EXHIBIT 13 BRYN MAWR BANK CORPORATION ANNUAL REPORT 1995 Contents Consolidated Financial Highlights . 1 Chairman's Letter ................. 3 Selected Financial Data ........... 9 Management's Discussion and Analysis ...................... 10 Consolidated Balance Sheets ....... 22 Consolidated Statements of Income ......................... 23 Consolidated Statements of Cash Flows ..................... 24 Consolidated Statements of Changes in Shareholders' Equity ... 25 Notes to Consolidated Financial Statements .............. 26 Report of Independent Accountants ....................... 35 Corporate Information ............. 36 CONSOLIDATED FINANCIAL HIGHLIGHTS FIVE-YEAR COMPOUND For the year 1995 1994 CHANGE GROWTH RATE - ------------ ---- ---- ------ ----------- (dollars in thousands) Net interest income........................................ $16,371 $15,301 7% 2% Other income............................................ 9,197 8,383 10 11 Other expenses.......................................... 18,325 17,535 5 2 Net income.............................................. 4,643 4,049 15 51 At year-end (dollars in thousands) Total assets............................................... $354,956 $333,180 7% 3% Total net loans......................................... 231,701 225,120 3 3 Total deposits.......................................... 317,601 301,337 5 3 Shareholders' equity.................................... 31,903 27,146 18 6 Per common share Net income................................................. $ 2.08 $ 1.85 12% 49% Dividends declared...................................... 0.50 0.325 54 -5 Book value.............................................. 14.57 12.41 17 6 Closing price........................................... 26.00 15.875 64 29 Selected ratios Return on average assets................................ 1.39% 1.26% Return on average shareholders' equity.................. 15.79 15.70 Our foundation is service quality... clearly distinguished service to all we encounter. [PHOTO APPEARS HERE] 1995 LEFT: Bill Mannion of BMT Mortgage Company with Walter Smedley (standing) and Vicki Quinn of Member Banking Credit Services Dear Shareholder: The Company, at year-end 1991 -- four years ago -- had been severely battered by bad loans. Our delinquent loan levels had approached the size of our net worth. According to Bill Issac, then head of the FDIC, the single, most reliable measure of bank failure was that of delinquencies exceeding net worth. That year, we wrote down one quarter of our net worth. By year end, we had reduced our staff to 200 from 254 two years earlier. About one in four employees in the Bank -- excluding the Trust Division -- had lost their jobs. During the fourth quarter of 1991, our stock hit a low of $3.25 a share, based on today's split-adjusted shares. Our existence as an independent institution was in danger. As I write this, a little over four years later, the Bank has more than recovered from the dark days. The bedrock of its well-being is better understood, and the ways to build upon that well-being much more clearly seen. Our foundation is service quality:the capture within our souls of a passion everyday to provide satisfying, clearly distinguished service to all we encounter, inside the Bank and out. We've developed our information processing capabilities -- a process which has no end in sight -- as we work to stay abreast, in appropriate ways, with technological change. We're improving the ways we find, correctly underwrite, and properly service borrowers. Our commercial cash management program is first-rate. And we've devoted important attention and resource to developing our critical revenue sources -- our investment management and fiduciary services -- which distinguish us from all but a few in the banking business. The satisfaction in our recovery comes, though, not from what we are today, but from the knowledge that we're well-equipped to continue our journey. LEFT: Peter Havens, Head of our Trust Division. [PHOTO APPEARS HERE] RIGHT: Commercial Lender Bill Fink and June Falcone of Banking Operations call on Pete Riley (left) and Bill Riley of Joseph W. Riley Company I'm proud indeed of just how far we've come from the difficult days of 1991, and I know that we're moving solidly ahead. Though we'll never reach a summit because there really isn't one, it's the quality of the journey we're on that counts. All that now said, here's how we did last year. Net income in 1995 -- $4.6 million or $2.08 per share -- was up 15%, from $4.0 million or $1.85 per share. The per share amounts for 1995 included the effect of adding common stock equivalents to the weighted average outstanding common shares for the year. When their effect is dilutive to earnings per share, common stock equivalents, consisting of certain shares subject to options, are added to the weighted average outstanding common shares. Lending revenues improved -- total interest income increased $3.2 million, from $20.4 million in 1994 to $23.6 million in 1995. We also enjoyed greater fees for services -- other income increased $800,000. Partially offsetting these gains were a $2.2 million increase in interest expense, $800,000 more in noninterest operating expenses, and a $500,000 jump in income taxes. So, net income grew $600,000 in 1995. All in all, net interest income gained 7% and fee-based other income was up 10%, while noninterest expense, excluding the loan loss provision and income taxes, increased 5%. Nonperforming assets stood at $4.4 million, up 4% from the levels at year-end 1994. Although nonperforming loans decreased, other real estate owned (OREO) balances increased more than enough to offset that decline. We took two steps which increased OREO. Capitalizable costs of $193,000 were added to an OREO property which has been for sale -- we hold a pending agreement -- and we acquired a participant's share in another OREO property for $404,000. The quality of the loan portfolio is excellent. Delinquencies, 30 days or longer, overall, were .9% of loans outstanding at year end. In recognition of the good year and based on solid capital levels, the March 1, 1996, regular quarterly dividend was increased 20%. Though the dividend increase outpaced the earnings gain, our payout ratio (dividend paid to net income) was 24% in 1995. We can, therefore, stand some modest increase in the dividend payout beyond the gain in net income. We're improving the ways we find, correctly underwrite, and properly service borrowers [PHOTO APPEARS HERE] Our investment management andfiduciary services . . . distinguish us from all but a few in the banking business. [PHOTO APPEARS HERE] LEFT: Rich Sichel, Forrest Mervine and Betty [PHOTO APPEARS HERE] Taylor of Investment Counselors of Bryn Mawr. RIGHT: Amanda Bedford at the trading desk in Trust Investments Now, let's review 1995 and look over a list of some of the year's highlights: * In January, we signed an agreement to modernize our information processing system. After considerable effort by many, we converted to the new system in February of this year. * We joined several other local banks in the Suburban Community Bank Council, which helps low income men and women acquire first homes. * I hosted a retiree luncheon, a personal highlight for me! * Member Bankers visited the Barnes Foundation exhibit at the Philadelphia Museum of Art. * We opened a limited-service office at Beaumont, a retirement community in Bryn Mawr. * We acquired two new IBM AS/400 computers. * Peter Havens joined the Bank to head the Trust Division, and we initiated our Family Office service. * We held our first Family Office Forum, a series of seminars and workshops designed to help families with wealth better deal with interpersonal issues, charitable giving, and wealth transfer. The forums continue. * We held two free open air concerts on Ludington Library's lawn. It was our 15th year of sponsoring these concerts. * Walter Smedley and Vicki Quinn joined the Bank as Member Banking lenders. They specialize in lending to high net worth individuals and families. * At One Tower Bridge in West Conshohocken, we opened a facility featuring an automated teller machine and a part-time representative. * Joe Bachtiger was installed as president of the National Association of Estate Planning Councils, a high honor well-deserved. * We introduced Tel-A-Loan, a state-of-the-art loan system that makes applying for a car loan, line of credit, or home equity loan as close as your phone. * We split the stock, two-for-one, in December. * We established Investment Counselors of Bryn Mawr, a department of our Trust Division, in offices at Two Tower Bridge, Conshohocken, to provide investment management services to high net worth individuals and employee benefit plans. Rich Sichel, chief investment officer, and two "new-to-us" professionals, Forrest Mervine and Betty Taylor, are its managing directors. * We were delighted that Bill Harral, president and chief executive officer of Bell Atlantic-Pennsylvania, joined the boards. Bill has already proved to be a wonderful addition and a real boost to the Corporation's well-being. * The Investment Department's record of superior performance was highlighted during 1995 with its Qualified Equity Fund's total return of 40.0% (compared to a return of 37.6% for the Standard and Poor's 500). For the last three years, The Bryn Mawr Trust has ranked in the First Quartile of six hundred investment managers according to Indata, a nationally recognized monitor of investment manager performance. [PHOTO APPEARS HERE] As time passes -- I've been at the Bank now for 35 years, the last 16 as its CEO - -- I become ever more aware of the importance of quality talent. I feel, every day, blessed to have so many extraordinary men and women in our midst. Every job around here demands perfection in its execution. We all must be constantly stretched, challenged, and charged to move along effectively, keeping our service levels truly exceptional while managing costs well. Uninspired folks don't do those things very well, if at all. I'm enormously grateful to those here who, together, make us the exceptional business we really are. They are the ones who create the goodness we so enjoy. And, we continue to be fully committed to the concept and practice of equal opportunity in all aspects of employment, and our resolve to provide a workplace free of discrimination remains steadfast. We'll keep on working to exceed service expectations of prospects and customers, keeping in mind that all we do, in the end, is for the benefit of our shareholders. I hope that you'll call if ever you have a question about what we're doing here, or if we could be of service to you or any of your family. We'll provide "simply the best service you'll ever find in a bank." Sincerely, /s/ Robert L. Stevens Robert L. Stevens Chairman March 1, 1996 SELECTED FINANCIAL DATA (in thousands, except for share and per share data) For the years ended December 31 1995 1994 1993 1992 1991 ------------------------------------------------------------------ Interest income............................... $ 23,617 $ 20,378 $ 19,495 $ 21,316 $ 23,785 Interest Expense.............................. 7,246 5,077 5,823 7,683 11,527 Net interest income........................... 16,371 15,301 13,672 13,633 12,258 Loan loss provision........................... 500 500 500 725 7,459 ------------------------------------------------------------------ Net interest income after loan loss provision. 15,871 14,801 13,172 12,908 4,799 Other income.................................. 9,197 8,383 9,786 7,979 6,430 Other expenses................................ 18,325 17,535 17,670 17,101 19,367 ------------------------------------------------------------------ Income (loss) before income taxes, extraordinary credit and cumulative effect of accounting change..... 6,743 5,649 5,288 3,786 (8,138) Applicable income taxes (benefit)............. 2,100 1,600 1,401 813 (2,695) ------------------------------------------------------------------ Income (loss) before extraordinary credit and cumulative effect of accounting change..... 4,643 4,049 3,887 2,973 (5,443) Extraordinary credit.......................... -- -- -- 250 -- Cumulative effect of accounting change........ -- -- (175) -- -- ------------------------------------------------------------------ Net income (loss)............................. $ 4,643 $ 4,049 $ 3,712 $ 3,223 $ (5,443) ================================================================== Per share data: Earnings (loss)............................ $ 2.08 $ 1.85 $ 1.71 $ 1.48 $ (2.51) Dividends declared......................... $ 0.50 $ 0.325 $ 0.20 -- $ 0.30 Weighted average shares outstanding,....... 2,233,898 2,183,900 2,176,446 2,170,588 2,170,220 (including common stock equivalents in 1995) (in thousands) At December 31 1995 1994 1993 1992 1991 ------------------------------------------------------------------ Total assets.................................. $ 354,956 $333,180 $320,942 $ 302,939 $ 292,929 Earning assets................................ 314,089 298,385 287,945 263,215 248,386 DEPOSITS...................................... 317,601 301,337 291,074 276,185 269,828 Shareholders' equity.......................... 31,903 27,146 24,627 21,320 18,065 For the years ended December 31 1995 1994 1993 1992 1991 ================================================================== Selected financial ratios: Net income (loss) to: Average total assets....................... 1.39% 1.26% 1.23% 1.13% (1.86)% Average shareholders' equity............... 15.79% 15.70% 16.37% 16.41% (24.74)% Average shareholders' equity to average total assets.................... 8.79% 8.06% 7.51% 6.91% 7.52% Dividends declared per share to net income per share....................... 24.04% 17.52% 11.73% -- -- Per share data and weighted average shares outstanding have been restated to reflect the 2-for-1 stock split, effective on December 29, 1995. MANAGEMENT'S DISCUSSION AND ANALYSIS The following is a discussion of the consolidated results of operations of Bryn Mawr Bank Corporation (the "Corporation") for each of the three years in the period ended December 31, 1995, as well as the financial condition of the Corporation as of December 31, 1995 and 1994. The Bryn Mawr Trust Company (the "Bank") is a wholly-owned subsidiary of the Corporation. This discussion should be read in conjunction with the Corporation's consolidated financial statements beginning on page 22. RESULTS OF OPERATIONS OVERVIEW The Corporation declared a 2-for-1 stock split, effective December 29, 1995. All share and per share data have been restated to reflect the effect of the 2-for-1 stock split. The Corporation reported net income of $4,643,000, or $2.08 per share, including the dilutive effect of common stock equivalents, for the year ended December 31, 1995. The year 1995 was a record year for Corporation earnings, surpassing 1989's record earnings of $4,077,000. Net income for 1995 represented a 15% increase over net income for 1994 of $4,049,000, or $1.85 per share. These record results for 1995 are primarily due to a 7% increase in net interest income in 1995, a 10% increase in other income, while other expenses were held to a 5% increase over 1994 levels. Continued improvement in asset quality and growth in earning assets, along with the establishment of the Trust division's family office operation in 1995 played a significant role in the growth of both net interest income and non-interest revenue streams in 1995 compared to 1994 levels. Both return on average assets and return on average equity increased over those reported for 1994. Return on average assets for the year increased to 1.39% from 1.26% in 1994, while return on average equity for 1995 was 15.79% compared to 15.70% in 1994. [GRAPHIC APPEARS HERE] During 1995, the Corporation declared and paid a $0.50 per share dividend, a 54% increase over the $0.325 per share dividend declared and paid in 1994. The dividend payout ratio for 1995 amounted to 24.04% of earnings per share, an increase from the dividend payout ratio of 17.52% for 1994. EARNINGS PERFORMANCE Lines of Business The Corporation continues to have three significant business lines from which it derives its earnings. Its core business, that is the banking business, has been the keystone of the Corporation's success over the years. Additional earnings streams are received from its trust line of business and, in more recent years, its mortgage banking line of business, the origination, sale and servicing of mortgage loans to the secondary mortgage market. Following is a segmentation analysis of the results of operations for those lines of business for 1995 and 1994: TABLE 1 - Lines of Business Analysis 1995 ------------------------------------------- MORTGAGE (dollars in thousands) BANKING TRUST BANKING CONSOLIDATED ------------------------------------------- Net interest income after loan loss provision ........ $15,391 $ -- $ 480 $15,871 Other income ................... 2,514 5,496 1,187 9,197 Other expenses ................. 