment, net | | | 14,654 | | | | 14,162 | |
Accrued interest receivable | | | 2,905 | | | | 2,579 | |
Deferred federal income taxes | | | 840 | | | | (3 | ) |
Mortgage servicing rights | | | 2,992 | | | | 3,172 | |
Other assets | | | 13,010 | | | | 14,683 | |
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Total assets | | $ | 692,967 | | | $ | 682,946 | |
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Liabilities | | | | | | | | |
Deposits: | | | | | | | | |
Noninterest-bearing demand | | $ | 153,084 | | | $ | 147,236 | |
Savings, NOW and market rate accounts | | | 314,311 | | | | 343,259 | |
Time deposits | | | 137,262 | | | | 110,470 | |
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Total deposits | | | 604,657 | | | | 600,965 | |
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Accrued interest payable | | | 2,089 | | | | 2,878 | |
Other liabilities | | | 10,402 | | | | 7,865 | |
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Total liabilities | | | 617,148 | | | | 611,708 | |
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Shareholders’ equity | | | | | | | | |
Common stock, par value $1; authorized 25,000,000 shares; issued 11,214,749 and 11,172,582 shares as of September 30, 2005 and December 31, 2004 respectively and outstanding of 8,559,105 and 8,597,958 shares as of September 30, 2005 and December 31, 2004, respectively | | | 11,215 | | | | 11,172 | |
Paid-in capital in excess of par value | | | 7,772 | | | | 7,112 | |
Accumulated other comprehensive income, net of taxes | | | (482 | ) | | | (288 | ) |
Retained earnings | | | 80,987 | | | | 75,179 | |
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| | | 99,492 | | | | 93,175 | |
Less: Common stock in treasury at cost — 2,655,644, and 2,574,624 shares as of September 30, 2005 and December 31, 2004 respectively | | | (23,673 | ) | | | (21,937 | ) |
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Total shareholders’ equity | | | 75,819 | | | | 71,238 | |
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Total liabilities and shareholders’ equity | | $ | 692,967 | | | $ | 682,946 | |
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Book Value per Share | | $ | 8.86 | | | $ | 8.29 | |
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The accompanying notes are an integral part of the consolidated financial statements.
4
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
Unaudited
| | | | | | | | |
| | Nine Months Ended September 30,
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| | 2005
| | | 2004
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Operating activities: | | | | | | | | |
Net income from operations | | $ | 8,466 | | | $ | 7,258 | |
Adjustments to reconcile net income from continuing operations to net cash (used) provided by operating activities: | | | | | | | | |
Provision for loan losses | | | 589 | | | | 562 | |
Provision for depreciation and amortization | | | 1,147 | | | | 1,029 | |
Loans originated for resale | | | (102,297 | ) | | | (121,537 | ) |
Proceeds from loans sold | | | 103,574 | | | | 125,074 | |
Gain on sale of loans | | | (1,378 | ) | | | (2,567 | ) |
Gain on sale of MSRs | | | — | | | | (1,146 | ) |
Provision for deferred income taxes (benefit) | | | (843 | ) | | | (737 | ) |
Change in tax receivable | | | (354 | ) | | | 800 | |
Change in accrued interest receivable | | | (326 | ) | | | (198 | ) |
Change in accrued interest payable | | | (789 | ) | | | 280 | |
Changes in mortgage servicing rights | | | 180 | | | | 1,098 | |
Other | | | 4,182 | | | | (1,115 | ) |
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Net cash provided by operating activities | | | 12,151 | | | | 8,801 | |
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Investing activities: | | | | | | | | |
Purchases of investment securities available for sale | | | (5,499 | ) | | | (15,426 | ) |
Proceeds from maturity and calls of investment securities available for sale | | | 5,238 | | | | 13,197 | |
Loan originations, net | | | (26,891 | ) | | | (48,618 | ) |
Sale of OREO | | | 377 | | | | — | |
OREO charge-offs | | | (20 | ) | | | — | |
Purchases of premises and equipment | | | (1,548 | ) | | | (974 | ) |
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Net cash (used) by investing activities | | | (28,343 | ) | | | (51,821 | ) |
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Financing activities: | | | | | | | | |
Net (decrease) increase in demand and savings deposits | | | (23,100 | ) | | | 42,900 | |
Net (decrease) increase in time deposits | | | 26,792 | | | | 11,946 | |
Dividends paid | | | (2,658 | ) | | | (2,587 | ) |
Retirement of treasury stock | | | 44 | | | | 31 | |
Purchases of treasury stock | | | (1,780 | ) | | | (2,574 | ) |
Proceeds from issuance of common stock | | | 703 | | | | 622 | |
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Net cash provided by financing activities | | | 1 | | | | 50,338 | |
Net cash (used) provided by operations | | | (16,191 | ) | | | 7,318 | |
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(Decrease) increase in cash and cash equivalents | | | (16,191 | ) | | | 7,318 | |
Cash and cash equivalents at beginning of period | | | 55,242 | | | | 46,295 | |
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Cash and cash equivalents at end of period | | $ | 39,051 | | | $ | 53,613 | |
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Supplemental cash flow information: | | | | | | | | |
Income taxes paid | | $ | 3,171 | | | $ | 5,290 | |
Interest paid | | $ | 5,424 | | | $ | 3,042 | |
The accompanying notes are an integral part of the consolidated financial statements.
5
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars In Thousands)
Unaudited
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30,
| | | Nine Months Ended September 30,
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| | 2005
| | | 2004
| | | 2005
| | | 2004
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Net income | | $ | 2,876 | | | $ | 2,109 | | | $ | 8,466 | | | $ | 7,258 | |
Other comprehensive income: | | | | | | | | | | | | | | | | |
Unrealized holding gain (loss) on available-for-sale securities | | | (243 | ) | | | 406 | | | | (299 | ) | | | (92 | ) |
Deferred income tax (expense) benefit on unrealized holding gain (loss) on available for sale securities | | | 85 | | | | (142 | ) | | | 105 | | | | 32 | |
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Total Comprehensive income | | $ | 2,718 | | | $ | 2,373 | | | $ | 8,272 | | | $ | 7,198 | |
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The accompanying notes are an integral part of the consolidated financial statements.
6
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 and 2004
(Unaudited)
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 the Corporation’s 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 period 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 Bryn Mawr Bank Corporation (“Corporation”) 2004 Annual Report on Form 10-K. The Corporation’s consolidated financial condition and results of operations consist almost entirely of The Bryn Mawr Trust Company’s (the “Bank”) financial condition and result of operations.
The results of operations for the three month period and nine month period ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year.
2. Earnings Per Common Share:
The Corporation follows the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 128, “Earnings per Share”. Basic earnings per 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 share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. All weighted average, actual shares and per share information in these financial statements have been adjusted retroactively for the effect of stock dividends and splits. The reconciliation of the numerators and denominators of the basic and diluted EPS follows:
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| | Three Months Ended September 30,
| | Nine Months Ended September 30,
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| | 2005
| | 2004
| | 2005
| | 2004
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Net income (in thousands) | | $ | 2,876 | | $ | 2,109 | | $ | 8,466 | | $ | 7,258 |
Weighted-Average basic shares outstanding | | | 8,555,037 | | | 8,595,229 | | | 8,565,311 | | | 8,614,631 |
Dilutive potential shares | | | 165,691 | | | 161,383 | | | 153,224 | | | 176,834 |
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Adjusted weighted-average diluted shares | | | 8,720,728 | | | 8,756,612 | | | 8,718,535 | | | 8,791,465 |
Basic earnings per share | | $ | .34 | | $ | .25 | | $ | .99 | | $ | .84 |
Diluted earnings per share | | $ | .33 | | $ | .24 | | $ | .97 | | $ | .83 |
3. Provision for Loan Losses
The loan loss provision charged to operating expenses is driven by a formula and those factors which, in Management’s judgment, deserve current recognition in estimating loan losses including the evaluation of the loan portfolio and the Corporation’s past loan loss experience. The allowance for loan losses is an amount that Management believes will be adequate to absorb losses inherent in existing loans and commitments.
7
4. Stock Based Compensation
The Corporation applies APB Opinion 25 and related interpretations in accounting for its Stock Option Plan. Accordingly, no compensation cost has been recognized for the Stock Option Plan. Had compensation for the Corporation’s Stock Option Plan been determined based on the fair value at the grant date for awards consistent with the optional provisions of SFAS No. 123R, “Accounting for Stock Based Compensation”, the Corporation’s net income and earnings per share would have been reduced in the proforma amounts indicated below:
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| | For The Three Months Ended September 30,
| | For The Nine Months Ended September 30,
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(in thousands except for per share data)
| | 2005
| | 2004
| | 2005
| | 2004
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Net income – as reported | | $ | 2,876 | | $ | 2,109 | | $ | 8,466 | | $ | 7,258 |
Stock based compensation cost, net of related taxes | | | 33 | | | 91 | | | 900 | | | 270 |
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Net income - proforma | | | 2,843 | | $ | 2,018 | | | 7,566 | | $ | 6,988 |
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Basic earnings per share – as reported | | $ | .34 | | $ | .25 | | $ | .99 | | $ | .84 |
Diluted earnings per share – as reported | | $ | .33 | | $ | .24 | | $ | .97 | | $ | .83 |
Basic earnings per share – proforma | | $ | .33 | | $ | .23 | | $ | .88 | | $ | .81 |
Diluted earnings per share – proforma | | $ | .33 | | $ | .23 | | $ | .87 | | $ | .79 |
In April of 2005, the Financial Accounting Standards Board (FASB) revised SFAS No. 123(R) “Share Based Payment an Amendment of FASB No. 123 and APB No. 25” that addresses the accounting for share based payment transactions. Prior to that revision, the effective date would have been for fiscal years and interim periods beginning after June 15, 2005. The new effective date is for fiscal years beginning after December 15, 2005. The Corporation will adopt SFAS 123(R) beginning with the first quarter of 2006. It is expected that the adoption of SFAS 123 (R) will reduce net income in 2006 by approximately $36 thousand.