14,056 3,413 728 18,197 ------------------------------------------- Operating profit ............... $ 3,849 $ 2,083 $ 939 $ 6,871 ------- General corporate expenses ..... -- -- -- 128 ------- Income before income taxes ..... -- -- -- $ 6,743 -------- % of consolidated operating profit 56% 30% 14% 100% 1994 ------------------------------------------- MORTGAGE (dollars in thousands) BANKING TRUST BANKING CONSOLIDATED ------------------------------------------- Net interest income after loan loss provision ........ $14,557 $ -- $ 244 $14,801 Other income ................... 2,627 4,719 1,037 8,383 Other expenses ................. 13,763 2,917 685 17,365 ------------------------------------------- Operating profit ............... $ 3,421 $ 1,802 $ 596 $ 5,819 ------------------------------------------- General corporate expenses ..... -- -- -- 170 Income before income taxes and cumulative effect of accounting change ............ -- -- -- $ 5,649 ------------------------------------------- % of consolidated operating profit 59% 31% 10% 100% The table reflects operating profits of each line of business before income taxes and, in 1993, the cumulative effect of an accounting change. Compared to 1994, all three segments of the Bank's lines of business showed healthy increases in operating profits. A significant increase in the amount of residential mortgage loans sold in the secondary mortgage market in 1995, compared to 1994, is the main reason for the increase in the mortgage banking percentage of operating profits to 14% from 10% in 1994. This increase in the mortgage banking segment's percentage of operating profits is also responsible for the declines in both the banking and trust segments' percentages of consolidated operating profits in 1995, compared to 1994, from 59% to 56% and 31% to 30%, respectively. BANKING LINE OF BUSINESS For most of 1995, the Bank's prime rate of interest increased over the prime rate as of December 31, 1994. The prime rate did decrease 50 basis points, 25 basis points in July 1995 and again late in the fourth quarter of 1995, ending the year at 8.5%. Much of the Bank's earning assets have rates of interest that are directly related to the prime rate. Therefore, a 6% increase in the Corporation's earning assets, along with an increase in the related rates of interest, tied to the prime rate, partially offset by a 59% increase in the Bank's higher costing certificates of deposit were the main reasons for a 6% increase in net interest income after loan loss provision in 1995, compared to 1994. An expanded discussion of net interest income follows under the section entitled "Net Interest Income." Other income decreased by 4% in 1995 compared to 1994. This was due primarily to a decrease in gains on the sale of other real estate owned ("OREO") in 1995 compared to 1994. During 1994, the Corporation disposed of $681,000 in OREO, realizing related gains of $294,000 compared to $278,000 sold in 1995, generating gains of $137,000. Exclusive of the $157,000 decrease in OREO gains from 1994 levels, other income in the banking line of business increased 2%. Total other expenses of the banking line of business increased 3% in 1995 compared to 1994 levels. Overall, the operating profits of the banking line of business increased 12% in 1995 compared to 1994. TRUST LINE OF BUSINESS The Bank's Trust Division reported a 16% increase in operating profit for 1995 compared to 1994 levels. Total trust fee income rose 16% in 1995. This was partially due to a 30% increase in the market value of assets managed, from $799,846,000 at December 31, 1994, to $1,039,804,000 as of December 31, 1995, as well as new revenue streams generated by the establishment of the family office operation in May 1995. [GRAPHIC APPEARS HERE] Other expenses of the Trust segment increased 17% in 1995 over 1994 levels. During 1995, in conjunction with the establishment of the family office operation, a Trust division incentive bonus, directly related to the overall profitability of the Trust division, was implemented. Based on the parameters established in this plan, a Trust division incentive bonus of $173,000 was included in other expenses for 1995. Also included in the Trust divisions other expenses for 1995 was the cost of administering the family office operation. Exclusive of the Trust incentive expense and the cost of the family office operation, Trust other expenses rose 9% in 1995 over 1994 levels. MORTGAGE BANKING LINE OF BUSINESS The operating profit of the Bank's mortgage banking segment increased 58% in 1995 compared to 1994. Mortgage interest rates increased sharply during 1994, making refinancing less attractive to borrowers. In 1995, mortgage banking rates began to decrease and the Bank was able to take advantage of the renewed interest in refinancing, thereby increasing both the volume of loans sold in the secondary mortgage market by 73% as well as the related loan fee and net gains on sales by 55%. As a result of this loan sale activity, as of December 31, 1995, the Bank serviced $203,934,000 in mortgage loans for others, an 18% increase over $172,108,000 in loans serviced for others at year end 1994. Following is a table showing the volume of mortgage loans originated and sold in the secondary mortgage market, the total loan fees and net gains realized, and the yield on these loan sales: TABLE 2: Summary of Loan Sale Activity (dollars in thousands) 1995 1994 --------------------- Volume of loans sold ............ $ 67,826 $ 39,109 Loan fees and net gains on sales $ 918 $ 591 Yield on sales .................. 1.35% 1.51% Other expenses of the Bank's mortgage banking segment increased 6% in 1995 compared to 1994 levels. [GRAPHIC APPEARS HERE] NET INTEREST INCOME A 16%, or $3,239,000, increase in interest income, partially offset by a 43%, or $2,169,000 increase in interest expense from year to year resulted in an overall increase in net interest income of 7% or $1,070,000. Growth in both average earning assets and the overall yield on earning assets in 1995, compared to 1994, contributed to the growth in interest income. A 59% increase in average outstanding certificates of deposit, primarily higher rate Premier CDs, offered during the first quarter of 1995, was responsible for the related increase in interest expense for 1995 compared to 1994 levels of interest expense. The Bank's net interest margin, defined as net interest income exclusive of loan fees as a percentage of average earning assets, remained level at 5.21% for both 1995 and 1994. TABLE 3 - Analyses of Interest Rates and Interest Differential The following table shows an analysis of the composition of net interest income for each of the last three years. Interest income on loans includes fees on loans of $798,000, $564,000 and $927,000 in 1995, 1994 and 1993, respectively. The average loan balances include nonaccrual loans. All average balances are calculated on a daily basis. Yields on investment securities are not calculated on a tax-equivalent basis. 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE INTEREST RATES INTEREST RATES INTEREST RATES AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/ (dollars in thousands) BALANCE EXPENSE PAID BALANCE EXPENSE PAID BALANCE EXPENSE PAID - --------------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks ......... $ 19,275 $ -- --% $ 22,474 $ -- --% $ 21,784 $ -- --% Interest-bearing deposits with other banks* .............. 108 8 7.4 422 12 2.8 532 15 2.8 Federal funds sold* ............. 13,658 813 6.0 6,839 261 3.8 11,305 343 3.0 Investment securities available for sale: Taxable* ...................... 48,502 2,562 5.3 59,717 2,899 4.9 53,799 2,647 4.9 Tax-exempt* ................... 11,905 607 5.1 13,498 708 5.2 13,593 749 5.5 ----------------------------------------------------------------------------------- Total investment securities ... 60,407 3,169 5.2 73,215 3,607 4.9 67,392 3,396 5.0 ----------------------------------------------------------------------------------- Loans* .......................... 225,656 19,627 8.7 202,177 16,498 8.2 183,792 15,741 8.6 Less allowance for loan losses .. (3,897) -- -- (3,734) -- -- (3,699) -- -- ----------------------------------------------------------------------------------- Net loans ....................... 221,759 19,627 8.9 198,443 16,498 8.3 180,093 $15,741 8.7 Other assets .................... 19,184 -- -- 18,694 -- -- 20,690 -- -- ----------------------------------------------------------------------------------- Total assets .................... $334,391 $23,617 -- $320,087 $20,378 -- $301,796 $19,495 -- =================================================================================== Liabilities: Demand deposits, noninterest-bearing ........... $ 68,654 $ -- --% $ 65,976 $ -- -- % $ 60,390 $ -- --% Savings deposits ................ 161,744 3,487 2.2 179,900 3,540 2.0 168,066 4,126 2.5 Time deposits ................... 68,328 3,754 5.5 42,925 1,512 3.5 44,767 1,697 3.8 FEDERAL FUNDS PURCHASED ......... 89 5 5.6 469 25 5.3 -- -- -- Other liabilities ............... 6,175 -- -- 5,022 -- -- 5,894 -- -- ----------------------------------------------------------------------------------- Total liabilities ............... 304,990 7,246 -- 294,292 5,077 -- 279,117 5,823 -- Shareholders' equity ............ 29,401 -- -- 25,795 -- -- 22,679 -- -- ----------------------------------------------------------------------------------- Total liabilities and shareholders' equity ............ $ 334,391 $7,246 -- $ 320,087 $ 5,077 -- $301,796 $ 5,823 -- =================================================================================== Total earning assets* ......... $ 299,829 -- -- $ 282,653 -- -- $263,021 -- -- Interest income to earning assets .. -- -- 7.9 -- -- 7.2 -- -- 7.4 Interest expense to earning assets . -- -- 2.4 -- -- 1.8 -- -- 2.2 Net yield on interest-earning assets ......................... -- -- 5.5 -- -- 5.4 -- -- 5.2 Average effective rate paid on interest-bearing liabilities ... -- -- 3.1 -- -- 2.3 -- -- 2.7 *Indicates earning assets. The following table shows the effect of changes in volumes and rates on interest income and interest expense. Variances which were not specifically attributable to volume or rate were allocated proportionately between volume and rate. Interest income on loans included increases (decreases) in fees on loans of $234,000 in 1995, ($363,000) in 1994, and ($1,085,000) in 1993. Table 4 - Rate/Volume Analyses (in thousands) 1995 vs. 1994 1994 vs. 1993 - -------------------------------------------------------------------------------------- INCREASE/(DECREASE) VOLUME RATE TOTAL VOLUME RATE TOTAL - -------------------------------------------------------------------------------------- Interest Income: Interest-bearing deposits with other banks ............ $(13) $ 9 $ (4) $ (3) $ -- $ (3) Federal funds sold ...... 354 198 552 (157) 75 (82) Investment securities available for sale: Taxable ............... (577) 240 (337) 290 (38) 252 Tax-exempt ............ (82) (19) (101) (5) (36) (41) Loans ................. 1,996 1,133 3,129 1,518 (761)* 757 ------------------------------------------------------ Total interest income ................ 1,678 1,561 3,129 1,643 (760) 883 Interest expense: Savings deposits ....... (375) 322 (53) 272 (858) (586) Time deposits .......... 1,152 1,09 (68) (117) Federal funds purchased ............. (21) 1 (20) 25 -- 25 ------------------------------------------------------ Total interest expense . 756 1,413 2,169 229 (975) (746) ------------------------------------------------------ Interest differential .. $ 922 $148 $1,070 $1,414 $215 $1,629 ------------------------------------------------------ * Included in the loan rate variance was an increase in interest income related to non performing loans of $69,000 and $110,000 in 1995 and 1994, respectively. The variances due to rate include the effect of nonaccrual loans because no interest is earned on such loans. The 16% growth in interest income for 1995 was attributable to both a 6% increase in average earning assets over the prior year as well as an increase in the yield on average earning assets from 7.2% for 1994 to 7.9% for 1995, a 10% increase. Average earning assets for 1995 were $299,829,000 compared to $282,653,000 for 1994. The Bank's average outstanding balances in the loan portfolio increased 12%, average federal funds sold grew 100%, reflecting the investment of the proceeds derived from the Premier CD promotion discussed above. The average balance of the investment portfolio decreased 17%. As of December 31, 1995, outstanding loans increased 3%. The most significant loan growth came in commercial and industrial loans, up 24% over December 31, 1994 levels. Construction lending, which has had little activity in recent years grew 82% during 1995. Partially offsetting these increases were 7% and 5% decreases in the respective year end 1995 balances of residential permanent mortgage loans and consumer loans. Residential loan balances decreased due to the increase in the sale of residential loans in the secondary mortgage market referred to above. The decrease in consumer lending was due primarily to a reduction in short-term indirect automobile loan balances at year-end 1995 compared to 1994. Average deposits increased $9,925,000 or 3% during 1995. However, a change in the mix of average daily balances of deposits has caused a 43% increase in interest expense. As interest rates paid on the Bank's savings deposits, including market rate, NOW and savings accounts, remained relatively unchanged during 1995, depositors sought alternative investment opportunities. Average savings deposits decreased 10% in 1995, compared to similar 1994 average balances. During the first quarter of 1995, the Bank offered a Premier certificate of deposit at highly competitive rates of interest. The Bank's average certificate of deposit balances grew 59% over similar balances for 1994. This change in the mix of average deposit balances, away from lower costing savings deposits into higher costing CDs was responsible for the 43% increase in interest expense for 1995. The cost of funds for the Bank averaged 2.4% in 1995 compared to 1.8% in 1994. LOAN LOSS PROVISION The Bank provided a loan loss provision of $500,000 in both 1995 and 1994. The allowance for possible loan losses was $3,652,000 and $3,618,000 as of December 31, 1995 and 1994, respectively. The ratio of the loan loss reserve to nonperforming loans was 598% and 466% as of December 31, 1995 and 1994, respectively. Nonperforming loans amounted to $611,000 at December 31, 1995, a 21% decrease from $776,000 at December 31, 1994. The allowance for possible loan losses, as a percentage of outstanding loans, was 1.55% as of December 31, 1995, compared to 1.58% as of December 31, 1994. Bank management determined that the 1995 loan loss provision was sufficient to maintain an adequate level of the allowance for possible loan losses during 1995. A summary of the changes in the allowance for possible loan losses and a breakdown of loan loss experience by major loan category for each of the past five years follows: TABLE 5 - Allowance for Possible Loan Losses December 31 (dollars in thousands) 1995 1994 1993 1992 1991 ---------------------------------------------------- Allowance for possible loan losses: Balance, January 1 ....... $3,618 $3,601 $3,848 $6,012 $3,894 ---------------------------------------------------- Charge-offs: Commercial and industrial (527) -- (462) (145) (538) Real estate--construction -- (229) (37) (2,094) (3,778) Real estate--mortgage .. (8) (69) (11) (92) (674) Consumer ............... (234) (365) (388) (658) (536) - ------------------------------------------------------------------------------- Total charge-offs ..... (769) (663) (898) (2,989) (5,526) - ------------------------------------------------------------------------------- Recoveries: Commercial and industrial 236 115 94 25 101 Real estate--construction -- -- -- -- 28 Real estate--mortgage .. 13 20 -- -- 1 Consumer ............... 54 45 57 75 55 - ------------------------------------------------------------------------------- Total recoveries ...... 303 180 151 100 185 - ------------------------------------------------------------------------------- Net charge-offs ...... (466) (483) (747) (2,889) (5,341) Provision for loan losses 500 500 500 725 7,459 - ------------------------------------------------------------------------------- Balance, December 31 .... $3,652 $3,618 $3,601 $3,848 $6,012 - ------------------------------------------------------------------------------- Net charge-offs to average loans .......... 0.2% 0.2% 0.4% 1.6% 2.7% - -------------------------------------------------------------------------------- TABLE 6 - Allocation of the Allowance for Possible Loan Losses The table below allocates the balance of the allowance for possible loan losses by loan category and the corresponding percentage of loans to total loans for each loan category for the last five years: December 31 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- % LOANS % LOANS % LOANS % LOANS % LOANS TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL (dollars in thousands) LOANS LOANS LOANS LOANS LOANS - --------------------------------------------------------------------------------------------------------------------------- Balance at end of period applicable to: Commercial and industrial ... $1,295 28.7% $1,289 23.9% $1,144 26.0% $1,335 26.5% $1,667 21.7% Real estate--construction ... 648 3.8 273 2.1 411 4.9 924 7.4 2,273 17.0 Real estate--mortgage ....... 259 36.4 332 40.4 297 41.0 120 36.4 146 34.2 Consumer .................... 619 31.1 680 33.6 552 28.1 460 29.7 372 27.1 Unallocated ................. 831 -- 1,044 -- 1,197 -- 1,009 -- 1,554 -- - ---------------------------------------------------------------------------------------------------------------------------- Total .................... $3,652 100.0% $3,618 100.0 % $3,601 100.0% $3,848 100.0% $6,012 100.0% ============================================================================================================================ The loan loss reserve allocation reflects a reserve based on specific loan loss reserve allocations on loans reviewed individually as well as an average historical loan write-off percentage for loans in each specific loan category not individually reviewed and is also increased by an additional percentage to reflect current market conditions. Refer to page 19 for further discussion of the Corporation's loan review process. OTHER INCOME The following table details other income for the years ended December 31, 1995 and 1994, and the percent change from year to year: TABLE 7 - Other Income 1995 1994 % CHANGE - ------------------------------------------------------------------------- Fees for trust services $5,496 $4,719 16% Service charges on deposit accounts 1,049 1,068 (2) Other fees and service charges 1,240 1,192 4 Net gain on sale of loans 479 386 24 Gain on sale of other real estate owned 137 294 (53) OREO revenues 353 319 11 Other operating income 443 405 9 - ------------------------------------------------------------------------- Total other income $9,197 $8,383 10% - ------------------------------------------------------------------------- In addition to net interest income, the Bank's three operating segments generate various fee-based income, including Trust income, service charges on deposit accounts, as well as loan servicing income and gains/losses on loan sales. As discussed in the "Lines of Business" section on pages 10 and 11, the increase in other income in 1995 from 1994 levels is primarily a result of an increase in Trust revenues and net gains on the sale of loans. Trust income grew 16% from year to year, a combination of the establishment of a new Trust product, the family office, and the increase in the market value of trust assets by 30%, to $1,039,804,000 at the year end 1995, up from $799,846,000 as of December 31, 1994. As interest rates rose during most of 1995, so did the earnings credit rate which is used to offset certain service charges on deposit accounts. This was the primary reason for the 2% decrease in service charges on checking accounts. As discussed in the banking line of business discussion, the 53% decline in gains on the sale of OREO was directly attributable to a decline in the disposition of OREO in 1995 compared to 1994 levels of OREO sales. Other fees and service charges increased 4% in 1995 from 1994 levels primarily due to an increase in documentation preparation fees related to the mortgage banking line of business discussed above. OTHER EXPENSES The following table details other expenses for the years ended December 31, 1995 and 1994, and the percent change from year to year: TABLE 8- Other Expenses 1995 1994 % CHANGE - -------------------------------------------------------------------------- Salaries-regular ...................... $ 6,906 $6,705 3% Salaries-other ........................ 1,112 817 36 Employee benefits ..................... 1,890 1,789 6 Occupancy expense ..................... 1,441 1,389 4 Furniture, fixtures and equipment ..... 877 851 3 Advertising ........................... 868 839 3 Computer processing ................... 1,174 1,085 8 Stationery and supplies ............... 279 258 8 Professional fees ..................... 701 683 3 Insurance ............................. 486 807 (40) Merchant credit card processing ....... 314 299 5 Net cost of operation of other real estate owned 52 39 33 Other operating expenses .............. 2,225 1,974 13 - -------------------------------------------------------------------------- Total other expenses .................. $18,325 $17,535 5% - -------------------------------------------------------------------------- Other expenses increased for the year ended December 31, 1995 by 5% compared to 1994. Regular salaries, the largest component of other expenses, rose 3%, due primarily to merit increases and staffing additions related to the establishment of the family office operation in the Trust division and a Member Banking Credit department, to service the credit needs of the Bank's Member Bankers. Both of these new ventures were established near mid-year 1995. These staffing additions were partially offset by staffing reductions at year end 1994, when the Bank eliminated 4 full time positions associated with its business development efforts. As of December 31, 1995, the Bank's full time equivalent staffing level was 197.5 compared to 194.0 as of December 31, 1994. Other salaries increased 36% from 1994 to 1995. These increases were primarily related to incentive based compensation, tied to the overall profitability of the Bank or specific lines of business. Included in other salaries is incentive compensation related to mortgage banking, Trust and overall Bank profitability. Based on the increased profitability of each segment, these incentive costs increased by $63,000, $173,000 and $164,000, respectively, from 1994. Employee benefit costs increased 6% due to escalating costs associated with the maintenance of a competitive employee benefits package. Computer processing fees increased 8% in 1995 compared to 1994. The Bank is in the process of converting from a remote job entry data processing system to an in-house system. In addition to an increase in computer processing fees related to the volume of transactions processed, additional data processing time was required as a part of the conversion process, thereby increasing computer processing fees. It is anticipated that the computer conversion will be accomplished sometime during the first quarter of 1996. Insurance expense decreased 40%. Insurance expense is composed of the premiums paid to the Federal Deposit Insurance Corporation ("the FDIC") for deposit insurance, as well as the cost of the Corporation's business insurance coverages. During 1995, the FDIC announced that the bank insurance fund was sufficiently funded to provide necessary coverage for insured bank deposits. Therefore, to those banks considered "well capitalized" by FDIC criteria, the FDIC refunded premiums paid from May 1995 through September 1995 and eliminated any further premium for the 4th quarter of 1995. The Bank is considered "well capitalized" by FDIC criteria. Therefore, for 1995, the Bank's FDIC deposit insurance premiums decreased by $295,000 or 46% from those paid in 1994. As of December 31, 1995, the FDIC anticipates no deposit insurance premiums for those banks classified as "well capitalized" during 1996. Due to reductions in overall insurance premiums related to the Corporation's business related coverages, the Corporation's business insurance premiums decreased $26,000 or 15% in 1995 from 1994 levels. This reduction in premiums was accomplished with no reductions in the related coverages for the Corporation. Other operating expenses increased $251,000 or 13% from 1994 to 1995 due to a number of factors. Of the $251,000 increase in other operating expenses in 1995, $137,000 of this increase was because of expenses related to two claims against the Bank. The Bank's hiring and extra help costs increased $53,000 as the Bank continually expands its search for qualified staff. Telephone costs were up $37,000, due primarily to increased costs associated with the expansion of the Bank's local area network and wide area network of computers. Travel and entertainment related expenses also rose $35,000, reflecting continued efforts to increase the Bank's market share of business, especially in the lending areas. The Bank's efficiency ratio, which is defined as the ratio of operating expenses to total revenues, measures the efficiency with which the Bank spends its revenue. The ratio has improved to 70.7% for 1995 compared to 73.5% in 1994 and 75.0% in 1993. It has been management's goal, over time, to improve this ratio to below 70%. INCOME TAXES The Corporation's provision for federal income taxes is based on the Corporation's statutory tax rate of 34%. Federal income taxes for 1995 were $2,100,000, compared to $1,600,000 for 1994. This represents an effective tax rate of 31.1% and 28.3% for 1995 and 1994, respectively. Income taxes for financial reporting purposes differ from the amount computed by applying the statutory rate to income before taxes, due primarily to tax-exempt income from certain loans and investment securities. See Note 8 to the consolidated financial statements. The Corporation adopted Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), during the first quarter of 1993. The cumulative effect of adopting SFAS No. 109 was a charge of $175,000. FINANCIAL CONDITION INVESTMENT SECURITIES The Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), as of January 1, 1994. Upon the adoption of SFAS No. 115, management elected to classify 100% of the investment portfolio as available for sale. Therefore, in accordance with SFAS No. 115, the investment portfolio was carried at its estimated market value of $59,211,000 and $58,563,000 as of December 31, 1995 and 1994, respectively. The amortized cost of the portfolio as of December 31, 1995 was $58,890,000, resulting in net unrealized gains of $321,000. The amortized cost of the portfolio at December 31, 1994 was $59,995,000, resulting in net unrealized losses of $1,432,000. The maturity distribution and weighted average yields on a fully tax-equivalent basis of investment securities at December 31, 1995, are as follows: TABLE 9 - Investment Portfolio MATURING MATURING FROM FROM MATURING 1997 2001 MATURING DURING THROUGH THROUGH AFTER (dollars in thousands 1996 2000 2005 2005 TOTAL - -------------------------------------------------------------------------------- Obligations of the U.S. Government and agencies: Book value ............. $24,607 $22,685 $ -- $ -- $47,292 Weighted average yield . 5.2% 6.0% -- -- 5.6% State and political subdivisions: Book value ............. $ 2,707 $ 7,930 -- -- $10,637 Weighted average yield 5.4% 4.9% -- -- 5.0% Other investment securities: Book value ............. $ 40 -- -- $1,242 $ 1,282 Weighted average yield . 5.0% -- -- 6.4% 6.4% - -------------------------------------------------------------------------------- Total book value $27,354 $30,615 -- $1,242 $59,211 Weighted average yield 5.2% 5.7% -- 6.4% 5.5% The positive fluctuation in the unrealized gain/loss from year to year was primarily a result of a decrease in market rates of interest during 1995. Approximately 80% of the investment portfolio consists of fixed rate U. S. Government and U. S. Government Agency securities and, therefore, the related decrease in market rates of interest during 1995 caused an increase in the market value of these securities during 1995, causing a net unrealized gain on the investment portfolio at December 31, 1995, compared to a net unrealized loss on the investment portfolio at December 31, 1994. The Corporation does not own any derivative investments and does not plan to purchase any of these investments in the foreseeable future. LOANS For financial reporting purposes, both fixed and floating rate home equity loans, collateralized by mortgages, are included in other permanent mortgage loans. Floating rate Personal CreditLine loans are included in consumer loans. A breakdown of the loan portfolio by major categories at December 31 for each of the last five years is as follows: TABLE 10 - Loan Portfolio December 31 (in thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------- Real estate loans: Permanent mortgage loans $85,752 $92,395 $78,553 $65,362 $63,244 Construction loans 8,905 4,884 9,482 13,376 31,506 Commercial and industrial loans 67,507 54,631 49,800 47,541 40,241 Consumer loans 73,189 76,828 53,882 53,302 50,287 - -------------------------------------------------------------------------------- Total $235,353 $228,738 $191,717 $179,581 $185,278 - -------------------------------------------------------------------------------- The maturity distribution of the loan portfolio, excluding loans secured by one-family residential property and consumer loans, at December 31, 1995, is shown below. MATURING FROM MATURING 1997 MATURING DURING THROUGH AFTER (in thousands) 1996 2000 2000 TOTAL - -------------------------------------------------------------------------------- COMMERCIAL, FINANCIAL, AND AGRICULTURAL $37,189 $21,937 $ 8,381 $ 67,507 Real estate--construction 5,594 3,311 -- 8,905 Real estate--other 395 5,143 25,334 30,872 - -------------------------------------------------------------------------------- Total $43,178 $30,391 $33,715 $107,284 - -------------------------------------------------------------------------------- Interest sensitivity on the above loans: Loans with predetermined rates $1,754 $14,468 $ 6,905 $ 23,127 Loans with adjustable or floating rates 41,424 15,923 26,810 84,157 - -------------------------------------------------------------------------------- Total $43,178 $30,391 $33,715 $107,284 - -------------------------------------------------------------------------------- There are no scheduled prepayments on the loans included in the maturity distributions. The Bank's lending function is its principal income generating activity, and it is the Bank's policy to continue to serve the credit needs of its market area. Total loans at December 31, 1995, increased 3% to $235,353,000 from $228,738,000 as of December 31, 1994. The most significant increase was in the commercial lending area. Commercial loan balances grew by 24% in 1995 compared to year end 1994 outstanding balances. During 1995, the Bank added a new commercial lender and created a Member Banking Credit department, by employing two experienced lenders who concentrate their efforts on meeting the loan requirements of the Bank's Member Bankers. The other area of loan growth was in the Bank's construction loan area. In recent years the Bank has made a conscious decision to reduce its construction loan balances, to lower its exposure to higher risk loans. As of December 31, 1995, the construction lending portfolio had no nonperforming loans nor any loans delinquent 30 days or more. The Bank has chosen to selectively return to the construction lending market. As of December 31, 1995, the construction loan portfolio has grown 82% over December 31, 1994 balances. Consumer loans, consisting of loans to individuals for household, automobile, family and other consumer needs, as well purchased indirect automobile paper from automobile dealers in the Bank's market area, decreased 5%. This was due primarily to a decrease in the outstanding balances of the indirect automobile paper. These installment contracts, typically, are shorter term in nature. The maturity of existing indirect automobile contracts was not able to be overcome by the addition of new contracts, due to a slowdown in consumer automobile purchasing in 1995. Permanent mortgage loans, which consist of commercial and residential mortgages as well as home equity loans, decreased 7% during 1995, primarily the result of the sale of $67,626,000 in residential mortgage loans in the secondary mortgage market. The Bank continues to actively pursue the mortgage banking line of business. [GRAPHIC APPEARS HERE] TABLE 11 - Loan Portfolio and Nonperforming Asset Analysis LOAN LOSS LOAN PORTFOLIO NONPERFORMING ASSETS RESERVE ------------------------------------------------------------------------------------------ Past Due Past Due Non- Other Total Non- Reserve for 30 to 89 90 Days Total Performing Real Estate Performing Loan Loss (in thousands) Current Days or More Loans Loans* Owned** assets** Allocation ------------------------------------------------------------------------------------------ Real estate loans: Permanent mortgage loans: Residential .......................... $ 12,380 $ 222 $ 55 $ 12,657 $ 55 $ 431 $ 486 $-- Commercial ........................... 30,715 96 61 30,872 61 1,386 1,447 -- Home equity .......................... 41,947 179 97 42,223 97 -- 97 -- ------------------------------------------------------------------------------------------ Total permanent mortgage loans ....... 85,042 497 213 85,752 213 1,817 2,030 259 Construction mortgage loans: Residential ........................... 7,655 -- -- 7,655 -- -- -- -- Commercial ............................ 1,250 -- -- 1,250 -- 1,977 1,977 -- ------------------------------------------------------------------------------------------ Total construction mortgage loans .... 8,905 -- -- 8,905 -- 1,977 1,977 648 ------------------------------------------------------------------------------------------ Total real estate loans .............. 