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the third quarter of 2005: Dividend yield of 2.12%, expected volatility of 20.41%, expected life of 6.06 years and risk-free interest rate of 3.90%. There were 2,625 options granted in the third quarter of 2005. On June 16, 2005 the Corporation accelerated the vesting of 83,916 out-of–the–money options which resulted in an additional proforma pre-tax expense of $430,000. The purpose of this transaction was to avoid the expense treatment of SFAS No. 123(R) in 2006 and 2007.
5. Pension and Other Post-retirement Benefit Plans
The Corporation sponsors two pension plans, the defined benefit pension plan and the Supplemental Employee Retirement Plan (“SERP”), and a post-retirement benefit plan for certain employees.
The following table provides a reconciliation of the components of the net periodic benefits cost for the three months ended and the nine months ended September 30, 2005 and 2004:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For The Three Months Ended September 30
| | For The Nine Months Ended September 30
|
| | Pension Benefits
| | | Post Retirement Benefits
| | Pension Benefits
| | | Post- Retirement Benefits
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| | 2005
| | | 2004
| | | 2005
| | | 2004
| | 2005
| | | 2004
| | | 2005
| | | 2004
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Service cost | | $ | 292 | | | $ | 283 | | | $ | 3 | | | $ | 5 | | $ | 876 | | | $ | 850 | | | $ | 9 | | | $ | 16 |
Interest cost | | | 413 | | | | 393 | | | | 35 | | | | 47 | | | 1,238 | | | | 1,180 | | | | 107 | | | | 141 |
Expected return on plan assets | | | (538 | ) | | | (484 | ) | | | — | | | | — | | | (1,615 | ) | | | (1,452 | ) | | | — | | | | — |
Amortization of transition obligation | | | — | | | | — | | | | 7 | | | | 7 | | | — | | | | — | | | | 20 | | | | 19 |
Amortization of prior service costs | | | 32 | | | | 32 | | | | (34 | ) | | | — | | | 97 | | | | 97 | | | | (103 | ) | | | — |
Amortization of net (gain) loss | | | 94 | | | | 71 | | | | 51 | | | | 46 | | | 280 | | | | 214 | | | | 152 | | | | 139 |
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Net periodic benefit cost | | $ | 293 | | | $ | 295 | | | $ | 62 | | | $ | 105 | | $ | 876 | | | $ | 889 | | | $ | 185 | | | $ | 315 |
As stated in the Corporation’s 2004 Annual Report, the Corporation does not have any minimum funding requirement for its defined benefit pension plan for 2005 but anticipates contributing $939 thousand for 2005. Additionally, the Corporation is expected to contribute approximately $129 thousand to the SERP plan for 2005. As of September 30, 2005, no
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contributions have been made to either of the pension plans. Changes were made to the post-retirement benefit plan in 2005 limiting future increases in plan costs to 120% of the current benefit.
6. Segment Information
SFAS No. 131, “Segment Reporting”, identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Executive Officer in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in SFAS No. 131 to the results of its operations.
The Corporation’s Banking segment consists of commercial and retail banking. The Banking segment is managed as a single strategic unit which generates revenues from a variety of products and services. The Banking segment generates interest income from its lending and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including service charges on deposit accounts; cash sweep fees, overdraft fees and interchange revenue associated with its Visa Check Card offering.
The Wealth Management segment has responsibility for all fiduciary activities within the Corporation, including investment management, trust administration, employee benefit administration, tax services and custodial services. This segment includes revenues and related expenses from an investment management agreement with another community bank.
The Mortgage Banking segment includes the origination of residential mortgage loans and the sale and servicing of such loans to the secondary mortgage market. This segment also includes the Corporation’s title insurance and joint mortgage origination activity with a real estate brokerage organization.
The “All Other” segment includes general corporate activities such as shareholder relations costs, NASDAQ fees and the annual meeting of shareholders. This segment also includes revenues and expenses from the Corporation’s insurance agency activities.
Segment information for the nine months ended September 30, 2005 and 2004 is as follows:
(Dollars in thousands)
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| | 2005
| |
| | Banking
| | | Wealth Management
| | | Mortgage Banking
| | | All Other
| | | Consolidated
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Net interest income | | $ | 22,996 | | | $ | — | | | $ | — | | | $ | 60 | | | $ | 23,056 | |
Less: Loan loss provision | | | 589 | | | | — | | | | — | | | | — | | | | 589 | |
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Net interest income after loan loss provision | | | 22,407 | | | | — | | | | — | | | | 60 | | | | 22,467 | |
Other income: | | | | | | | | | | | | | | | | | | | | |
Fees for wealth management services | | | — | | | | 8,593 | | | | — | | | | — | | | | 8,593 | |
Gain on sale of MSRs* | | | — | | | | — | | | | — | | | | — | | | | — | |
Other income | | | 2,416 | | | | 4 | | | | 2,613 | | | | 233 | | | | 5,266 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total other income | | | 2,416 | | | | 8,597 | | | | 2,613 | | | | 233 | | | | 13,859 | |
Other expenses: | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | 10,271 | | | | 3,583 | | | | 702 | | | | 198 | | | | 14,754 | |
Occupancy | | | 2,587 | | | | 475 | | | | 178 | | | | (93 | ) | | | 3,147 | |
Amortization of mortgage servicing rights | | | — | | | | — | | | | 513 | | | | — | | | | 513 | |
Other operating expense* | | | 3,591 | | | | 804 | | | | 389 | | | | 237 | | | | 5,021 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total other expense | | | 16,449 | | | | 4,862 | | | | 1,782 | | | | 342 | | | | 23,435 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Segment profit (loss) before income taxes | | | 8,374 | | | | 3,735 | | | | 831 | | | | (49 | ) | | | 12,891 | |
Intersegment revenues (expenses) ** | | | 136 | | | | 135 | | | | — | | | | (271 | ) | | | — | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Segment profit (loss) after eliminations | | $ | 8,510 | | | $ | 3,870 | | | $ | 831 | | | $ | (320 | ) | | $ | 12,891 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
% of segment profit (loss) | | | 66.0 | % | | | 30.0 | % | | | 6.4 | % | | | (2.4 | )% | | | 100.0 | % |
9
| | | | | | | | | | | | | | | | | | | | |
| | 2004***
| |
| | Banking
| | | Wealth Management
| | | Mortgage Banking
| | | All Other
| | | Consolidated
| |
Net interest income | | $ | 19,666 | | | $ | — | | | $ | — | | | $ | 66 | | | $ | 19,732 | |
Less: Loan loss provision | | | 562 | | | | — | | | | — | | | | — | | | | 562 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net interest income after loan loss provision | | | 19,104 | | | | — | | | | — | | | | 66 | | | | 19,170 | |
Other income: | | | | | | | | | | | | | | | | | | | | |
Fees for wealth management services | | | — | | | | 7,789 | | | | — | | | | — | | | | 7,789 | |
Gain on sale of MSRs* | | | — | | | | — | | | | 1,145 | | | | — | | | | 1,145 | |
Other income | | | 2,583 | | | | — | | | | 3,945 | | | | 211 | | | | 6,739 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total other income | | | 2,583 | | | | 7,789 | | | | 5,090 | | | | 211 | | | | 15,673 | |
Other expenses: | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | 9,650 | | | | 3,670 | | | | 1,064 | | | | 202 | | | | 14,586 | |
Occupancy | | | 2,411 | | | | 426 | | | | 185 | | | | (90 | ) | | | 2,932 | |
Amortization of mortgage servicing rights | | | — | | | | — | | | | 646 | | | | — | | | | 646 | |
Other operating expense* | | | 3,685 | | | | 812 | | | | 892 | | | | 257 | | | | 5,646 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total other expense | | | 15,746 | | | | 4,908 | | | | 2,787 | | | | 369 | | | | 23,810 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Segment profit (loss) before income taxes | | | 5,941 | | | | 2,881 | | | | 2,303 | | | | (92 | ) | | | 11,033 | |
Intersegment revenues (expenses) ** | | | 133 | | | | 135 | | | | — | | | | (268 | ) | | | — | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Segment profit (loss) after eliminations | | $ | 6,074 | | | $ | 3,016 | | | $ | 2,303 | | | $ | (360 | ) | | $ | 11,033 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
% of segment profit (loss) | | | 55.1 | % | | | 27.3 | % | | | 20.9 | % | | | (3.3 | )% | | | 100.0 | % |
* | Mortgage Banking segment salaries and benefits and other operating expenses for 2004 include $76 thousand and $190 thousand, respectively of expense related to the sale of mortgage servicing rights (“MSRs”). No such sale of MSRs occurred in the first nine months of 2005. |
** | Intersegment revenues consist of rental payments, insurance commissions and a management fee. |
*** | Reclassified for comparative purposes. |
7. Mortgage Servicing Rights
MSRs are recorded as an asset when residential mortgages originated by the Corporation are sold with servicing rights retained by the Corporation. MSRs represent the right to receive cash flows from servicing residential mortgage loans. The MSRs are capitalized based on the relative fair value of the servicing right on the date the mortgage loan is sold. MSRs are amortized in proportion to and over the period of the estimated net servicing income. MSRs are carried at the lower of cost or estimated fair value. The Corporation obtains an independent appraisal of the fair value of its MSRs each quarter, which approximates the fair value expected in a sale between a willing buyer and a seller.
MSRs are assessed quarterly for impairment based on the estimated fair value of those rights. As part of the quarterly impairment valuation, the MSR portfolio is stratified on the basis of certain predominant risk characteristics, including loan type and note rate. To the extent that the carrying value of the MSRs exceeds estimated fair value for any stratum, impairment is recognized which may be adjusted in the future if the estimated fair value of the MSRs increases.