93,947 497 213 94,657 213 3,794 4,007 907 Commercial and industrial loans ........ 66,437 919 151 67,507 339 -- 339 -- ------------------------------------------------------------------------------------------ Total commercial and industrial loans ..................... 66,437 919 151 67,507 339 -- 339 1,295 ------------------------------------------------------------------------------------------ Consumer loans: Direct ................................ 12,578 77 10 12,665 10 -- 10 -- Indirect .............................. 58,047 296 44 58,387 44 -- 44 -- CreditLine ............................ 2,112 20 5 2,137 5 -- 5 -- ----------------------------------------------------------------------------------------- Total consumer loans ................. 72,737 393 59 73,189 59 -- 59 619 Unallocated reserve for loan loss ..... -- -- -- -- -- -- -- 831 ------------------------------------------------------------------------------------------ Total ............................. $233,121 $ 1,809 $ 423 $235,353 $ 611 $ 3,794 $4,405 $ 3,652 ------------------------------------------------------------------------------------------ * Nonperforming loans are loans on which scheduled principal and/or interest is past due 90 days or more and loans less than 90 days past due which are deemed to be problem loans by management. Total nonperforming loans of $611,000 includes the $423,000 in loans past due 90 days or more plus $188,000 in loans less than 90 days delinquent, on which certain borrowers have paid interest regularly. **Other real estate owned was written down to current market values at the time of reclassification to this category. These amounts are not included in the total loan amounts. DEPOSITS The Bank attracts deposits from within its primary market area by offering various deposit instruments, including savings accounts, NOW accounts, market rate accounts, and certificates of deposits. Total deposits increased 5% to $317,601,000 at December 31, 1995, from $301,337,000 at year-end 1994. A more meaningful measure of deposit change is average daily balances. As illustrated in Table 12, average deposit balances increased 3%. In an effort to increase its deposit base in 1995, the Bank offered one and two year Premier certificates of deposit, at interest rates of 6.50% and 7.00%, respectively. As a result, the Bank increased its average daily certificate of deposit balances by 59%. Partially offsetting this increase in average CD balances, was a 10% decrease in average daily balances of savings deposits, specifically, market rate, NOW and savings account deposits. The Bank's average daily non-interest bearing demand deposits grew 4% over similar balances for 1994. [GRAPHIC APPEARS HERE] The following table presents the average balances of deposits and the percentage change for the years indicated: TABLE 12 - Average Daily Balances of Deposits % CHANGE % CHANGE 1995 VS. 1994 VS. (dollars in thousands) 1995 1994 1994 1993 1993 --------------------------------------------------- Demand deposits, non- interest-bearing ...... $ 68,654 $ 65,976 4.1 $ 60,390 9.2% --------------------------------------------------- Market rate accounts .... 50,720 56,694 (10.5) 51,163 10.8 NOW accounts ............ 65,999 67,195 (1.8) 59,758 12.4 Regular savings ......... 45,025 56,011 (19.6) 57,145 (2.0) --------------------------------------------------- 161,744 179,900 (10.1) 168,066 7.0 --------------------------------------------------- Time deposits ........... 68,328 42,925 59.2 44,767 (4.1) --------------------------------------------------- Total ................. $298,726 $288,801 3.4% $273,223 5.7% --------------------------------------------------- The following table shows the maturity of certificates of deposit of $100,000 or greater as of December 31, 1995: TABLE 13 - Maturity of Certificates of Deposit of $100,000 or Greater (in thousands) Three months or less ......... $ 7,578 Three to six months .......... 2,549 Six to twelve months ......... 1,040 Greater than twelve months ... 851 ------- Total ....................... $12,018 ======= CAPITAL ADEQUACY At December 31, 1995, total shareholders' equity of the Corporation was $31,903,000, a $4,757,000 or 18% increase over $27,146,000 at December 31, 1994. In addition to earnings and dividends for the year, the impact of SFAS No. 115 resulted in a significant increase in shareholders' equity in 1995. As of December 31, 1995, shareholders' equity included unrealized gains on investment securities, net of deferred taxes, of $212,000 compared to unrealized losses on investment securities, net of taxes, of $945,000 at December 31, 1994. This change accounts for a $1,157,000 increase in total shareholders' equity from December 31, 1994, to year end 1995. [GRAPHIC APPEARS HERE] The Corporation and the Bank are required to meet certain regulatory capital adequacy guidelines. Under these guidelines, risk-based capital ratios measure capital as a percentage of risk-adjusted assets. Risk-adjusted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on the associated risk. The Bank's risk-based capital ratios at December 31, 1995 and 1994, are listed below. These ratios are all in excess of the minimum required capital ratios, also listed below. TABLE 14 - Risk-Based Capital Ratios 1995 1994 ------------------------------------------- Minimum Minimum Actual Required Actual Required ------------------------------------------- Tier I capital ratio 11.42% 4.00% 10.82% 4.00% Total capital ratio 12.67 8.00 12.08 8.00 The FDIC has created a statutory framework for capital requirements that established five categories of capital strength, ranging from a high of "well-capitalized" to a low of "critically under capitalized." As of December 31, 1995 and 1994, the Bank exceeded the levels required to meet the definition of a "well-capitalized" bank. Management anticipates that the Corporation and the Bank will continue to be in compliance with all capital requirements and continue to be classified as "well-capitalized." The Corporation's continued declaration of dividends in the future is dependent on future earnings. RISK ELEMENTS Risk elements, as defined by the Securities and Exchange Commission in its Industry Guide 3, are composed of four specific categories: (1) nonaccrual, past due, and restructured loans, (2) potential problem loans, loans not included in the first category, but where information known by Bank management indicates that the borrower may not be able to comply with present payment terms, (3) foreign loans outstanding, and (4) loan concentrations. Table 11 presents a summary, by loan type, of the Bank's nonaccrual and past due loans as of December 31, 1995. It is the Bank's policy to promptly place nonperforming loans on nonaccrual status. Bank management knows of no outstanding loans that presently would meet the criteria for inclusion in the potential problem loan category, as indicated under specific category (2) referred to above. The Bank has no foreign loans, and loan concentrations are presented in Table 6. This table presents the percentage of outstanding loans, by loan type, compared to total loans outstanding as of December 31, 1995. ASSET QUALITY The Bank is committed to maintaining and developing quality assets. Loan growth is generated primarily within the Bank's market area, which includes Montgomery, Delaware and Chester Counties, as well as portions of Bucks and Philadelphia Counties. The development of quality loan growth is controlled through a uniform lending policy that defines the lending functions and goals, loan approval process, lending limits, and loan review. Nonperforming assets amounted to $4,405,000 at December 31, 1995, a 4% increase from $4,251,000 at December 31, 1994, because of an increase in OREO balances. Nonperforming loans were $611,000 at December 31, 1995, a 21% decrease from $776,000 at December 31, 1994. OREO increased $319,000 or 9% to $3,794,000 at December 31, 1995, from $3,475,000 at December 31, 1994, because of $193,000 in capitalizable costs being added to an existing OREO property and a $404,000 purchase of a participant's share of an OREO property. Both of these OREO properties are being offered for sale and are appraised for more than the Bank's new carrying value. These two increases in OREO balances were partially offset by a $278,000 reduction in OREO balances related to the disposition of three OREO properties during 1995. As of December 31, 1995, there were three properties remaining in OREO. The ratio of nonperforming assets as a percentage of total assets was 1.24% as of December 31, 1995, compared to 1.28% as of December 31, 1994. TABLE 15 - Nonperforming Assets December 31 (in thousands) 1995 1994 1993 1992 1991 ------------------------------------------ Loans past due 90 days or more not on nonaccrual status: Real estate--mortgage $ -- $ 48 $ 139 $240 $ 232 Consumer 155 82 59 121 182 Loans on which the accrual of interest has been discontinued: Commercial and industrial 339 -- 205 1,023 1,356 Real estate--mortgage 117 371 1,032 862 115 Real estate--construction -- 275 708 407 1,803 ------------------------------------------ Total nonperforming loans 611 776 2,143 2,653 3,688 Other real estate owned* 3,794 3,475 3,539 6,524 9,654 ------------------------------------------ Total nonperforming assets $4,405 $4,251 $5,682 $9,177 $13,342 ------------------------------------------ All loans past due 90 days or more, except consumer loans and home equity mortgage loans, are placed on nonaccrual status. Such factors as the type and size of the loan, the quality of the collateral, and historical creditworthiness of the borrower and/or guarantors are considered by management in assessing the collectibility of such loans. Interest foregone on nonaccrual status loans was $59,000 for the year ended December 31, 1995. Interest earned and included in interest income on these loans prior to their nonperforming status amounted to $50,000 in 1995. * Refer to Note 2 to the consolidated financial statements. The Bank maintains a Loan Review Committee (the "Committee") that periodically reviews the status of all nonaccrual loans, loans criticized by both the Bank's regulators and an independent consultant retained to review both the loan portfolio as well as the overall adequacy of the loan loss reserve. During the review of the loan loss reserve, the Committee considers specific loans on a loan-by-loan basis, pools of similar loans, prior historical writeoff activity, and a supplemental reserve allocation as a measure of conservatism for any unforeseen loan loss reserve requirements. The sum of these components is compared to the loan loss reserve balance, and any additions deemed necessary to the loan loss reserve balance are charged to operating expenses on a timely basis. The Corporation is regulated and periodically inspected by The Federal Reserve Board. During 1995, the Bank became a state member bank of the Federal Reserve System. The Bank is regulated and periodically examined by the Federal Reserve Board and the Pennsylvania Department of Banking. There are no recommendations by the regulators which would have a material effect on the Corporation's liquidity, capital resources, or results of operations. In May 1993, Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), was issued. Under the requirements of SFAS No. 114, recognition of an impairment in the performance of a loan is required when it is probable that all amounts will not be collected in accordance with the loan agreement. SFAS No. 114 was subsequently amended by Statement of Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosure" ("SFAS No. 118"), to allow a creditor to use existing methods for recognizing interest income on an impaired loan. The Corporation adopted SFAS No. 114 and No. 118 during the first quarter of 1995. The adoption of SFAS No. 114 and No. 118 has not had a material impact on the financial position or results of operations of the Corporation. ASSET AND LIABILITY MANAGEMENT Through its Asset/Liability Committee ("ALCO") and the application of Risk Management Policies and Procedures, the Bank seeks to minimize its exposure to interest rate risk as well as to maintain sufficient liquidity and capital. [GRAPHIC APPEARS HERE] TABLE 16 - Interest Rate Sensitivity Analysis as of December 31, 1995 REPRICING PERIODS ---------------------------------------------------------------------------------------- 0 TO 30 31 TO 90 91 TO 180 181 TO 365 OVER NON-RATE (dollars in thousands) DAYS DAYS DAYS DAYS 1 YEAR SENSITIVE TOTAL ---------------------------------------------------------------------------------------- Assets: Interest-bearing deposits with other banks ...................... $ 115 $ -- $ -- $ -- $ -- $ -- $ 115 Federal funds sold ...................... 19,410 -- -- -- -- -- 19,410 Investment securities ................... 7,930 5,191 5,876 21,215 18,999 -- 59,211 Loans ................................... 70,897 7,387 13,132 19,648 124,289 $ (3,652) 231,701 Cash and due from banks ............... -- -- -- -- -- 25,128 25,128 Other assets ......................... -- -- -- -- -- 19,391 19,391 ---------------------------------------------------------------------------------------- Total assets ......................... $ 98,352 $ 12,578 $ 19,008 $ 40,863 $ 143,288 $ 40,867 $ 354,956 ---------------------------------------------------------------------------------------- Liabilities and shareholders' equity: Demand, noninterest-bearing ........... $ -- $ -- $ -- $ -- $ -- $ 81,128 $ 81,128 Savings deposits ...................... 60,503 -- -- -- 100,838 -- 161,340 Time deposits ......................... 15,683 13,897 14,100 10,330 21,123 -- 75,133 Other liabilities ..................... -- -- -- -- -- 5,452 5,452 Shareholders' equity ................. -- -- -- -- -- 31,903 31,903 ---------------------------------------------------------------------------------------- Total liabilities and shareholders' equity ................. $ 76,186 $ 13,897 $ 14,100 $ 10,330 $ 121,961 $ 118,483 $ 354,956 ---------------------------------------------------------------------------------------- Gap ..................................... $ 22,167 $ (1,319) $ 4,908 $ 30,533 $ 21,328 $ (77,616) -- Cumulative gap .......................... $ 22,167 $ 20,848 $ 25,756 $ 56,289 $ 77,616 -- -- Cumulative earning assets as a ratio of costing liabilities ................ 129% 123% 125% 149% 133% -- -- INTEREST RATE SENSITIVITY The difference between interest sensitive assets and interest sensitive deposits, stated in dollars, is referred to as the interest rate sensitivity gap. A positive gap is created when interest rate sensitive assets exceed interest rate sensitive deposits. A positive interest rate sensitive gap will result in a greater portion of assets compared to deposits repricing with changes in interest rates within specified time periods. The opposite effect results from a negative gap. In practice, however, there may be a lag in repricing some products in comparison to others. A positive gap in the short-term, 30 days or less, in an increasing rate environment should produce an increase in net interest income. The converse is true of a negative gap in a rising interest rate environment. As shown in Table 16, the Bank is presently asset interest rate sensitive in the short term, 30 days or less category. The Bank uses income simulation models to measure its interest rate risk and to manage its interest rate sensitivity. The simulation models consider not only the impact of changes in interest rates on forecasted net interest income, but also such factors as yield curve relationships, possible loan prepayments and deposit withdrawals. As of year-end 1995, based on an analysis of the results from the simulation model, the amount of the Bank's interest rate risk was within the acceptable range as established by the Bank's Risk Management Policies and Procedures. While future interest rate movements and their effect on Bank revenue cannot be predicted, there are no trends, events, or uncertainties of which the Corporation's management is currently aware that will have, or are reasonably likely to have, a material effect on the Corporation's liquidity, capital resources, or results of operations in the future. LIQUIDITY The Bank's liquidity is maintained by managing its core deposits, purchasing federal funds, selling loans in the secondary market, and borrowing from the Federal Home Loan Bank of Pittsburgh. The Bank had available a $33,000,000 line of credit with the Federal Home Loan Bank of Pittsburgh as of December 31, 1995. The Bank's liquid assets include cash and cash equivalents as well as certain unpledged investment securities. Periodically, ALCO reviews the Bank's liquidity ratio, which is basically the relationship of liquid assets to certain deposits. This ratio, as of December 31, 1995, was 28% compared to 24% as of December 31, 1994. The primary reason for the increase in the liquidity ratio was an increase in federal funds sold. It is the Bank's policy to maintain a liquidity ratio in excess of 20%. During 1995, the Corporation's financing activities provided $15,172,000 in net cash, primarily the result of a $33,313,000 increase in outstanding certificate of deposit balances, partially offset by decreases of $17,049,000 in demand and savings deposits. This net increase in cash provided by financing activities, along with a $12,827,000 increase in net cash provided from operations, primarily due to a $6,721,000 net increase in cash from the origination and sale of residential mortgage loans in the secondary mortgage market, were used to fund the net cash used in investing activities of $13,783,000, primarily a $26,088,000 increase in purchased automobile paper, partially offset by loan repayments, net of new loan originations of $12,765,000. Loan repayments, net of originations, are exclusive of residential mortgage loans originated for resale and loans sold in the secondary residential mortgage market as well as the increase in loan balances resulting from the purchased automobile paper from automobile dealerships during 1995, as discussed above. The balance of the increase in net cash available was used to increase the Corporation's cash and cash equivalents by $14,216,000 from December 31, 1994 to December 31, 1995. 1994 VS. 1993 RESULTS OF OPERATIONS Net Income Net income for the year ended December 31, 1994 was $4,049,000, a 9% increase over net income of $3,712,000 for the year ended December 31, 1993. Exclusive of the cumulative effect of an accounting change in 1993, the result of adopting SFAS No. 109 in 1993, net income of $4,049,000 in 1994, increased 4% over income before the cumulative effect of an accounting change of $3,887,000 for 1993. On a per share basis, net income rose from $1.71 in 1993 to $1.85 in 1994. In 1994, the Corporation paid dividends of $0.325 per share, a 63% increase over $.20 per share, paid in 1993. Return on average assets was 1.26% for 1994 compared to 1.23% in 1993. Return on average equity was 15.70% in 1994 versus 16.37% in 1993. Net Interest Income Net interest income increased 12% in 1994 from 1993 levels. Interest income increased 5% and interest expense decreased 13%. The 5% rise in interest income was due to a 7% increase in daily average earning asset balances, partially offset by a decline in the average yield on earning assets, from 7.4% in 1993 to 7.2% in 1994. Interest expense declined 13% or $883,000 from 1993 to 1994 due to a decline in interest rates paid on deposits, from 2.7% in 1993 to 2.3% in 1994. The result was an increase in the net interest margin from 4.85% in 1993 to 5.21% in 1994. Loan Loss Provision The provision for loan losses amounted to $500,000 in 1994 and 1993. The allowance for possible loan losses as a percentage of nonperforming loans amounted to 466% and 168% as of December 31, 1994 and 1993, respectively. The significant decline in outstanding nonperforming loans at December 31, 1994 from year end 1993, $2,143,000 at December 31, 1993 to $776,000 at December 31, 1994, is primarily responsible for the increase in the ratio of loan loss reserves to nonperforming loans at year end 1994. Other Income Other income decreased 14% in 1994 from 1993 levels. Primarily responsible for this $1,403,000 decrease in other income was a $1,056,000 decrease in net gains on the sale of mortgage loans. The Bank sold $108,685,000 in mortgage loans during 1993 compared to only $39,109,000 in 1994. Increasing mortgage interest rates during 1994 were primarily responsible for this decline in income. The Bank also had a $595,000 reduction in gains on the sale of OREO in 1994 compared to 1993 gains. During 1993 the Bank disposed of $4,234,000 in OREO properties, realizing related gains of $889,000 compared to OREO sales of $681,000 in 1994 realizing gains of $294,000. Trust fees increased by $300,000 or 7% in 1994 over 1993 levels. Other Expenses Other expenses decreased by $135,000 or 1% in 1994 from 1993. While regular salaries increased $452,000 or 7%, salaries- other, primarily incentive based, decreased $244,000 or 23%. Decreases in incentives based on mortgage banking profitability and overall bank profitability are primarily responsible for the decreases. Advertising costs increased $123,000 or 17% in 1994 from 1993 levels, the result of continuing the Corporation's television, radio, and print media advertising campaign. Professional fees, primarily associated with the administration of nonperforming assets and the cost of operating OREO decreased $254,000 and $555,000, respectively, in 1994 as the amount of nonperforming assets were reduced by 25%, or $1,431,000, from year-end 1993 to 1994. Income Taxes The income tax provision for 1994 was $1,600,000, or a 28.3% effective rate, compared to $1,401,000, or a 26.5% effective rate, for 1993. CONSOLIDATED BALANCE SHEETS (in thousands) As of December 31 1995 1994 --------------------------- ASSETS Cash and due from banks ........................................................................ $ 25,128 $ 19,353 Interest-bearing deposits with other banks ..................................................... 115 1,584 Federal funds sold ............................................................................. 19,410 9,500 Investment securities available for sale, at market value (amortized cost of $58,890,000 and $59,995,000 at December 31, 1995 and 1994, respectively) ................................................ 59,211 58,563 --------------------------- Loans .......................................................................................... 235,353 228,738 Less: Allowance for possible loan losses .................................................... (3,652) (3,618) --------------------------- Net loans .............................................................................. 231,701 225,120 Premises and equipment, net .................................................................... 11,820 11,383 Accrued interest receivable .................................................................... 2,463 1,999 Deferred federal income taxes .................................................................. 1,042 1,730 Other real estate owned ........................................................................ 3,794 3,475 Other assets ................................................................................... 272 473 --------------------------- Total assets ................................................................................ $ 354,956 $ 333,180 --------------------------- LIABILITIES Deposits: Demand, noninterest-bearing ................................................................. $ 81,128 $ 83,142 Savings ..................................................................................... 161,340 176,375 Time ........................................................................................ 75,133 41,820 --------------------------- Total deposits .............................................................................. 317,601 301,337 Other liabilities .............................................................................. 5,452 4,697 --------------------------- Total liabilities ........................................................................... 323,053 306,034 Commitments and contingencies (Note 12) SHAREHOLDERS' EQUITY Common stock, par value $1, authorized, 5,000,000 shares, issued 2,493,200 shares and 1,245,100 shares as of December 31, 1995 and 1994, respectively, and outstanding 2,190,380 shares and 1,093,690 shares as of December 31, 1995 and 1994, respectively ...................................................................... 2,493 1,245 Paid-in capital in excess of par value ......................................................... 4,363 5,559 Unrealized investment appreciation (depreciation), net of deferred income taxes ................ 212 (945) Retained earnings .............................................................................. 26,374 22,826 --------------------------- 33,442 28,685 Less: Common stock in treasury, at cost -- 302,820 and 151,410 shares of December 31, 1995 and 1994, respectively ........................................... (1,539) (1,539) --------------------------- Total shareholders' equity ................................................................ 31,903 27,146 --------------------------- Total liabilities and shareholders' equity ................................................ $ 354,956 $ 333,180 --------------------------- The accompanying notes are an integral part of the consolidated financial statements CONSOLIDATED STATEMENTS OF INCOME (in thousands, except for share and per share data) For the years ended December 31 1995 1994 1993 --------------------------------------- Net interest income: Interest income: Interest and fees on loans ................................................... $ 19,627 $ 16,498 $ 15,741 Interest on federal funds sold ............................................... 813 261 343 Interest and dividends on investment securities: Taxable interest income ..................................................... 2,491 2,853 2,594 Tax-exempt interest income .................................................. 607 708 749 Dividend income ............................................................. 79 58 68 --------------------------------------- Total interest income ..................................................... 23,617 20,378 19,495 Interest expense on deposits ................................................... 7,246 5,077 5,823 --------------------------------------- Net interest income ............................................................ 16,371 15,301 13,672 Loan loss provision ............................................................ 500 500 500 Net interest income after loan loss provision .................................. 15,871 14,801 13,172 --------------------------------------- Other income: Fees for trust services ...................................................... 5,496 4,719 4,419 Service charges on deposit accounts .......................................... 1,049 1,068 1,266 Other fees and service charges ............................................... 1,240 1,192 1,394 Net gain on sale of loans .................................................... 479 386 1,442 Gain on sale of other real estate owned ...................................... 137 294 889 Other real estate owned revenue .............................................. 353 319 -- Other operating income ...................................................... 443 405 376 --------------------------------------- Total other income .......................................................... 9,197 8,383 9,786 --------------------------------------- Other expenses: Salaries-regular ............................................................. 6,906 6,705 6,253 Salaries-other ............................................................... 1,112 817 1,061 Employee benefits ............................................................ 1,890 1,789 1,488 Occupancy expense ............................................................ 1,441 1,389 1,333 Furniture, fixtures, and equipment ........................................... 877 851 811 Advertising .................................................................. 868 839 716 Computer processing .......................................................... 1,174 1,085 1,051 Stationery and supplies ...................................................... 279 258 260 Professional fees ............................................................ 701 683 937 Insurance .................................................................... 486 807 867 Merchant credit card processing .............................................. 314 299 279 Net cost of operation of other real estate owned ............................. 52 39 594 Other operating expenses ..................................................... 2,225 1,974 2,020 --------------------------------------- Total other expenses ................................................... 18,325 17,535 17,670 --------------------------------------- Income before income taxes and cumulative effect of accounting change ...................................... 6,743 5,649 5,288 Applicable income taxes ........................................................ 2,100 1,600 1,401 --------------------------------------- Income before cumulative effect of accounting change ........................... 4,643 4,049 3,887 Cumulative effect of accounting change ......................................... -- -- (175) --------------------------------------- Net income ..................................................................... $ 4,643 $ 4,049 $ 3,712 --------------------------------------- Earnings per average common share before cumulative effect of accounting change* ...................................... $ 2.08 $ 1.85 $ 1.79 Cumulative effect of accounting change* ........................................ $ -- $ -- $ (0.08) Earnings per average common share from net income* ............................. $ 2.08 $ 1.85 $ 1.71 Average number of shares outstanding, including common stock equivalents* ................................................................. 2,233,898 2,183,900 2,176,446 *Restated to reflect the 2-for-1 stock split, effective December 29, 1995. The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the years ended December 31 1995 1994 1993 ------------------------------------------- OPERATING ACTIVITIES: Net income ...................................................................... $ 4,643 $ 4,049 $ 3,712 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................................................... 500 500 500 Provision for depreciation and amortization .................................. 986 891 873 Provisions for writedowns of other real estate owned ......................... -- -- 504 Cumulative effect of accounting change ....................................... -- -- 175 Loans originated for resale .................................................. (61,105) (41,260) (115,092) Proceeds from sale of loans .................................................. 67,826 40,986 111,194 Net Gain on sale of loans .................................................... (479) (386) (1,442) Gain on sale of investment securities ........................................ -- (2) -- Net gain on disposal of other real estate owned .............................. (137) (294 ) (889 Provision for deferred income taxes .......................................... (148) 66 290 Change in income taxes payable/refundable .................................... 160 (55) 676 Change in interest receivable ................................................ (464) (109) (215) Change in interest payable ................................................... 101 (11) (27) Other ........................................................................ 944 (97) 1,059 ---------------------------------------------- Net cash provided by operating activities .................................... 12,827 4,278 1,318 ---------------------------------------------- INVESTING ACTIVITIES: Purchases of investment securities ............................................ (21,289) (10,261) (47,832) Proceeds from maturities of investment securities ............................. 22,320 23,254 34,437 Proceeds from sales of investment securities available for sale ............... -- 7,009 -- Proceeds on disposition of other real estate owned ............................ 415 975 5,123 Purchase of other real estate owned ........................................... (404) -- (1,319) Capitalization of costs of other real estate owned ............................ (193) -- -- Loan repayments, net of originations .......................................... 12,765 8,125 16,049 Purchase of automobile retail installment contracts ........................... (26,088) (45,877) (22,061) Loan originations to facilitate the sale of other real estate owned ........... -- -- (1,532) Purchases of premises and equipment ........................................... (1,309) (1,057) (869) ---------------------------------------------- Net cash used by investing activities ........................................ (13,783) (17,832) (18,004) ---------------------------------------------- FINANCING ACTIVITIES: Change in demand and savings deposits ......................................... (17,049) 12,279 18,657 Change in time deposits ....................................................... 33,313 (2,016) (3,768) Dividends paid ................................................................ (1,095) (710) (435) Repayment of mortgage debt .................................................... (49) (43) (35) Proceeds from issuance of common stock ........................................ 52 125 30 ---------------------------------------------- Net cash provided by financing activities .................................... 15,172 9,635 14,449 ---------------------------------------------- Change in cash and cash equivalents ............................................. 14,216 (3,919) (2,237) Cash and cash equivalents at beginning of year .................................. 