The following summarizes the Corporation’s activity related to MSRs for the nine months ended September 30, 2005 and 2004:
| | | | | | | | |
(In thousands)
| | 2005
| | | 2004
| |
Balance, January 1 | | $ | 3,172 | | | $ | 4,391 | |
Additions | | | 333 | | | | 947 | |
Amortization | | | (501 | ) | | | (646 | ) |
Impairment | | | (12 | ) | | | — | |
Sales | | | — | | | | (1,399 | ) |
| |
|
|
| |
|
|
|
Balance, September 30 | | $ | 2,992 | | | $ | 3,293 | |
| |
|
|
| |
|
|
|
Fair Value | | $ | 4,484 | | | $ | 4,335 | |
10
There was impairment of $12,000 in the MSRs for the nine months ended September 30, 2005. There was no impairment of MSRs for the nine months ended September 30, 2004.
At September 30, 2005, 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:
| | | | |
(In thousands)
| | September 30, 2005
| |
Fair value amount of MSRs | | $ | 4,484 | |
Weighted average life (in years) | | | 5.75 | |
Prepayment speeds (constant prepayment rate) (*): | | | 15.14 | % |
Impact on fair value: | | | | |
10% adverse change | | $ | (172 | ) |
20% adverse change | | $ | (391 | ) |
Discount rate: | | | 9.00 | % |
Impact on fair value: | | | | |
10% adverse change | | $ | (50 | ) |
20% adverse change | | $ | (168 | ) |
(*) | represents the weighted average prepayment rate for the life of the MSR asset. |
These assumptions and sensitivities are hypothetical and should be used with caution. As the table also indicates, 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.
8. Impaired Loans
The Corporation identifies a loan as impaired when a borrower is deemed to be unable to meet the original terms of a loan. Once a loan is delinquent for 90 days or more, it is considered an impaired loan. Impaired loans at September 30, 2005 were $273 thousand. Except for certain consumer loans, all loans are placed on nonaccrual status when they become delinquent for 90 days or more and any outstanding accrued interest receivable on such loans is reversed from income. If the loan valuation is less than the recorded value of the loan, an impairment reserve must be established for the difference. As of September 30, 2005, there were no impaired loans for which it was necessary to establish an impairment reserve. The Corporation recognizes income on an impaired loan under the cash basis when the loan is current and the collateral on the loan is sufficient to cover the outstanding obligation to the Corporation. If these factors do not exist, the Corporation will not recognize income on an impaired loan.
9. Capital
The Corporation declared and paid a regular dividend of $0.11 per share, during the third quarter of 2005. This payment totaled $941 thousand. The dividend was increased 10% or $0.01 per share to $0.11 per share effective for the dividend declared to shareholders of record on August 1, 2005 payable September 1, 2005.
During the first nine months of 2005, the Corporation repurchased 85,500 shares of its common stock for $1,779,730 at an average purchase price of $20.82 per share.
10. New Accounting Pronouncements
Stock Based Compensation - In April of 2005, the FASB revised SFAS No. 123(R) “Share Based Payment an Amendment of FASB No. 123 and APB No. 95”. See Note 4 above. Stock Based Compensation for additional information.
Accounting Changes and Error Correction - In July of 2005, the FASB issued SFAS No. 154 “Accounting Changes on Error Correction” which changes the requirements for accounting for and reporting a change in accounting principles. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not anticipated to have a significant impact on the Corporation.
11
Item 2 | Management’s Discussion and Analysis of Results of Operation and Financial Condition |
Special Cautionary Notice Regarding Forward Looking Statements
Certain of the statements contained in this Report and the documents incorporated by reference herein, may constitute forward-looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Corporation to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include statements with respect to the Corporation’s financial goals, business plans, business prospects, credit quality, credit risk, reserve adequacy, liquidity, origination and sale of residential mortgage loans, impairment of goodwill, the effect of changes in accounting standards, and market and pricing trends. The words “expect,” “anticipate,” “intended,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. The Corporation’s actual results may differ materially from the results anticipated by the forward-looking statement due to a variety of factors, including without limitation:
| • | | the effect of future economic conditions on the Corporation and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and savings patterns, and the Corporation’s interest rate risk exposure and credit risk; |
| • | | changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; |
| • | | governmental monetary and fiscal policies, as well as legislation and regulatory changes; |
| • | | changes in accounting requirements or interpretations; |
| • | | the risks of changes in interest rates on the level and composition of deposits, loan demand, and the value of loan collateral and securities, as well as interest rate risk; |
| • | | the effects of competition from other commercial banks, thrifts, mortgage companies, finance companies, credit unions, securities brokerage firms, insurance companies, money-market and mutual funds and other institutions operating in the Corporation’s trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally together with such competitors offering banking products and services by mail, telephone, computer and the internet; |
| • | | any extraordinary event; |
| • | | the Corporation’s success in continuing to generate new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; |
| • | | the Corporation’s ability to continue to generate investment results for customers and the ability to continue to develop investment products in a manner that meets customers needs; |
| • | | the Corporation’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers; |
| • | | the Corporation’s ability to originate and sell residential mortgage loans; |
| • | | the accuracy of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; and |
| • | | the Corporation’s success in managing the risks involved in the foregoing. |
All written or oral forward-looking statements attributed to the Corporation are expressly qualified in their entirety by use of the foregoing cautionary statements. All forward-looking statements included in this Report are based upon information presently available, and the Corporation assumes no obligation to update any forward-looking statement.
12
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. The Bank is headquartered in Bryn Mawr, PA, a western suburb of Philadelphia, PA. The Bank provides wealth management, community banking, residential mortgage lending and business banking services to its customers through eight full service branches and seven retirement community offices throughout Montgomery, Delaware and Chester counties. 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 goal of The Bryn Mawr Trust Company is to become the preeminent community bank and wealth management organization in the Philadelphia area.
Results of Operations
The following is Management’s 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 Corporation’s consolidated financial condition and results of operations consist almost entirely of the Bank’s 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. The year-end financial statements are audited.
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 year’s financial statements to the current year’s 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 losses involves a higher degree of judgment and complexity than other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by Management to be sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan 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, 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 portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from Management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.
The Corporation recognizes deferred tax assets and liabilities for the future tax effects of temporary differences, net of operating loss carry forwards and tax credits. Deferred tax assets are subject to Management’s judgment based upon available evidence that future realization is more likely than not. If Management determines that the Corporation may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.
The valuation of mortgage servicing rights (“MSRs”) is a critical accounting policy due to the complexity of the quarterly valuation process which is performed by an outside consultant based on data provided by Management. Changes in market interest rates, consumer behavior, demographic trends and other factors influence the value of MSRs. See Note 7 above in the accompanying unaudited financial statements for additional information.
The Corporation has not substantively changed any aspect of its overall approach in the application of the foregoing policies. There have been no material changes in assumptions or estimation techniques utilized as compared to prior periods.
Executive Overview
The Corporation had net income of $2.876 million for the three months ended September 30, 2005, an increase of 36.4% or $767 thousand, compared with $2.109 million in the same period last year. Diluted earnings per share for the third quarter
13
of 2005 were $0.33, an increase of 37.5% or $.09 per share compared with $0.24 in the same period last year. Return on average equity (ROE) and return on average assets (ROA) for the quarter ended September 30, 2005 were 15.35% and 1.65%, respectively. ROE was 12.20% and ROA was 1.27% for the same period last year.
The Corporation’s Board of Directors declared a quarterly dividend of $0.11 per share, payable December 1, 2005, to shareholders of record as of October 31, 2005.
The major factor contributing to the increase in earnings for the third quarter of 2005 compared to the same period last year was a 53 basis point or 11.8% increase in the Corporation’s net interest margin to 5.01% from 4.48% in the same period last year. Net interest income for the three months ended September 30, 2005, increased $1.232 million or 18.1% to $8.046 million from $6.814 million in the same period last year, as the Corporation’s asset sensitive loan portfolio continued to benefit from a series of Federal Reserve interest rate increases. Also contributing to the improvement in earnings was a $482 thousand or 19.4% increase in Wealth Management revenue.
Net income for the nine months ended September 30, 2005 was $8.466 million, an increase of 16.6% or $1.208 million, compared to $7.258 million in the same period last year. On a year to date basis, diluted earnings per share were $0.97, an increase of $0.14 per share or 16.9%, compared with $0.83 in the same period last year. ROE and ROA for the first nine months of 2005 were 15.58% and 1.66%, respectively. ROE was 14.31% and ROA was 1.52% for the same period last year.
The major factor contributing to the increase in earnings for the first nine months of the year compared to the same period last year was a 41 basis point or 9.0% increase in the Corporation’s net interest margin to 4.95% from 4.54%. Net interest income for the nine months ended September 30, 2005, increased $3.324 million or 16.8% to $23.056 million from $19.732 million in the same period last year. Additionally, fees for Wealth Management services increased 10.3% or $804 thousand to $8.593 million versus $7.789 million, partially offsetting declines in residential mortgage related revenues.
In the first nine months of 2004, the Corporation sold mortgage-servicing rights (“MSRs”) that contributed $572 thousand to after tax income and increased diluted earnings per share $0.07. There were no sales of MSRs in the first nine months of 2005. Net income and diluted earnings per share for the first nine months of 2004, excluding the after tax impact of the MSRs sale, would have been $6.686 million and $0.76 per share, respectively. Excluding the impact of the MSRs sale, 2005 nine month net income increased $1.780 million or 26.6% and diluted earnings per share increased $0.21 or 27.6% over the same period last year. (See accompanying reconcilement of GAAP net income and diluted earnings per share to net income and diluted earnings per share that exclude the MSRs sale on page 15).