30,437 34,356 36,593 ---------------------------------------------- Cash and cash equivalents at end of year ........................................ $ 44,653 $ 30,437 $ 34,356 ---------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Income taxes ................................................................. $ 1,414 $ 1,513 $ 1,220 Interest ..................................................................... 7,145 5,088 5,850 Noncash investing transactions: Loans converted into other real estate owned ................................. -- 908 318 The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands, except for shares of common stock) SHARES OF UNREALIZED COMMON COMMON PAID-IN RETAINED GAINS TREASURY For the years ended 1995, 1994, and 1993 STOCK ISSUED STOCK CAPITAL EARNINGS (LOSSES) STOCK ---------------------------------------------------------------------------- Balance, December 31, 1992 ............................. 1,238,320 $ 1,238 $ 5,411 $ 16,210 $-- $ (1,539) Net income ............................................. -- -- -- 3,712 -- -- Dividends declared, $0.40 per share .................... -- -- -- (435) -- Common stock issued .................................... 1,700 2 28 -- -- -- ---------------------------------------------------------------------------- Balance, December 31, 1993 ............................. 1,240,020 1,240 5,439 19,487 -- (1,539) Cumulative effect of change in accounting principle, net of deferred income taxes of $444,000 ............................. -- -- -- -- 863 -- Net income ............................................. -- -- -- 4,049 -- -- Dividends declared, $0.65 per share .................... -- -- -- (710) -- -- Change in unrealized gains (losses), net of income taxes of $931,000 .................................... -- -- -- -- (1,808) -- Common stock issued .................................... 5,080 5 120 ---------------------------------------------------------------------------- Balance, December 31, 1994 ............................. 1,245,100 1,245 5,559 22,826 (945) (1,539) Net income ............................................. -- -- -- 4,643 -- -- Dividends declared, $0.50 per share .................... -- -- -- (1,095) -- -- Change in unrealized gains (losses), net of income taxes of $596,000 .................................... -- -- -- -- 1,157 -- Common stock issued .................................... 1,500 1 51 -- -- -- Common stock issued in conjunction with the 2-for-1 stock split, effective December 29, 1995 .................................... 1,246,600 1,247 (1,247) -- -- -- ---------------------------------------------------------------------------- Balance, December 31, 1995 ............................. 2,493,200 $ 2,493 $ 4,363 $ 26,374 $ 212 $ (1,539) ---------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Bryn Mawr Bank Corporation (the "Corporation") and The Bryn Mawr Trust Company (the "Bank"). All significant intercompany transactions and accounts have been eliminated upon consolidation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting policies of the Corporation conform to generally accepted accounting principles and to general practices of the banking industry. The significant accounting policies are as follows: Cash and cash equivalents: Cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing deposits with other banks with original maturities of three months or less. Cash balances reserved to meet regulatory requirements of the Federal Reserve Board amounted to $9,674,000 and $8,257,000 at December 31, 1995 and 1994, respectively. Investment securities: On January 1, 1994, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115 requires all entities to allocate their investments among three categories as applicable: (1) trading, (2) available for sale, and (3) held to maturity. Management categorized all of its investment securities as available for sale as part of the asset/liability management strategy since they may be sold in response to changes in interest rates, prepayments, and similar factors. Investments in this classification are reported at the current market value with net unrealized gains or losses, net of the applicable deferred tax effect, being added to or deducted from the Corporation's total shareholders' equity on the balance sheet. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting SFAS No. 115 as of January 1, 1994 was an increase in the balance of shareholders' equity of $863,000 to reflect the net unrealized gain (net of $444,000 in deferred income taxes) of $1,307,000 on investment securities classified as available for sale. As of December 31, 1994, shareholders' equity was decreased by $945,000 due to unrealized losses (net of $487,000 in deferred income tax benefits) of $1,432,000 in the investment securities portfolio. As of December 31, 1995, shareholders' equity was increased by $212,000 due to unrealized gains (net of $109,000 in deferred income taxes) of $321,000 in the investment securities portfolio. Prior to the adoption of SFAS No. 115, investments in fixed maturity securities classified as available for sale were carried at the lower of aggregate amortized cost or market value. Loans: Interest income on loans performing satisfactorily is recognized on the accrual method of accounting. Nonperforming loans are loans on which scheduled principal and/or interest is past due 90 days or more or loans less than 90 days past due which are deemed to be problem loans by management. All nonperforming loans, except consumer loans, are placed on nonaccrual status, and any outstanding interest receivable at the time the loan is deemed nonperforming is deducted from interest income. Such factors as the type and size of the loan, the quality of the collateral, and historical creditworthiness of the borrower and/or guarantors are considered by management in assessing the collectibility of such loans. In May 1993, Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), was issued. Under the requirements of SFAS No. 114, recognition of an impairment in the performance of a loan will be required when it is probable that all amounts will not be collected in accordance with the loan agreement. SFAS No. 114 was subsequently amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure" ("SFAS No. 118"), to allow a creditor to use existing methods for recognizing interest income on an impaired loan. The adoption of SFAS No. 114 and No. 118 was required in the first quarter of 1995. As of December 31, 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $565,000. All impaired loans had a related allowance for loan loss. The total related allowance for loan loss at December 31, 1995 was $233,000. The adoption of SFAS No. 114 and No. 118 did not have a material impact on the financial position or results of operations of the Corporation. Loan loss provision: The loan loss provision charged to operating expenses is based on those factors which, in management's judgement, deserve current recognition in estimating possible loan losses including the continuing evaluation of the loan portfolio and the Bank's past loan loss experience. The allowance for possible loan losses is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit. Premises and equipment: Premises and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed on a straight-line basis over the estimated useful lives, as follows: premises--10 to 50 years, and equipment--3 to 20 years. Leasehold improvements are being amortized over the shorter of the estimated useful life or the term of the lease. Maintenance and repairs are charged to expense; major renewals and betterments are capitalized. Gains and losses on dispositions are reflected in current operations. Income taxes: In February 1992, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), was issued. It changes the method of computing deferred income taxes from the deferred to a liability approach. The Corporation adopted SFAS No. 109 on January 1, 1993. The Corporation did not restate its prior years' consolidated financial statements in conjunction with the adoption of SFAS No. 109, but rather, reported a charge against 1993's earnings as the cumulative effect of the accounting change, in the amount of $175,000. Since deferred taxes are adjusted for any enacted change in tax rates under SFAS No. 109, the Corporation's results of operations may be subject to volatility. Trust income: Trust Division income is recognized on the cash basis of accounting. Reporting such income on a cash basis does not materially affect net income. Other real estate owned: Other real estate owned ("OREO") is comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. OREO is recorded at the lower of the carrying value of the loan at the time of foreclosure or the market value of the property actually received. Should the resulting current market value of the property underlying the loan be below the current book value of the loan, the loan is written down to the current market value through a charge to the loan loss reserve. Market values are estimated through performing a detailed discounted cash flow analysis of each property, taking into consideration a number of factors, including the projected time period to complete the sale of the property, the projected selling price and costs of administration of the property. This stream of both positive and negative cash flows is discounted back to a present value using a current rate of interest. In addition, a reserve is maintained for estimated losses to cover potential risk of loss that may exist in the portfolio of real estate acquired by foreclosure. The balance of this reserve amounted to $149,000 and $177,000 as of December 31, 1995 and 1994, respectively. Revenues relating to the operation of these properties are recognized on a cash basis. Subsequent costs directly related to the completion of properties under construction are capitalized to the extent they are considered to be realizable. Operating expenses and any writedowns subsequent to foreclosure of the carrying value are charged to current period earnings. Gains and losses upon disposition are reflected in earnings as realized. Earnings per share: Earnings per average common share is based on the weighted average of common shares outstanding during the year and, when their effect is dilutive, common equivalent shares consisting of certain shares subject to options. Recently issued accounting standards: In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 122 "Accounting for Mortgage Servicing Rights" which is effective for the Corporation beginning January 1, 1996. The statement requires the recognition of separate assets relating to the rights to service mortgage loans for others based on their fair value if it is practicable to estimate the value. The statement applies prospectively to transactions entered into in 1996, therefore there will be no cumulative effect upon adoption of this statement. In addition, this statement is not expected to have a significant effect on the financial position or the results of operations of the Corporation. In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation", which is effective for the Corporation beginning January 1, 1996. SFAS No. 123 provides an alternative method of accounting for stock-based compensation arrangements, based on fair value of the stock-based compensation determined by an option pricing model utilizing various assumptions regarding the underlying attributes of the options and the Corporation's stock, rather than the existing method of accounting for stock-based compensation which is provided in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). The FASB encourages entities to adopt the fair value based method, but does not require the adoption of this method. For those entities that continue to apply APB 25, proforma disclosure of the effect, if adopted, of SFAS 123 on net income and earnings per share would be required in the 1996 financial statements. The Corporation will continue to apply APB 25 and therefore, there will be no impact on the financial position and results of operations. 3. INVESTMENT SECURITIES The amortized cost and estimated market value of investments, one hundred percent of which were classified as available for sale, are as follows: (in thousands) 1995 ---------------------------------------------------- GROSS GROSS ESTIMATED Amortized Unrealized Unrealized Market Carrying COST GAINS LOSSES VALUE VALUE ---------------------------------------------------- Obligations of the U.S. Government and agencies ........... $47,100 $261 $69 $47,292 $47,292 State & political subdivisions ........... 10,515 122 -- 10,637 10,637 Other securities ......... 1,275 7 -- 1,282 1,282 Total ................. $58,890 $390 $69 $59,211 $59,211 ---------------------------------------------------- (in thousands) 1994 ---------------------------------------------------- GROSS GROSS ESTIMATED Amortized Unrealized Unrealized Market Carrying COST GAINS LOSSES VALUE VALUE ---------------------------------------------------- Obligations of the U.S. Government and agencies .......... $46,134 $-- $1,297 $44,837 $44,837 State & political subdivisions .......... 12,861 66 205 12,722 12,722 Other securities ........ 1,000 4 -- 1,004 1,004 Total ................ $59,995 $70 $1,502 $58,563 $58,563 ---------------------------------------------------- At December 31, 1995, securities having a book value of $10,745,000 were pledged as collateral for public funds, trust deposits, and other purposes. The amortized cost and estimated market value of investment securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands) 1995 ----------------------- ESTIMATED AMORTIZED MARKET Cost Value ----------------------- Due in one year or less ..................... $27,283 $27,354 Due after one year through five years ....... 30,372 30,615 Due after five years through ten years ...... -- -- Due after ten years ......................... 1,235 1,242 ----------------------- Total .................................... $58,890 $59,211 ----------------------- Proceeds from sales of debt securities are as follows: (in thousands) 1995 1994 1993 ---------------------------- Proceeds ................. $-- $7,009 $-- Gross gains .............. -- 2 -- Gross losses ............. -- -- -- 4. LOANS: Loans outstanding at December 31 are detailed by category as follows: (in thousands) 1995 1994 --------------------- Real estate loans: Permanent mortgage loans .............................. $85,752 $92,395 Construction loans .................................... 8,905 4,884 Commercial and industrial loans ......................... 67,507 54,631 Loans to individuals for household, family, and other consumer expenditures ....................... 73,189 76,828 --------------------- Total ............................................. $235,353 $228,738 --------------------- All loans past due 90 days or more, except consumer loans, are placed on nonaccrual status. Nonperforming loans amounted to $611,000 and $776,000 at December 31, 1995 and 1994, respectively. Forgone interest on nonaccrual loans was $59,000, $128,000, and $238,000 in 1995, 1994, and 1993, respectively. 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES: The summary of the changes in the allowance for possible loan losses is as follows: (in thousands) 1995 1994 1993 ------------------------------------- Balance, January 1 $3,618 $3,601 $3,848 Charge-offs (769) (663) (898) Recoveries 303 180 151 ------------------------------------- Net charge-offs (466) (483) (747) Loan loss provision 500 500 500 ------------------------------------- Balance, December 31 $3,652 $3,618 $3,601 ------------------------------------- 6. PREMISES AND EQUIPMENT: A summary of premises and equipment at December 31 is as follows: (in thousands) 1995 1994 --------------------- LAND $ 2,974 $2,974 --------------------- Buildings .......................................... 10,472 10,425 Furniture and equipment ............................ 7,821 6,646 Leasehold improvements ............................. 169 89 --------------------- 21,436 20,134 Less accumulated depreciation ...................... 9,616 8,751 --------------------- Total ........................................... $11,820 $11,383 --------------------- The Corporation has borrowings outstanding of $2,557,000 at December 31, 1995. The borrowings are collateralized by properties with a book value of $4,351,000 at December 31, 1995. The weighted average interest rate on the borrowings was 9.75% in 1995 and 1994. 7. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments"("SFAS No. 107"), requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No.107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it practicable to estimate that value: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. Investment securities: Estimated fair values for investment securities are based on quoted market price, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments. Loans: For variable rate loans that reprice frequently and which have no significant change in credit risk, estimated fair values are based on carrying values. Fair values of certain mortgage loans and consumer loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The estimated fair value of nonperforming loans is based on discounted flows as determined by the internal loan review of the Bank or the value of the underlying collateral, as determined by independent party appraisers. Deposits: The estimated fair values disclosed for noninterest-bearing demand deposits, NOW accounts, and Market Rate and Market Rate Checking accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on the certificate of deposit. SFAS No. 107 defines the fair value of demand deposits as the amount payable on demand and prohibits adjusting estimated fair value from any value derived from retaining those deposits for an expected future period of time. Other liabilities: Estimated fair values of long term mortgages, collateralized by two properties included in premises and equipment, are based on discounted cash flow analyses, using interest rates currently being offered for similar types of loans and amortizing the loan under existing amortization tables for each loan. Off-balance sheet instruments: Estimated fair values of the Corporation's off-balance sheet instruments (standby letters of credit and loan commitments) are based on fees currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and estimated fair values of off-balance sheet instruments. The carrying amount and estimated fair value of the Corporation's financial instruments at December 31 are as follows: (IN THOUSANDS) 1995 1994 - -------------------------------------------------------------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------------------------------------------------- Financial assets: Cash and due from banks ... $25,128 $25,128 $19,353 $19,353 Interest-bearing deposits with other banks .......... 115 115 1,584 1,584 Federal funds sold ......... 19,410 19,410 9,500 9,500 Investment securities ...... 59,211 59,211 58,563 58,563 Net loans .................. 231,701 233,645 225,120 222,247 -------------------------------------------------- Total financial assets .... $335,565 $337,509 $314,120 $311,247 -------------------------------------------------- Financial liabilities: Deposits ............... $317,601 $317,422 $301,337 $300,548 Other liabilities ....... 2,557 2,944 2,605 2,713 -------------------------------------------------- Total financial liabilities $320,158 $320,336 $303,942 $303,261 Off-balance sheet instruments $65,788 $65,788 $53,505 $ 53,505 -------------------------------------------------- 8. APPLICABLE FEDERAL INCOME TAXES: The Corporation adopted SFAS No. 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes as of January 1, 1993, decreased net income by $175,000 ($0.08 per share) and is reported separately in the statement of income for the year ended December 31, 1993. The components of the net deferred tax asset as of December 31 are as follows: (in thousands) 1995 1994 ----------------------- Deferred tax assets: Other real estate owned ........................... $ 356 $ 366 Loan loss reserve ................................. 472 519 Unrealized depreciation on investment securities ...................................... -- 487 Deferred loan fees ................................ 73 99 Other reserves .................................... 370 412 ----------------------- 1,271 1,883 Deferred tax liabilities: Depreciation ...................................... (120) (153) Unrealized appreciation on investment securities ...................................... (109) -- ----------------------- Total deferred tax assets ........................... $1,042 $1,730 ----------------------- No valuation allowance was recorded upon the adoption of SFAS No. 109 in the first quarter of 1993 or as of December 31, 1995, 1994 or 1993. The provisions for federal income taxes consist of the following: (in thousands) 1995 1994 1993 ------------------------------ Currently payable ............................ $2,008 $1,534 $1,111 Deferred ..................................... 92 66 290 ------------------------------ Total ...................................... $2,100 $1,600 $1,401 ------------------------------ The sources of timing differences resulting in deferred federal income taxes and the approximate tax effect of each are as follows: (in thousands) 1995 1994 1993 ----------------------------- Other real estate owned ......................... $10 $(99) $(122) Loan loss provision ............................. 47 108 122 Depreciation .................................... (33) (31) (16) Pension expense ................................. (67) 15 34 Deferred loan fees .............................. 26 75 (23) Other ........................................... 109 (2) 295 - -------------------------------------------------------------------------------- Total .......................................... $92 $66 $290 - -------------------------------------------------------------------------------- Applicable federal income taxes differed from the amount derived by applying the statutory federal tax rate to income as follows: (Dollars in thousands) 1995 1994 1993 ----------------------------- Statutory federal tax rate ...................... 34% 34% 34% ----------------------------- Computed "expected" tax expense ........................ $2,201 $1,921 $1,798 Benefit reductions in taxes resulting from tax-exempt income ............................. (285) (333) (326) Other, net ...................................... 184 12 (71) ----------------------------- Actual tax expense .............................. $2,100 $1,600 $1,401 ----------------------------- 9. EMPLOYEE BENEFIT PLANS: Pension Plan The Bank sponsors a noncontributory, defined benefit pension plan (the "Plan") covering substantially all employees. The Plan provides for normal retirement at age 65 and, under certain conditions, also permits early retirement and payment of spouse's benefits. Total pension expense (income) under the Plan amounted to $122,000, ($45,000) and ($106,000) for the years ended December 31, 1995, 1994, and 1993, respectively. Pension expense (income) for the years ended December 31 is comprised of the following: (in thousands) 1995 1994 1993 ------------------------------- Service cost--benefits earned during the period ........................... $428 $407 $301 Interest cost on projected benefit obligation .......................... 669 611 585 Actual return on Plan assets .................. (3,009) (35) (1,303) Unrecognized gain ............................. -- -- -- Net amortization and deferral ................. 2,034 (1,028) 311 ------------------------------- Net periodic pension cost (income) ............ $122 $(45) $(106) ------------------------------- The following table presents a reconciliation of the funded status of the defined benefit plan at December 31, 1995 and 1994. The accrued pension liability is included in Other liabilities on the accompanying consolidated balance sheets. (in thousands) 1995 1994 ----------------------- Actuarial present value of benefit obligation: Accumulated benefit obligation (including vested benefits of $8,420,000 and $7,224,000 as of December 31, 1995 and 1994) $(8,570) $(7,319) ----------------------- Projected benefit obligation for service rendered to date (10,510) (8,382) Plan assets at fair value (invested primarily in the Bank's temporary, income, and equity common trust funds) 12,691 10,081 ----------------------- Plan assets in excess of projected benefit obligation 2,181 1,699 Unrecognized net gain (2,450) (1,716) Unrecognized prior service cost 70 141 Unrecognized transition asset at January 1, 1994, being amortized over a remaining period of one year -- (201) ----------------------- Accrued pension liability included in consolidated balance sheets $ (199) $ (77) ----------------------- Significant assumptions used in determining the accrued pension obligation were as follows: 1995 1994 1993 ----------------------------- Discount rate .................................. 7.0% 8.0% 7.5% Projected compensation increase ................ 5.0 5.0 5.0 Expected long-term rate of return on plan assets ..................... 8.0 8.0 8.0 Supplemental Employee Retirement Plan The Bank sponsors a noncontributory Supplemental Employee Retirement Plan (the "SERP") covering one employee. The SERP provides for supplemental retirement benefits, in an amount that is equal to the difference between what would have been payable under the Plan and the maximum amount payable under current regulations. SERP expense was first recognized in 1995 and amounted to $71,000. SERP expense for the year ended December 31 is comprised of the following: (in thousands) 1995 ------ Service cost--benefits earned during the period ........................ $ 9 Interest cost on projected benefit obligation .......................... 24 Actual return on Plan assets ........................................... -- Unrecognized gain ...................................................... -- Net amortization and deferral .......................................... 38 ------ Net periodic SERP cost ................................................. $71 ------ The following table presents a reconciliation of the accrued liability for the SERP as of December 31, 1995. The accrued SERP liability is included in Other liabilities on the accompanying consolidated balance sheets. (in thousands) 1995 -------- Actuarial present value of benefit obligation: Accumulated benefit obligation (including vested benefits of $65,000 as of December 31, 1995) ................................ $ (65) Projected benefit obligation for service rendered to date .......................................... (370) Unrecognized net loss ............................................... 35 Unrecognized prior service cost ..................................... 264 Accrued SERP liability included in consolidated balance sheets .................................... $ (71) Significant assumptions used in determining the accrued pension obligation were as follows: 1995 ----- Discount rate .......................................................... 7.0% Projected compensation increase ........................................ 5.0 Expected long-term rate of return on plan assets ............................................. -- Thrift Plan The Corporation sponsors a thrift and savings plan (the "Thrift Plan") covering substantially all employees. The Thrift Plan provides for the Corporation to make incentive contributions equal to the participant's basic contribution up to a maximum of 3% of compensation and provides for voluntary employee contributions. All contributions and interest earned thereon are vested immediately. The Thrift Plan expense was approximately $165,000, $170,000, and $149,000 in 1995, 1994, and 1993, respectively. Post-Retirement Benefits In addition to providing pension and thrift plan benefits, the Corporation provides certain health care and life insurance benefits for certain retired employees. The Corporation adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Post-Retirement Benefits other than Pensions ("SFAS No. 106"), in the first quarter of 1993. SFAS No. 106 requires that the expected cost of such benefits be actuarially determined and accrued ratably from the date of hire to the date the employee is fully eligible to receive benefits. The Corporation elected to amortize the net obligation existing as of the date of adoption (transition obligation) over the remaining service periods of active plan participants. The net periodic post-retirement benefit cost for 1995 and 1994 was $335,000 and $339,000, respectively. The net periodic post-retirement benefit cost for the years ended December 31 is comprised of the following: (in thousands) 1995 1994 ------------------- Service cost-- benefits attributed to service during the period ............................... $ 12 $ 11 Interest cost on accumulated Postretirement benefit obligation ...................................... 204 201 Amortization of transition obligation ..................... 119 127 Amortization of unrecognized gain ......................... -- -- ------------------- Net periodic post-retirement benefit cost ................. $335 $339 ------------------- The assumed discount rate used in the calculation for the accumulated post-retirement benefit obligation was 7.0% and 8.0% for 1995 and 1994, respectively. The assumed health care cost trend rate for 1996 was 9% and was graded down in 1% increments per year to an ultimate rate of 6% per year. The following table summarizes the amounts recognized in the Corporation's balance sheet as of December 31, 1995 and 1994: (in thousands) 1995 1994 --------------------- Accumulated post-retirement benefit obligation .......... $(2,830) $(2,638) Unrecognized variance of experience different from that assumed and unamortized transition obligation ................................. 2,428 2,365 Accrued post-retirement benefit cost .................... $(402) $ (273) --------------------- The impact of a 1% increase in the assumed health care cost trend rate for each future year would be as follows: (in thousands) 1995 ------- Accumulated post-retirement benefit obligation as of December 31 .................................................. $3,015 Service cost ......................................................... 12 Interest cost ........................................................ 217 Net amortization and deferral ........................................ 129 Post-Employment Benefits In November 1992, Statement of Financial Accounting Standards No. 112, Employers' Accounting for Post-Employment Benefits ("SFAS No. 112"), was issued. SFAS No. 112 requires employers to recognize any obligation to provide post-employment (as differentiated from post-retirement) benefits by accruing the estimated liability. During the first quarter of 1994, the Corporation adopted SFAS No. 112, which did not have a material impact on the results of operations. 10. STOCK OPTION PLAN: The Corporation maintains a stock option and stock appreciation rights plan (the "Plan") whereby, prior to 1994, up to 108,000 authorized and unissued or Treasury shares of the Corporation's common stock were reserved for issuance under the Plan. During 1994, the shareholders' approved an additional 108,860 shares for issuance under the Plan. The option to purchase shares of the Corporation's common stock may be issued to key officers. During 1995, the shareholder's approved the issuance of 40,000 shares, 10,000 to be granted to outside directors, for 4 years after each Annual Meeting. The option price will be set at the last sale price for the stock on the 3rd business day following the Corporation's Annual Meeting. Options granted may either be incentive stock options within the meaning of the Internal Revenue Service code, or non-qualified options. The stock options are exercisable over a period determined by the Board of Directors; however, the option period will not commence earlier than one year or be longer than ten years from the date of the grant. The Plan provides that the option price at the date of grant will not be less than the fair market value of the Corporation's common stock. The following is a summary of transactions under the Plan: SHARES AVAILABLE PRICE UNDER FOR PER OPTION OPTION SHARE ---------------------------------------------- Balance at December 31, 1992 .... 77,420 14,220 $ 9.00 - $16.50 Options granted ............... 14,000 (14,000) $14.75 Options exercised ............. (3,400) -- $ 9.00 ---------------------------------------------- Balance at December 31, 1993 .... 88,020 220 $ 9.00 - $16.50 Options canceled .............. -- (220) Options authorized ............ -- 108,860 Options granted ............... 107,600 (107,600) $15.50 - $18.60 Options exercised ............. (10,160) -- $ 9.00 - $14.75 Options expired ............... (3,800) -- $14.75 - $16.5 ---------------------------------------------- Balance at December 31, 1994 .... 181,660 1,260 $ 9.00 - $18.60 Options authorized ............ -- 40,000 Options granted ............... 10,000 (10,000) $17.375 Options exercised ............. (3,000) -- $17.375 Options expired ............... (3,200) -- $15.50 - $18.60 ---------------------------------------------- Balance at December 31, 1995 .... 185,460 31,260 ---------------------------------------------- Exercisable at December 31, 1995 105,420 $ 9.00 - $18.60 ---------------------------------------------- Stock appreciation rights may be granted in tandem with non-qualified stock options. No stock appreciation rights have been granted under the Plan. The options had a $.04 per share dilutive effect on earnings per share for the year ended December 31, 1995 and would not have had a dilutive impact on earnings per share for the years ended December 31, 1994 and 1993 had they been exercised. 11. RELATED PARTY TRANSACTIONS: The Corporation had loans outstanding directly to executive officers, directors and certain other related parties of $2,898,000 and $2,405,000 at December 31, 1995 and 1994, respectively. Following is a summary of these transactions: (in thousands) 1995 1994 --------------------- Balance, beginning of year ............................. $2,405 $2,326 Additions .............................................. 