Total loans increased $26.9 million or 4.8% to $591.5 million from $564.6 million over the past nine months while the Corporation’s asset quality remains strong as non-performing loans as a percent of total loans was 0.05% at September 30, 2005. The Corporation continues to focus its new business development efforts on loans to small to mid-size companies.
Total deposits grew $3.7 million or 0.6% over the past nine months to $604.7 million at September 30, 2005 from $601.0 million at December 31, 2004. Continued expansion of the retail banking footprint is anticipated with controlled de novo expansion in the suburban Philadelphia market. The two recently opened retail branch locations in Exton and Newtown Square PA are gaining market share and performing better than projected. Competition for deposits in the Corporation’s primary trading area remains very competitive, especially for consumer deposits.
Pricing changes in the secondary mortgage market in 2005 resulted in a higher percentage of the Corporation’s residential mortgage production being sold servicing released (instead of servicing retained) compared to similar periods in 2004. The impact of this, along with normal payment activity has reduced the balance of residential mortgage loans serviced and reduced the related loan servicing fee income.
14
Key Performance Ratios
Key financial performance ratios for the three months and nine months ended September 30, 2005 and 2004 are shown in the table below:
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30,
| | | Nine Months Ended September 30,
| |
| | 2005
| | | 2004
| | | 2005
| | | 2004
| |
Return on Average Equity (ROE) | | | 15.35 | % | | | 12.20 | % | | | 15.58 | % | | | 14.31 | % |
Return on Average Assets (ROA) | | | 1.65 | % | | | 1.27 | % | | | 1.66 | % | | | 1.52 | % |
Efficiency Ratio | | | 64.1 | % | | | 69.8 | % | | | 63.5 | % | | | 67.3 | % |
Net Interest Margin | | | 5.01 | % | | | 4.48 | % | | | 4.95 | % | | | 4.54 | % |
Diluted Earnings Per Share | | $ | 0.33 | | | $ | 0.24 | | | $ | 0.97 | | | $ | 0.83 | |
Dividend Per Share | | $ | 0.11 | | | $ | 0.10 | | | $ | 0.31 | | | $ | 0.30 | |
| | | | | | | | | | | | |
| | September 30
2005
| | | December 31
2004
| | | September 30
2004
| |
Book Value Per Share | | $ | 8.86 | | | $ | 8.29 | | | $ | 8.15 | |
Allowance for Loan Losses as a Percentage of Loans | | | 1.25 | % | | | 1.23 | % | | | 1.25 | % |
Reconcilement of Non-GAAP Information
See table below for a reconcilement of GAAP net income, diluted earnings per share, non-interest income and non-interest expense to comparable data that excludes the MSRs sale. Management believes that the presentation excluding the impact of the sale of MSRs in the first nine months of 2004 provides useful supplemental information essential to the proper understanding of the operating results of the Corporation’s core business. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures, which may be presented by other companies.
Reconciliation of Non-GAAP Information
Nine Month Period Ended September 30,
(dollars in thousands except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Income
| | | Change
| | | Diluted Earnings Per Share
| | | Change
| |
| | 2005
| | 2004
| | | $
| | %
| | | 2005
| | 2004
| | | $
| | %
| |
As reported | | $ | 8,466 | | $ | 7,258 | | | $ | 1,208 | | 16.6 | % | | $ | 0.97 | | $ | 0.83 | | | $ | 0.14 | | 16.9 | % |
After tax effect of MSR sale1 | | | — | | | (572 | ) | | $ | 572 | | — | | | | — | | $ | (0.07 | ) | | | 0.07 | | — | |
| |
|
| |
|
|
| |
|
| | | | |
|
| |
|
|
| |
|
| | | |
Adjusted for sale | | $ | 8,466 | | $ | 6,686 | | | $ | 1,780 | | 26.6 | % | | $ | 0.97 | | $ | 0.76 | | | $ | 0.21 | | 27.6 | % |
| |
|
| |
|
|
| |
|
| | | | |
|
| |
|
|
| |
|
| | | |
1 | MSR gain was calculated as follows: |
Revenues of $1.145 million, direct expenses of $266 thousand and allocated income taxes of $307 thousand netting to $572 thousand of net income.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Non Interest Income
| | Change
| | | Non Interest Expense
| | Change
| |
| | 2005
| | 2004
| | $
| | | %
| | | 2005
| | 2004
| | $
| | | %
| |
As reported | | $ | 13,859 | | $ | 15,673 | | (1,814 | ) | | (11.6 | ) | | $ | 23,435 | | | 23,810 | | (375 | ) | | (1.6 | )% |
MSR sale income | | | — | | | 1,145 | | (1,145 | ) | | | | | | — | | | — | | | | | | |
MSR sale expenses | | | — | | | | | | | | | | | | — | | | 266 | | (266 | ) | | — | |
| |
|
| |
|
| |
|
| | | | |
|
| |
|
| |
|
| | | |
Adjusted for sale | | $ | 13,859 | | $ | 14,528 | | (669 | ) | | (4.6 | ) | | $ | 23,435 | | $ | 23,544 | | (109 | ) | | (0.05 | )% |
| |
|
| |
|
| |
|
| | | | |
|
| |
|
| |
|
| | | |
Components of Net Income
Net income is affected by five major elements: net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposit and borrowed funds; the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans; non-interest income which is made up primarily of certain fees, trust income, residential mortgage activities and gains and losses from sale of securities; non-interest expenses, which consist primarily of salaries, employee benefits and other operating expenses; and income taxes. Each of these major elements will be reviewed in more detail in the following discussion.
15
Net Interest Income and Related Assets and Liabilities
The rate volume analysis in the table below analyzes changes in net interest income for the three months and nine months ended September 30, 2005 over September 30, 2004 by its rate and volume components.
Rate /Volume Analyses
| | | | | | | | | | | |
(in thousands) | | Three Months Ended September 30, 2005 Compared to 2004
| |
Increase/(Decrease)
| | Volume
| | | Rate
| | Total
| |
Interest Income: | | | | | | | | | | | |
Interest-bearing deposits with other banks | | $ | 6 | | | $ | 32 | | $ | 38 | |
Federal funds sold | | | (47 | ) | | | 38 | | | (9 | ) |
Investment securities available for sale | | | 28 | | | | 11 | | | 39 | |
Loans | | | 562 | | | | 1,235 | | | 1,797 | |
| |
|
|
| |
|
| |
|
|
|
Total interest income | | | 549 | | | | 1,316 | | | 1,865 | |
| |
|
|
| |
|
| |
|
|
|
Interest expense: | | | | | | | | | | | |
Savings, NOW and market rate | | | (38 | ) | | | 284 | | | 246 | |
Time deposits | | | 207 | | | | 175 | | | 382 | |
Short term borrowings | | | — | | | | 5 | | | 5 | |
| |
|
|
| |
|
| |
|
|
|
Total interest expense | | | 169 | | | | 464 | | | 633 | |
| |
|
|
| |
|
| |
|
|
|
Interest differential | | $ | 380 | | | $ | 853 | | $ | 1,233 | |
| |
|
|
| |
|
| |
|
|
|
| |
(in thousands) | | Nine Months Ended September 30, 2005 Compared to 2004
| |
Increase/(Decrease)
| | Volume
| | | Rate
| | Total
| |
Interest Income: | | | | | | | | | | | |
Interest-bearing deposits with other banks | | $ | 6 | | | $ | 45 | | $ | 51 | |
Federal funds sold | | | (54 | ) | | | 73 | | | 19 | |
Investment securities available for sale | | | 107 | | | | — | | | 107 | |
Loans | | | 1,782 | | | | 2,679 | | | 4,461 | |
| |
|
|
| |
|
| |
|
|
|
Total interest income | | | 1,841 | | | | 2,797 | | | 4,638 | |
| |
|
|
| |
|
| |
|
|
|
Interest expense: | | | | | | | | | | | |
Savings, now and market rate | | | 6 | | | | 493 | | | 499 | |
Time deposits | | | 481 | | | | 303 | | | 784 | |
Short term borrowings | | | 6 | | | | 25 | | | 31 | |
| |
|
|
| |
|
| |
|
|
|
Total interest expense | | | 493 | | | | 821 | | | 1,314 | |
| |
|
|
| |
|
| |
|
|
|
Interest differential | | $ | 1,348 | | | $ | 1,977 | | $ | 3,325 | |
| |
|
|
| |
|
| |
|
|
|
16
Analyses of Interest Rates and Interest Differential
The table below presents the major asset and liability categories on an average daily basis for the periods presented, along with interest income and expense and key rates and yields.
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months ended September 30,
| |
| | 2005
| | | 2004
| |
(dollars in thousands)
| | Average Balance
| | | Interest Income/ Expense
| | Average Rates Earned/ Paid
| | | Average Balance
| | | Interest Income/ Expense
| | Average Rates Earned/ Paid
| |
Assets: | | | | | | | | �� | | | | | | | | | | | | |
Interest-bearing deposits with other banks | | $ | 4,729 | | | $ | 44 | | 3.61 | % | | $ | 2,328 | | | $ | 6 | | 1.03 | % |
Federal funds sold | | | 7,420 | | | | 64 | | 3.42 | % | | | 20,689 | | | | 73 | | 1.40 | % |
Investment securities available for sale: | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 30,905 | | | | 248 | | 3.18 | % | | | 27,388 | | | | 208 | | 3.02 | % |
Tax-exempt | | | 5,050 | | | | 40 | | 3.22 | % | | | 5,024 | | | | 41 | | 3.25 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total investment securities | | | 35,954 | | | | 288 | | 3.19 | % | | | 32,412 | | | | 249 | | 3.06 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Loans(1) | | | 588,726 | | | | 9,438 | | 6.36 | % | | | 549,120 | | | | 7,641 | | 5.54 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total interest earning assets | | | 636,830 | | | | 9,834 | | 6.13 | % | | | 604,549 | | | | 7,969 | | 5.24 | % |
Cash and due from banks | | | 27,413 | | | | | | | | | | 33,446 | | | | | | | |
Allowance for loan losses | | | (7,359 | ) | | | | | | | | | (7,076 | ) | | | | | | |
Other assets | | | 33,559 | | | | | | | | | | 29,000 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Total assets | | $ | 690,443 | | | | | | | | | $ | 659,919 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Savings, NOW and market rate | | $ | 318,222 | | | $ | 770 | | 0.96 | % | | $ | 343,327 | | | $ | 524 | | 0.61 | % |
Time deposits | | | 133,052 | | | | 1,013 | | 3.02 | % | | | 100,365 | | | | 631 | | 2.50 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total interest-bearing deposits | | | 451,274 | | | | 1,783 | | 1.57 | % | | | 443,692 | | | | 1,155 | | 1.04 | % |
Short term borrowings | | | 516 | | | | 5 | | 3.84 | % | | | — | | | | — | | — | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total interest-bearing liabilities | | | 451,790 | | | | 1,788 | | 1.57 | % | | | 443,692 | | | | 1,155 | | 1.04 | % |
Demand deposits, noninterest-bearing | | | 152,048 | | | | | | | | | | 138,609 | | | | | | | |
Other liabilities | | | 12,303 | | | | | | | | | | 8,843 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Total noninterest-bearing liabilities | | | 164,351 | | | | | | | | | | 147,452 | | | | | | | |
Total liabilities | | | 616,142 | | | | | | | | | | 591,144 | | | | | | | |
Shareholders’ equity | | | 74,302 | | | | | | | | | | 68,775 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 690,443 | | | | | | | | | $ | 659,919 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Net interest spread | | | | | | | | | 4.56 | % | | | | | | | | | 4.20 | % |
Effect of noninterest-bearing sources | | | | | | | | | 0.45 | % | | | | | | | | | 0.28 | % |
| | | | | |
|
| |
|
| | | | | |
|
| |
|
|
Net interest income/ margin on earning assets | | | | | | $ | 8,046 | | 5.01 | % | | | | | | $ | 6,814 | | 4.48 | % |
| | | | | |
|
| |
|
| | | | | |
|
| |
|
|
(1) | Non-accrual loans have been included in average loan balances, but interest on nonaccrual loans has not been included for purposes of determining interest income. |
Net interest income for the three months ended September 30, 2005 of $8.046 million was $1.232 million or 18.1% higher than the net interest income for the same period in 2004 of $6.814 million. The analysis above indicates that increased loan volume along with the increase in rates were the primary drivers of the increase in net interest income. Average earning assets increased $32.3 million or 5.3% in the third quarter of 2005 compared to the same period in 2004. Average total loans grew $39.606 million or 7.2% while investments increased $3.542 million or 10.9% over 2004. During the third quarter of 2005, average investments were 5.6% of total earning assets compared to 5.4% during the same period in 2004.
17
The average earning asset yield during the third quarter of 2005 of 6.13% was 89 basis points higher than the 5.24% during the same period in 2004. The rate paid on average interest bearing liabilities of 1.57% in 2005 was 53 basis points higher than the 1.04% in 2004. Average non-interest bearing demand deposits grew 9.7%, while savings decreased 7.3% and time deposits increased 32.6%.
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months ended September 30,
| |
| | 2005
| | | 2004
| |
(dollars in thousands)
| | Average Balance
| | | Interest Income/ Expense
| | Average Rates Earned/ Paid
| | | Average Balance
| | | Interest Income/ Expense
| | Average Rates Earned/ Paid
| |
Assets: | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits with other banks | | $ | 2,809 | | | $ | 65 | | 3.09 | % | | $ | 1,951 | | | $ | 14 | | 0.96 | % |
Federal funds sold | | | 5,663 | | | | 125 | | 2.95 | % | | | 11,655 | | | | 106 | | 1.21 | % |
Investment securities available for sale | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 30,765 | | | | 730 | | 3.17 | % | | | 26,278 | | | | 626 | | 3.18 | % |
Tax-exempt | | | 5,087 | | | | 123 | | 3.23 | % | | | 5,062 | | | | 120 | | 3.17 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total investment securities | | | 35,852 | | | | 853 | | 3.18 | % | | | 31,340 | | | | 746 | | 3.18 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Loans(1) | | | 578,324 | | | | 26,648 | | 6.16 | % | | | 535,268 | | | | 22,187 | | 5.54 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total interest earning assets | | | 622,648 | | | | 27,691 | | 5.95 | % | | | 580,214 | | | | 23,053 | | 5.31 | % |
Cash and due from banks | | | 31,322 | | | | | | | | | $ | 32,824 | | | | | | | |
Allowance for loan losses | | | (7,224 | ) | | | | | | | | | (6,948 | ) | | | | | | |
Other assets | | | 33,241 | | | | | | | | | | 29,937 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Total assets | | $ | 679,987 | | | | | | | | | $ | 636,027 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Savings, NOW and market rate | | $ | 321,260 | | | $ | 1,980 | | 0.82 | % | | $ | 319,955 | | | $ | 1,481 | | 0.62 | % |
Time deposits | | | 126,459 | | | | 2,614 | | 2.76 | % | | | 100,180 | | | | 1,830 | | 2.44 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total interest-bearing deposits | | | 447,719 | | | | 4,594 | | 1.37 | % | | | 420,135 | | | | 3,311 | | 1.05 | % |
Short term borrowings | | | 1,766 | | | | 41 | | 3.10 | % | | | 1,135 | | | | 10 | | 1.18 | % |
| |
|
|
| |
|
| | | | |
|
|
| |
|
| | | |
Total interest-bearing liabilities | | | 449,485 | | | | 4,635 | | 1.38 | % | | | 421,270 | | | | 3,321 | | 1.05 | % |
Demand deposits, noninterest-bearing | | | 147,235 | | | | | | | | | | 136,991 | | | | | | | |
Other liabilities | | | 10,639 | | �� | | | | | | | | 10,007 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Total noninterest-bearing liabilities | | | 157,874 | | | | | | | | | | 146,998 | | | | | | | |
Total liabilities | | | 607,359 | | | | | | | | | | 568,268 | | | | | | | |
Shareholders’ equity | | | 72,628 | | | | | | | | | | 67,759 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 679,987 | | | | | | | | | $ | 636,027 | | | | | | | |
| |
|
|
| | | | | | | |
|
|
| | | | | | |
Net interest spread | | | | | | | | | 4.57 | % | | | | | | | | | 4.26 | % |
Effect of noninterest-bearing sources | | | | | | | | | 0.38 | % | | | | | | | | | 0.28 | % |
| | | | | |
|
| |
|
| | | | | |
|
| |
|
|
Net interest income/ margin on earning assets | | | | | | $ | 23,056 | | 4.95 | % | | | | | | $ | 19,732 | | 4.54 | % |
| | | | | |
|
| |
|
| | | | | |
|
| |
|
|
(1) | Non-accrual loans have been included in average loan balances, but interest on nonaccrual loans has not been included for purposes of determining interest income. |
Net interest income for the nine months ended September 30, 2005 of $23.056 million was $3.324 million or 16.8% higher than the net interest income for the same period in 2004 of $19.732 million. The analysis above indicates that increased loan volume along with the increase in rates were the primary drivers of the increase in net interest income. Average earning assets increased $42.434 million or 7.3% for the first nine months of 2005 compared to the same period in 2004. Average total loans grew $43.056 million or 8.0% while investments increased $4.512 million or 14.4% over 2004. During the first nine months of 2005, average investments were 5.8% of total earning assets compared to 5.4% during the same period in 2004.
18
The average earning asset yield during the first nine months of 2005 of 5.95% was 64 basis points higher than the 5.31% during the same period in 2004. The rate paid on average interest bearing liabilities of 1.38% in 2005 was 33 basis points higher than the 1.05% in 2004. Average non-interest bearing demand deposits grew 7.5%, while savings and time deposits increased 0.41% and 26.23%, respectively.
Net Interest Margin
The Corporations net interest margin increased 41 basis points to 5.01% in the third quarter of 2005 from 4.48% in the same period last year. The net interest margin and related components for the past five linked quarters are as follows:
| | | | | | | | | | | | | | | | | |
Year
| | Quarter
| | Earning Asset Yield
| | | Interest Bearing Liability Cost
| | | Net Interest Spread
| | | Effect of Non-Interest Bearing Sources
| | | Net Interest Margin
| |
2005 | | 3rd | | 6.13 | % | | 1.57 | % | | 4.56 | % | | 0.45 | % | | 5.01 | % |
2005 | | 2nd | | 5.94 | % | | 1.37 | % | | 4.57 | % | | 0.37 | % | | 4.94 | % |
2005 | | 1st | | 5.76 | % | | 1.19 | % | | 4.57 | % | | 0.32 | % | | 4.89 | % |
2004 | | 4th | | 5.45 | % | | 1.10 | % | | 4.35 | % | | 0.29 | % | | 4.64 | % |
2004 | | 3rd | | 5.24 | % | | 1.04 | % | | 4.20 | % | | 0.28 | % | | 4.48 | % |
The Corporation anticipates that continued increases in interest rates will have a positive effect on the Corporation’s net interest margin in 2005. However, factors such as competitive market conditions for deposits and competitive share driven loan pricing could impact the net interest margin in 2006 and beyond.
Interest Rate Sensitivity
The Corporation actively manages its interest rate sensitivity positions. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. Management’s Asset Liability Committee (“ALCO”), using policies and procedures approved by the Corporation’s Board of Directors, is responsible for managing the rate interest sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and repricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offering of loan and deposit terms and through borrowings from the Federal Home Loan Bank of Pittsburgh (“FHLB”).
The Corporation uses several tools to manage its interest rate risk including interest rate sensitivity analysis (aka “Gap Analysis”), market value of portfolio equity analysis, interest rate simulations under various rate scenarios and net interest margin reports. The results of these reports are compared to limits established by the Corporation’s Asset Liability Management Policies and appropriate adjustments are made if the results are outside of established limits.
The following table demonstrates the annualized result of an interest rate simulation and the expected effect that a parallel interest rate shift in the yield curve and subjective adjustments in deposit pricing might have on the Corporation’s projected net interest income over the next 12 months.
Summary of Interest Rate Simulation
| | | | | | | |
| | September 30, 2005
| |
(dollars in thousands)
| | Change In Net Interest Income Over Next 12 Months
| |
Change in Interest Rates | | | | | | | |
+200 basis points | | $ | 1,985 | | | 5.89 | % |
+100 basis points | | $ | 1,198 | | | 3.55 | % |
-100 basis points | | $ | (1,420 | ) | | (4.21 | )% |
-200 basis points | | $ | (3,297 | ) | | (9.78 | )% |
The interest rate simulation above indicates that the Corporation’s balance sheet as of September 30, 2005 is asset sensitive meaning that an increase in interest rates should increase net interest income and a decline in interest rates will cause a decline in net interest income over the next 12 months.
19
The following table presents the Corporation’s interest rate sensitivity position or Gap Analysis as of September 30, 2005
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands)
| | 0 to 90 Days
| | | 90 to 365 Days
| | | 1-5 Years
| | | Over 5 Years
| | | Non-Rate Sensitive
| | | Total
|
Assets: | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits with other banks | | $ | 8,075 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 8,075 |
Investment securities | | | 4,145 | | | | 8,063 | | | | 18,901 | | | | 4,333 | | | | — | | | | 35,442 |
Loans, net of allowance | | | 281,759 | | | | 31,950 | | | | 207,478 | | | | 62,886 | | | | — | | | | 584,073 |
Cash and due from banks | | | — | | | | — | | | | — | | | | — | | | | 26,882 | | | | 26,882 |
Other assets | | | — | | | | — | | | | — | | | | — | | | | 34,401 | | | | 34,401 |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
Total assets | | $ | 293,979 | | | $ | 40,013 | | | $ | 226,379 | | | $ | 67,219 | | | $ | 61,283 | | | $ | 688,873 |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
Liabilities and shareholders’ equity: | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest-bearing demand | | $ | 28,681 | | | $ | 18,996 | | | $ | 101,313 | | | $ | — | | | $ | — | | | $ | 148,990 |
Savings, NOW and market rate | | | 52,048 | | | | 44,068 | | | | 167,855 | | | | 50,340 | | | | — | | | | 314,311 |
Time deposits | | | 51,027 | | | | 55,876 | | | | 30,359 | | | | — | | | | — | | | | 137,262 |
Other liabilities | | | — | | | | — | | | | — | | | | — | | | | 12,491 | | | | 12,491 |
Shareholders’ equity | | | 2,708 | | | | 8,123 | | | | 43,325 | | | | 21,663 | | | | — | | | | 75,819 |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
Total liabilities and shareholders’ equity | | $ | 134,464 | | | $ | 127,063 | | | $ | 342,852 | | | $ | 72,003 | | | $ | 12,491 | | | $ | 688,873 |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
Gap | | $ | 159,515 | | | $ | (87,050 | ) | | $ | (116,473 | ) | | $ | (4,784 | ) | | $ | 48,792 | | | | — |
Cumulative gap | | $ | 159,515 | | | $ | 72,465 | | | $ | (44,008 | ) | | $ | (48,792 | ) | | | (0 | ) | | | — |
Cumulative earning assets as a % of cumulative interest bearing liabilities | | | 285 | % | | | 165 | % | | | 141 | % | | | 141 | % | | | — | | | | — |
The table above indicates that the Corporation is asset sensitive in the immediate to 90 day time frame and should experience an increase in net interest income in the near term if interest rates rise. The converse is also true. Cash and due from banks and non-interest bearing demand balances in the Gap analysis have been reduced by the amount of uncollected deposits in transit of $4.1 million.
Provision for Loan Losses
The Corporation uses the allowance method of accounting for credit losses. The balance in the allowance for loan losses is determined based on Management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including Management’s assumptions as to future delinquencies, recoveries and losses.
Increases to the allowance for loan losses are implemented through a corresponding provision (expense) in the Corporation’s statement of income. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.
While Management considers the allowance for loan losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or Management’s assumptions as to future delinquencies, recoveries and losses and Management’s intent with regard to the disposition of loans. In addition, the Pennsylvania Department of Banking and the Federal Reserve Bank of Philadelphia, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses.
The Corporation’s allowance for loan losses is the accumulation of various components that are calculated based on various independent methodologies. All components of the allowance for loan losses are estimations. Management bases its recognition and estimation of each allowance component on certain observable data that it believes is reflective of the underlying loan losses being estimated. The observable data and accompanying analysis is directionally consistent, based upon trends, with the resulting component amount for the allowance for loan losses. Components include the following: historical loss estimation by loan product type and by risk rating within each product type, payment (past due) status, industry concentrations, internal and external variables such as economic conditions. Other factors considered include credit policy, underwriting changes and adequacy of the loan review process.
Industry concentration is recognized as a possible factor in the estimation of loan losses. The Corporation has a material portion of its loans in real estate related loans. Over 60% of the Corporation’s commercial real estate exposure is owner occupied with the balance in investor owned real estate. A predominant percentage of the Corporation’s real estate exposure, both commercial and residential, is in the Corporation’s Philadelphia trade area. No specific loss-related
20
observable data is recognized by Management currently, therefore no specific factor is calculated in the reserve solely for the impact of these concentrations, although management continues to carefully consider relevant data for possible future sources of observable data.
Asset quality remains strong at September 30, 2005 as nonperforming loans as a percentage of total loans were 5 basis points. This compares with 24 basis points at December 31, 2004 and 25 basis points at September 30, 2004. The allowance for loan losses as a percentage of total loans was 1.25% at September 30, 2005 compared with 1.23% at December 31, 2004 and 1.25% at September 30, 2004. The provision for loan losses for the third quarter of 2005 was $209 thousand, compared to $187 thousand in the same period last year. The provision for loan losses for the first nine months of 2005 was $589 thousand, compared to $562 thousand in the same period last year.
Summary of Changes in the Allowance For Loan Losses
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30,
| | | Nine Months Ended September 30,
| | | Year Ended December 31, 2004
| |
(in thousands of dollars)
| | 2005
| | | 2004
| | | 2005
| | | 2004
| | |
Balance, beginning of period | | $ | 7,252 | | | $ | 6,965 | | | $ | 6,927 | | | $ | 6,670 | | | $ | 6,670 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Consumer | | | — | | | | (11 | ) | | | (9 | ) | | | (42 | ) | | | (94 | ) |
Commercial and industrial | | | — | | | | (94 | ) | | | — | | | | (167 | ) | | | (167 | ) |
Real estate | | | (71 | ) | | | (193 | ) | | | (136 | ) | | | (193 | ) | | | (431 | ) |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Total charge-offs | | | (71 | ) | | | (298 | ) | | | (145 | ) | | | (402 | ) | | | (692 | ) |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Consumer | | | 1 | | | | 5 | | | | 9 | | | | 29 | | | | 47 | |
Commercial and industrial | | | 1 | | | | 1 | | | | 11 | | | | 1 | | | | 2 | |
Real estate | | | — | | | | — | | | | 1 | | | | — | | | | — | |
Total recoveries | | | 2 | | | | 6 | | | | 21 | | | | 30 | | | | 49 | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Net (charge-offs) / recoveries | | | (69 | ) | | | (292 | ) | | | (124 | ) | | | (372 | ) | | | (643 | ) |
| |
|
|
| |
|
|
| |
|
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|
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Provision for loan losses | | | 209 | | | | 187 | | | | 589 | | | | 562 | | | | 900 | |
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| |
|
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|
| |
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Balance, end of period | | $ | 7,392 | | | $ | 6,860 | | | $ | 7,392 | | | $ | 6,860 | | | $ | 6,927 | |
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|
Analysis of Credit risk
Non Performing Assets and Related Ratios
| | | | | | | | | | | | |
(In thousands of dollars)
| | September 30, 2005
| | | December 31, 2004
| | | September 30, 2004
| |
Non-accrual loans | | $ | 273 | | | $ | 1,353 | | | $ | 1,373 | |
Loans 90 days or more past due | | | — | | | | 22 | | | | 13 | |
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| |
|
|
| |
|
|
|
Total non performing loans | | | 273 | | | | 1,375 | | | | 1,386 | |
Other real estate owned (“OREO”) | | | — | | | | 357 | | | | 475 | |
| |
|
|
| |
|
|
| |
|
|
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Total non performing assets | | $ | 273 | | | $ | 1,732 | | | $ | 1,861 | |
| |
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| |
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| |
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Allowance for loan losses to non performing assets | | | 2,707.7 | % | | | 399.9 | % | | | 368.6 | % |
Allowance for loan losses to non performing loans | | | 2,707.7 | % | | | 503.8 | % | | | 494.9 | % |
Non performing loans to total loans | | | 0.05 | % | | | 0.24 | % | | | 0.25 | % |
Allowance for loan losses to total loans | | | 1.25 | % | | | 1.23 | % | | | 1.25 | % |
Non performing assets to total assets | | | 0.04 | % | | | 0.25 | % | | | 0.28 | % |
Period end loans | | $ | 591,465 | | | $ | 564,597 | | | $ | 550,839 | |
Average loans (quarterly average) | | $ | 588,726 | | | $ | 549,220 | | | $ | 549,120 | |
Allowance for loan losses | | $ | 7,392 | | | $ | 6,927 | | | $ | 6,860 | |
Asset quality is strong as non-performing assets at September 30, 2005 of $273 thousand represent 0.05% of total assets.
Impaired Loan Detail
The Corporation’s policy for interest income recognition on nonaccrual loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligations of the Corporation. The Corporation will not recognize income if these factors do not exist.
21
| | | | | | | | | |
(In thousands of dollars)
| | September 30, 2005
| | December 31, 2004
| | September 30, 2004
|
Impaired loans | | $ | 273 | | $ | 1,353 | | $ | 1,373 |
Average year to date impaired loans | | | 1,002 | | | 794 | | | 598 |
Impaired loans with specific loss allowances | | | — | | | — | | | — |
Loss allowances reserved on impaired loans | | | — | | | — | | | — |
Year to date income recognized on impaired loans | | $ | 20 | | $ | 5 | | | 5 |
Non-Interest Income - Three months ended September 30, 2005
Non-interest income of $4.725 million for the three months ended September 30, 2005 increased 10.9% or $465 thousand from $4.260 million reported for the same period in 2004.
Fees for wealth management services increased $482 thousand or 19.4% from $2.490 million for the third quarter of 2004 to $2.972 million for the same period in 2005. The 19.4% increase is the result of new business development efforts, a strong contribution from the estate administration department and an increase in fees effective in the second quarter of 2005, partially offset by soft stock market conditions. The market value of assets under administration increased 20.6% to $2.205 billion as of September 30, 2005 compared with $1.829 billion as of September 30, 2004. This increase is partly a result of a business acquisition by a significant client.
The decline in service charges on deposit accounts of $36 thousand or 8.1% from $444 thousand to $408 thousand is primarily attributed to lower fees on commercial checking accounts due to the rise in the earnings credit that these customers receive in an increasing interest rate environment to pay for their services and the industry trend toward “free” checking.
Net gains on the sale of loans were $456 thousand for the third quarter of 2005, a 7.7% decrease from $494 thousand reported for the same quarter in 2004. Residential loan sales amounted to $38.6 million for the third quarter of 2005, a 28.7% increase from $30.0 million for the same quarter of 2004. The decline in revenues is primarily due to the reduction in the basis points earned on the sale of loans. The Corporation earned approximately 118 basis points on loans sold for the third quarter of 2005 compared to 165 basis points for the same period in 2004.
Income from loan servicing and late fees amounted to $321 thousand for the third quarter of 2005, an 11.1% decrease from the $361 thousand reported for the third quarter of 2004 due to lower loan servicing balances. As of September 30, 2005, the Bank serviced $438.2 million in loans for others, a 17.1% decrease from the $528.5 million in loans serviced as of September 30, 2004. The decline in loan servicing balances is due to normal payment activity and a higher percentage of mortgage production being sold with servicing released in 2005 compared to 2004.
Other operating income increased by $97 thousand or 20.6% for the third quarter of 2005, to $568 thousand compared with $471 thousand for the same period in 2004. This increase is partially due to revenues from title insurance activities resulting from an increase in mortgage originations during the quarter and increased insurance fee revenue.
Non-Interest Income - Nine months ended September 30, 2005
Non-interest income of $13.859 million for the nine months ended September 30, 2005 decreased 11.6% or $1.814 million from the $15.673 million reported for the same period in 2004. Excluding the gain on the sale of MSRs of $1.145 million in the first quarter of 2004, non-interest income decreased 4.6% or $669 million.
Fees for wealth management services increased $804 thousand or 10.3% from $7.789 million for the first nine months of 2004 to $8.593 million for the same period in 2005. The 10.3% increase is the result of solid new business development efforts, a strong contribution from the estate administration department and an increase in fees effective in the second quarter of 2005, partially offset by a soft stock market. As stated above, the market value of assets under administration increased 20.6% to $2.205 billion as of September 30, 2005 compared with $1.829 billion as of September 30, 2004.
The decline in service charges on deposit accounts of $197 thousand or 14.1% is primarily attributed to lower fees on commercial checking accounts due to the rise in the earnings credit that these customers receive to pay for their services in an increasing rate environment and the industry trend toward “free” checking.
Net gains on the sale of loans were $1.378 million for the first nine months of 2005, a 46.3% decrease from $2.568 million reported for the same period in 2004. Residential loan sales amounted to $102.8 million for the first nine months of 2005, a 17.2% decrease from $124.2 million for the same period of 2004. The Corporation earned approximately 134 basis points on loans sold for the first nine months of 2005 compared to 207 basis points for the same period in 2004.
22
During the first quarter of 2004, the Bank sold MSRs relating to $245 million of loans being serviced by the Bank which produced a net gain of $1.145 million. There was no such gain reported for the first nine months of 2005.
Income from loan servicing and late fees amounted to $999 thousand for the first nine months of 2005, a 21.5% decrease from $1.272 million reported for the first nine months of 2004. The decrease is due to reduced loan servicing balances partially resulting from the sale of MSRs in the first quarter of 2004, normal amortization and management’s decision, to sell a higher percentage of current period mortgage production servicing released.
Other operating income increased by $187 thousand or 12.5% for the first nine months of 2005 to $1.688 million compared with $1.501 million for the same period in 2004. This increase is partially due to the licensing of the Bank’s Sarbanes Oxley (“SOX”) 404 templates to other community banks and a gain on the sale of an OREO property in April 2005.
Non-Interest Expense – Three months ended September 30, 2005
Non-interest expense increased $459 thousand or 5.9% for the third quarter of 2005 to $8.187 million from $7.728 million for the third quarter of 2004.
Salaries and wages increased $779 thousand or 21.4%, from $3.635 million for the three months ended September 30, 2004 to $4.414 million for the same period in 2005. The increase of $779 thousand is due to higher incentive compensation, and an increase in staffing related to the staffing of the Exton Branch. Employee benefits expenses decreased $71 thousand or 6.6% from $1.069 million for the third quarter of 2004 to $998 thousand for the same period in 2005. Lower pension expense and lower post-retirement medical benefits, due to the limiting future increases in plan costs to 120% of the current benefit, are the primary drivers of this decline.
Occupancy expenses increased $33 thousand or 6.2%, and furniture, fixtures and equipment increased $61 thousand or 14.3% primarily due to the opening of the Exton branch in March of 2005. Amortization of MSRs decreased $38 thousand or 25% due to lower loan servicing balances.
Advertising expense decreased $69 thousand or 26.1% from $264 thousand for the third quarter of 2004 to $195 thousand for the third quarter of 2005. This decrease is due to timing and frequency of various advertising programs.
Professional fees decreased $159 thousand or 33.3% to $318 thousand in the third quarter of 2005 from $477 thousand in the third quarter of 2004. The decrease is primarily concentrated in consulting fees specifically related to SOX, partially offset by an increase in auditing fees.
Non-Interest Expense – Nine months ended September 30, 2005
Non-interest expense decreased $375 thousand or 1.6% for the first nine months of 2005 to $23.435 million from $23.810 million for the first nine months of 2004. Non interest expenses for the first nine months of 2005, excluding the $266 thousand of expenses associated with the sale of MSRs, decreased $109 thousand or 0.5% from the first nine months of 2004.
Salaries and wages increased $368 thousand or 3.3%, from $11.310 million for the nine months ended September 30, 2004 to $11.678 million for the same period in 2005. This increase is primarily due to higher incentives resulting from corporate performance and the opening of the Exton branch in March of 2005. This is partially offset by lower staffing levels and reduced part time and overtime payments. Employee benefits expenses decreased $200 thousand or 6.1% from $3.276 million for the first nine months of 2004 to $3.076 million for the same period in 2005. Reduced pension, retiree medical expense and payroll tax costs, partially offset by higher medical insurance premiums account for the decrease.
Occupancy expenses increased $79 thousand or 4.9%, and furniture, fixtures and equipment increased $136 thousand or 10.4% primarily due to the opening of the Exton branch in March 2005. Amortization of MSRs decreased $133 thousand or 20.6% due to the decline in the volume of mortgage servicing rights related the sale of the MSRs in March 2004 and the lower volume of mortgage loans sold servicing retained in the nine months of 2005 compared with 2004.
Professional fees decreased $268 thousand or 22.6% to $917 thousand in the first nine months of 2005 from $1.185 million for the first nine months of 2004. The decrease is primarily in consulting fees specifically related to SOX, partially offset by an increase in auditing fees.
Other operating expenses decreased $335 thousand or 8.9%, from $3.756 million for the first nine months of 2004 to $3.421 million for the first nine months of 2005. The decrease is primarily in computer processing fees and residential mortgage related expenses. The decrease is partially offset by increases in bank shares tax and security related costs.
23
Income Taxes
Income taxes from operations for the three months ended September 30, 2005 were $1.499 million compared to $1.050 million for the same period in 2004. This represents an effective tax rate for the three months ended September 30, 2005 of 34.3% and an effective tax rate of 33.2% for the same period in 2004.
Income taxes from operations for the first nine months of 2005 were $4.425 million compared to $3.775 million for the first nine months of 2004. This represents an effective tax rate of 34.3% for the nine months ended September 30, 2005 and an effective tax rate of 34.2% for the same period in 2004.
Balance Sheet Analysis
Total assets increased $10.1 million or 1.5% from $682.9 million as of December 31, 2004 to $693.0 million as of September 30, 2005. A decrease in overnight investments of $20.6 million was used to partially fund loan growth. Total loans increased $26.9 million or 4.8% to $591.5 million from $564.6 million over the past 9 months and average loans for the third quarter of 2005 increased $10.5 million or 1.8% to $588.7 million compared to $578.2 million in the second quarter of 2005. However, loan totals at September 30, 2005 are $2.5 million or 0.4% lower than June 30, 2005, due to increased liquidity by various commercial loan clients resulting in pay-downs of commercial loan totals, partially offset by increases in adjustable rate residential mortgages. The Corporation continues to focus its new business development efforts on loans to small to mid-size companies.
Total deposits grew $3.7 million or 0.6% over the past 9 months to $604.7 million at September 30, 2005 from $601 million at December 30, 2004. Total deposits declined $713 thousand from June 30, 2005 due to seasonality and higher non-interest bearing balances at the end of the second quarter. Average deposits for the third quarter of 2005 increased $9.3 million or 1.6% to $603.3 million compared to $594.0 million in the second quarter of 2005. Continued expansion of the retail banking footprint is anticipated with controlledde novo expansion in the suburban Philadelphia market. The two recently opened retail branch locations in Exton and Newtown Square are gaining market share and performing better than projected. Due to the highly competitive nature of the financial services business, the Corporation anticipates that interest bearing accounts will make up a greater share of total deposits than they have historically.
As of September 30, 2005 the Corporation holds notes receivable totaling $1.166 million from the purchaser of the assets of JWR&Co. In October, 2005 a line of credit totaling $195 thousand was paid off thereby reducing the notes receivable to $971 thousand. These notes bear interest at 6.00% and have various payments and due dates. The balance on these notes was $1.286 million as of December 31, 2004. Management anticipates that these notes will be collected in accordance with the terms of the notes. See discussion of discontinued operations and critical accounting policies in Management’s discussion and analysis of the Corporation’s 2004 Form 10-K for additional information. These notes receivable are included on the Corporation’s consolidated balance sheet in commercial loans.
Capital
Consolidated shareholder’s equity of the Corporation was $75.8 million or 10.9% of total assets, as of September 30, 2005, compared to $71.2 million or 10.4% of total assets, as of December 31, 2004. The following table presents the Corporation’s and Bank’s capital ratios and the minimum capital requirements to be considered “Well Capitalized” by regulators as of September 30, 2005 and December 31, 2004:
| | | | | | |
| | Ratio
| | | Minimum Ratio to be Well Capitalized
| |
September 30, 2005: | | | | | | |
Total (Tier II) Capital to Risk Weighted Assets | | | | | | |
Consolidated | | 12.75 | % | | 10 | % |
Bank | | 11.72 | % | | 10 | % |
Tier I Capital to Risk Weighted Assets | | | | | | |
Consolidated | | 11.62 | % | | 6 | % |
Bank | | 10.58 | % | | 6 | % |
Leverage Ratio (Capital to Total Assets) | | | | | | |
Consolidated | | 10.94 | % | | 5 | % |
Bank | | 9.96 | % | | 5 | % |
December 31, 2004: | | | | | | |
Total (Tier II) Capital to Risk Weighted Assets | | | | | | |
Consolidated | | 12.33 | % | | 10 | % |
Bank | | 11.09 | % | | 10 | % |
Tier I Capital to Risk Weighted Assets | | | | | | |
Consolidated | | 11.24 | % | | 6 | % |
Bank | | 9.99 | % | | 6 | % |
Leverage Ratio (Capital to Total Assets) | | | | | | |
Consolidated | | 10.43 | % | | 5 | % |
Bank | | 9.26 | % | | 5 | % |
24
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.
Liquidity
The Corporation manages its liquidity position on a daily basis as part of the daily settlement function and monthly as part of the asset liability management process. The Bank’s liquidity is maintained by managing its core deposits as the primary source, and purchasing federal funds, selling loans in the secondary market, borrowing from the FHLB and selling securities as its secondary sources. Availability with the FHLB was approximately $220 million as of September 30, 2005. Overnight Fed Funds lines consist of lines from five banks totaling $29.0 million. Quarterly, ALCO reviews the Corporation’s liquidity needs and reports its findings to the Risk Management Committee of the Bank’s Board of Directors. As of September 30, 2005, the Bank did not have any funds borrowed from the FHLB or in overnight Fed Funds.
Off Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at September 30, 2005 were $294.702 million.
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30, 2005 amounted to $11.407 million.
Estimated fair values of the Corporation’s off-balance sheet instruments 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 the estimated fair value of off-balance sheet instruments.
Contractual Cash Obligations of the Corporation as of September 30, 2005:
| | | | | | | | | | | | | | | |
(In thousands)
| | Total
| | Within 1 Year
| | 2 - 3 Years
| | 4 - 5 Years
| | After 5 Years
|
Deposits without a stated maturity | | $ | 467,395 | | $ | 467,395 | | | | | | | | | |
Consumer certificates of deposit | | $ | 137,262 | | | 106,903 | | | 29,807 | | | 398 | | | 154 |
Operating leases | | | 20,198 | | | 785 | | | 1,488 | | | 1,483 | | | 16,442 |
Purchase obligations | | | 2,017 | | | 952 | | | 771 | | | 256 | | | 38 |
Non-discretionary pension contributions | | | — | | | — | | | — | | | — | | | — |
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Total | | $ | 626,872 | | $ | 576,035 | | $ | 32,066 | | $ | 2,137 | | $ | 16,634 |
Section 404 of Sarbanes Oxley Act of 2002
The Corporation and its Management completed compliance procedures relating to Section 404 of the Sarbanes Oxley Act of 2002 (SOX 404) for the fiscal year ended December 31, 2004 as documented in the Corporation’s Form 10-K. Management continues to devote considerable effort in 2005 to assure compliance with all aspects of SOX 404 by December 31, 2005. Consulting and professional fees relating to this compliance amounted to approximately $470 thousand for 2004.
25
Other Information
Opening of New Full Service Branch Offices in Newtown Square and Exton
During the first quarter of 2004, the Bank established a new full service branch office in Newtown Square, Pennsylvania, thereby enabling the Bank to both broaden and strengthen its footprint in Delaware County, Pennsylvania. This new branch had deposits of $22.2 million as of September 30, 2005. In March of 2005, the Bank established a new full service branch in Exton, Pennsylvania. The Exton branch had deposits of $5.8 million as of September 30, 2005. The Bank anticipates measured expansion of its branch footprint over the next few years.
Regulatory Matters and Pending Legislation
Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, an impact on the Corporation’s results of operations.
Federal law currently requires that the FDIC increase assessment rates if the reserve ratio of the FDIC’s Bank Insurance Fund (“BIF”) were to fall below 1.25%. Such increased assessments would be required to be designed to restore the BIF reserve ratio to at least 1.25% within twelve months. At present, Management cannot be sure whether the BIF reserve ratio will be above or below the minimum required level or whether Congress will enact legislation that would change the requirement that the FDIC increase assessment rates. Management also cannot predict at this time what the Bank’s assessment for FDIC insurance premiums would be if the FDIC is required to increase assessment rates in 2006, because the premiums would be based upon the FDIC’s analysis of the level of fees that would be necessary to bring the BIF into compliance.
Effects of Inflation
Inflation has some impact on the Corporation’s operating costs. Unlike many industrial companies, however, substantially all of the Corporation’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
Effect of Government Monetary Policies
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.
The Corporation is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Corporation’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation cannot be predicted.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
There has been no material change in the Corporation’s assessment of its sensitivity to market risks since its presentation in the 2004 Annual Report and Form 10-K filed with the Securities and Exchange Commission (“SEC”).
Item 4. | CONTROLS AND PROCEDURES |
As of the end of the period covered by the report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer, Frederick C. Peters II, and Chief Financial Officer, J. Duncan Smith, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings.
26
There have not been any changes in the Corporation’s internal controls over financial reporting during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
27
PART II OTHER INFORMATION.
Item 1. | Legal Proceedings. |
None.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
During the third quarter of 2005, the Corporation maintained, and continues to maintain, one stock repurchase program. The following table presents the repurchasing activity of this program during the third quarter of 2005:
| | | | | | | | |
Period
| | Total Number of shares Purchased
| | Average Price Paid per Share
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
| | Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs
|
July 1, 2005 - July 31, 2005 | | None | | — | | — | | 48,994 |
August 1, 2005 – August 31, 2005 | | None | | — | | — | | 48,994 |
September 1, 2005 – September 30, 2005 | | None | | — | | — | | 48,994 |
| |
| |
| |
| |
|
Total | | — | | — | | — | | 48,994 |
| |
| |
| |
| |
|
Notes to this table:
On October 17, 2002 the Board of Directors of the Corporation authorized a stock repurchase program, effective in January 2003. This stock repurchase program is the only stock repurchase program presently in effect (the “Program”). This Program was publicly announced in a press release, also issued on October 17, 2002.
The Corporation was authorized to repurchase an amount of Corporation stock, not to exceed the lesser of $7,500,000 or 4% of the then outstanding shares of common stock, which, after the effect of the two-for-one stock split, effective October 1, 2003, amounted to 348,094 shares. During 2005, under the Program, the Corporation repurchased 85,500 shares of Corporation stock, having an average cost of $19.29 per share.
There is no expiration date on the Program.
The Corporation presently has no plans for an early termination of the Program.
All shares were purchased through the Program and were accomplished in open-market transactions.
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Submission of Matters to Vote of Security Holders |
None
None
28
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| | | | Bryn Mawr Bank Corporation |
| | | |
Date: November 8, 2005 | | | | By: | | /s/ FREDERICK C. PETERS II |
| | | | | | | | Frederick C. Peters II |
| | | | | | | | President & Chief Executive Officer |
| | | |
Date: November 8, 2005 | | | | By: | | /s/ J. DUNCAN SMITH |
| | | | | | | | J. Duncan Smith |
| | | | | | | | Treasurer and Chief Financial Officer |
29
Form 10-Q
Index to Exhibits
| | | | |
Exhibit 31.1 | | - | | Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a). |
| | |
Exhibit 31.2 | | - | | Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a). |
| | |
Exhibit 32.1 | | - | | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
Exhibit 32.2 | | - | | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Form 10-Q
30