1,340 275 Amounts collected ...................................... (847) (196) --------------------- Balance, end of year ................................... $2,898 $2,405 --------------------- 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT 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. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition.The contractual amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument of commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Some of the the commitments are expected to expire without being drawn upon, and the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at December 31, 1995, are $62,054,000. The Corporation evaluates each customer's creditworthiness on a case-by-case basis.The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, residential real estate, and income-producing commercial properties. 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 extending loan facilities to customers. The collateral varies, but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and residential real estate for those commitments for which collateral is deemed necessary. The Corporation's obligation under standby letters of credit as of December 31, 1995, amounted to $3,734,000. As of December 31, 1995, the Corporation had no loans sold with recourse outstanding. The Corporation grants construction, commercial, residential mortgage, and consumer loans to customers primarily in Southeastern Pennsylvania. Although the Corporation has a diversified loan portfolio, its debtors' ability to honor their contracts is substantially dependent upon the general economic conditions of the region. 13. RISKS AND UNCERTAINTIES The earnings of the corporation depend on the earnings of the Bank. The Bank's earnings are dependent upon both the level of net interest income and non-interest revenue streams, primarily fees for trust services, that are earned annually. Accordingly, the earnings of the Corporation are subject to risks and uncertainties surrounding both its exposure to changes in the interest rate environment and movements in financial markets. Most of the Bank's lending activity is with customers located in southeastern Pennsylvania. Lending is spread between commercial, consumer and real estate related loans, including construction lending. While these loan concentrations represent a potential concentration of credit risk, the Bank's credit loss experience compares favorably to the Bank's peer group credit loss experience. The financial statements of the Corporation are prepared in conformity with generally accepted accounting principles that require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. Significant estimates are made by management in determining the allowance for possible loan losses and the carrying value of other real estate owned. Consideration is given to a variety of factors in establishing these estimates , including current economic conditions, the results of the internal loan review process, delinquency statistics, borrowers perceived financial and managerial strengths and the adequacy of supporting collateral, if collateral dependent , or the present value of future cash flows. Since the allowance for possible loan losses and carrying value of other real estate owned are dependent, to a great extent, on general and other economic conditions beyond the Bank's control, it is at least reasonably possible that the estimates of the allowance for possible loan losses and the carrying value of other real estate owned could differ materially from currently reported values in the near term. 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): QUARTERS ENDING 1995 (In thousands, except per share data) 3/31 6/30 9/30 12/31 ------------------------------------ Interest income .......................... $5,516 $5,867 $6,071 $6,163 Interest expense ......................... 1,594 1,826 1,910 1,916 Net interest income ...................... 3,922 4,041 4,161 4,247 Provision for loan losses ................ 125 125 125 125 Income before income taxes ............... 1,540 1,634 1,858 1,711 Net income ............................... 1,090 1,144 1,299 1,110 Net income per share of common stock ..... 0.50 0.52 0.59 0.49 QUARTERS ENDING 1994 (In thousands, except per share data) 3/31 6/30 9/30 12/31 ------------------------------------ Interest income .......................... $4,772 $4,955 $5,160 $5,491 Interest expense ......................... 1,257 1,241 1,258 1,321 Net interest income ...................... 3,515 3,714 3,902 4,170 Provision for loan losses ................ 125 125 125 125 Income before income taxes ............... 1,323 1,342 1,378 1,606 Net income ............................... 945 990 1,003 1,111 Net income per share of common stock ..... 0.43 0.45 0.46 0.51 15. CONDENSED FINANCIAL STATEMENTS: The condensed financial statements of the Corporation (parent company only) as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, are as follows: Condensed Balance Sheets (in thousands) 1995 1994 -------------------- Assets: Cash ................................................... $ 130 $ 182 Investments in subsidiaries, at equity in net assets ................................. 29,982 25,117 Premises and equipment, net ............................ 4,351 4,450 Other assets ........................................... 5 2 -------------------- Total assets ......................................... $34,468 $29,751 -------------------- Liabilities and shareholders' equity: Mortgages payable ...................................... $2,557 $2,605 Other liabilities ...................................... 8 -- -------------------- Total liabilities ...................................... 2,565 2,605 Common stock, par value $1, authorized 5,000,000 shares, issued 2,493,200 shares and 1,245,100 shares as of December 31, 1995 and 1994, respectively, and outstanding 2,190,380 shares and 1,093,690 shares as of December 31, 1995 and 1994, respectively ............... 2,493 1,245 Paid-in capital in excess of par value ................... 4,363 5,559 Unrealized investment appreciation (depreciation), net of deferred income taxes ........................... 212 (945) Retained earnings ........................................ 26,374 22,826 Less common stock in treasury, at cost- 302,820 and 151,410 shares as of December 31, 1995 and 1994, respectively. .............. (1,539) (1,539) -------------------- Total shareholders' equity ........................... 31,903 27,146 -------------------- Total liabilities and shareholders' equity ........... $34,468 $29,751 -------------------- Condensed Statements of Income (in thousands) 1995 1994 1993 ------------------------------ Dividends from The Bryn Mawr Trust Company $1,095 $ 710 $ 435 Interest and other income 236 389 389 Total operating income 1,331 1,099 824 Expenses 478 524 459 ------------------------------ Income before equity in undistributed income of subsidiary and cumulative effect of accounting change 853 575 365 Equity in undistributed income of subsidiary before cumulative effect of accounting change: The Bryn Mawr Trust Company 3,708 3,428 3,498 ------------------------------ Income before income taxes and cumulative effect of accounting change 4,561 4,003 3,863 Federal income tax benefit 82 46 24 ------------------------------ Income before cumulative effect of accounting change 4,643 4,049 3,887 Cumulative effect of accounting change -- -- (175) ------------------------------ Net income $4,643 $4,049 $3,712 ------------------------------ Condensed Statements of Cash Flows (in thousands) 1995 1994 1993 ----------------------------- Operating activities Net income .................................... $4,643 $4,049 $3,712 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary: The Bryn Mawr Trust Company ..................... (3,708) (3,428) (3,323) Depreciation expense ............................ 98 98 98 Other ........................................... (42) (47) (28) ----------------------------- Net cash provided by operating activities ........................ 991 672 459 ----------------------------- Financing activities: Dividends paid ................................ (1,095) (710) (435) Return from Bryn Mawr Financial Services, Inc. ...................... -- -- 10 Proceeds from issuance of stock ............... 52 125 30 ----------------------------- Net cash used by financing activities .................................. (1,043) (585) (395) ----------------------------- (Decrease) increase in cash and cash equivalents ..................................... (52) 87 64 Cash and cash equivalents at beginning of year ............................... 182 95 31 Cash and cash equivalents at end of year ................................... $ 130 $ 182 $ 95 ----------------------------- These statements should be read in conjunction with the other notes related to the consolidated financial statements. As a bank and trust company subject to the Pennsylvania Banking Code (the "Banking Code") of 1965 as amended, the Bank is subject to legal limitations as to the amount of dividends that can be paid to its shareholder, the Corporation. The Banking Code restricts the payment of dividends by the Bank to the amount of its retained earnings. As of December 31, 1995, the Bank's retained earnings amounted to $29,982,000. Therefore, as of December 31, 1995, dividends available for payment to the Corporation are limited to $29,982,000. Since the sole source of dividend funding for the Corporation's dividend payments to its shareholders is the Bank's dividends, the Corporation is effectively limited as to the amount of dividends that it may pay to an amount equal to the limits placed on the Bank, as discussed above. 16. SEGMENT INFORMATION As a part of its operating segments, the Bank generates significant operating profits from its banking, its trust and mortgage banking activities. The Bank's Trust Division provides both corporate and individual trust products and services to its customers. Assets under management were $1,040,000,000, $799,846,000, and $764,571,000 at December 31, 1995, 1994, and 1993, respectively. The Bank also sells residential mortgage loans in the secondary mortgage loan market, generating significant operating profits for the Bank. The Bank originated and sold mortgage loans in the secondary mortgage loan market amounting to $67,826,000, $39,109,000, and $108,865,000 in 1995, 1994, and 1993, respectively. Segment information for the years ended December 31, 1995, 1994, and 1993 is as follows: 1995 ---------------------------------------- MORTGAGE BANKING TRUST BANKING CONSOLIDATED ---------------------------------------- Interest and fee income .............. $23,137 $-- $ 480 $ 23,617 ---------------------------------------- Other operating income: Fees for trust services ........... -- 5,496 -- 5,496 Service charges on checking accounts ................ 1,049 -- -- 1,049 Other fees and service charges .... 487 -- 753 1,240 Net gains on loan sales ........... 45 -- 434 479 Gains on sale of other real estate owned ..................... 137 -- -- 137 Other real estate owned revenue ... 353 -- -- 353 Other ............................. 443 -- -- 443 Total other operating income ......... 2,514 5,496 1,187 9,197 ---------------------------------------- Total gross revenues ................. $25,651 $5,496 $1,667 $ 32,814 Operating profit ..................... $ 3,849 $2,083 $ 939 $ 6,871 ---------------------------------------- General corporate expenses ........... -- -- -- $ 128 ---------------------------------------- Income before income taxes, extraordinary credit and cumulative effect of an accounting change .................. -- -- -- $ 6,743 ---------------------------------------- Identifiable assets at December 31 ....................... $354,774 $ 170 $ 12 $354,956 ---------------------------------------- Capital expenditures ................. $ 1,269 $ 34 -- $ 1,303 ---------------------------------------- Depreciation and amortization ........ $ 873 $ 99 $ 14 $ 986 ---------------------------------------- 1994 ---------------------------------------- MORTGAGE BANKING TRUST BANKING CONSOLIDATED ---------------------------------------- Interest and fee income .............. $20,134 $ -- $ 244 $20,378 ---------------------------------------- Other operating income: Fees for trust services ........... -- 4,719 -- 4,719 Service charges on checking accounts ................ 1,068 -- -- 1,068 Other fees and service charges .... 502 -- 690 1,192 Net gains on loan sales ............ 39 -- 347 386 Gains on sale of other real estate owned ..................... 294 -- -- 294 Other real estate owned revenue ... 319 -- -- 319 Other ............................. 405 -- -- 405 ---------------------------------------- Total other operating income ......... 2,627 4,719 1,037 8,383 ---------------------------------------- Total gross revenues ................. $22,761 $4,719 $1,281 $28,761 ---------------------------------------- Operating profit ..................... $ 3,421 $1,802 $ 596 $ 5,819 General corporate expenses ........... -- -- -- $ 170 ---------------------------------------- Income before income taxes, extraordinary credit and cumulative effect of an accounting change .................. -- -- -- $ 5,649 Identifiable assets at December 31 ....................... $332,909 $ 236 $ 35 $333,180 ---------------------------------------- Capital expenditures ................. $ 841 $ 208 $ 8 $ 1,057 Depreciation and amortization ........ $ 806 $ 66 $ 19 $ 891 ---------------------------------------- 1993 ---------------------------------------- MORTGAGE BANKING TRUST BANKING CONSOLIDATED ---------------------------------------- Interest and fee income .............. $18,905 $ -- $ 590 $19,495 ---------------------------------------- Other operating income: Fees for trust services ........... 4,419 -- 4,419 Service charges on checking accounts ................ 1,266 -- -- 1,266 Other fees and service charges .... 517 -- 877 1,394 Net gains on loan sales ........... 42 -- 1,400 1,442 Gains on sale of other real estate owned ..................... 889 -- -- 889 Other .............................. 369 -- 7 376 Total other operating income ......... 3,083 4,419 2,284 9,786 ---------------------------------------- Total gross revenues ................. $21,988 $4,419 $2,874 $29,281 ---------------------------------------- Operating profit ..................... $ 2,144 $1,595 $1,649 $ 5,388 General corporate expenses ........... -- -- -- $ 100 ---------------------------------------- Income before income taxes, extraordinary credit and cumulative effect of an accounting change .. -- -- -- $ 5,288 ---------------------------------------- Identifiable assets at December 31 .. $320,816 $ 94 $ 32 $320,942 Capital expenditures ................. $ 840 $ 3 $ 26 $ 869 ---------------------------------------- Depreciation and amortization ........ $ 821 $ 41 $ 11 $ 873 ---------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Bryn Mawr Bank Corporation: We have audited the accompanying consolidated balance sheets of Bryn Mawr Bank Corporation and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bryn Mawr Bank Corporation and subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Corporation changed its method of accounting for investment securities in 1994 and, as discussed in Notes 8 and 9, changed its method of accounting for income taxes and postretirement benefits other than pensions, respectively, in 1993. /s/ Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania January 18, 1996 CORPORATE INFORMATION as of February 1, 1996 DIRECTORS Darrell J. Bell Consultant, Main Line Health, Inc. Richard B. Cuff President, Cuffco, Inc. Warren W. Deakins Self-Employed, Insurance Sales Eleanor Carson Donato President and Owner, C.N. Agnew, Realtor, Inc. William Harral, III President and Chief Executive Officer, Bell Atlantic-Pennsylvania, Inc. Peter H. Havens Executive Vice President, The Bryn Mawr Trust Company Sherman R. Reed, 3rd Builder and Developer Phyllis M. Shea Attorney-at-Law, Shea and Shea Robert L. Stevens Chairman, Chief Executive Officer, and President of Bryn Mawr Bank Corporation and The Bryn Mawr Trust Company B. Loyall Taylor, Jr. President, Taylor Gifts, Inc. Samuel C. Wasson, Jr. Secretary of Bryn Mawr Bank Corporation and Executive Vice President and Secretary of The Bryn Mawr Trust Company Thomas A. Williams Vice President, Secretary/Treasurer, Houghton International, Inc. ANNUAL MEETING The Annual Meeting of Shareholders of Bryn Mawr Bank Corporation will be held at The American College, 270 Bryn Mawr Avenue, Bryn Mawr, Pennsylvania, on Tuesday, April 16, 1996, at 2:00 p.m. CORPORATE HEADQUARTERS 801 Lancaster Avenue Bryn Mawr, Pennsylvania 19010-3396 (610)526-2300 AUDITORS Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania 19103-2962 LEGAL COUNSEL Monteverde, McALee, FitzPatrick, Tanker & Hurd, P.C. One Penn Center at Suburban Station 1617 John F. Kennedy Boulevard, Suite 1500 Philadelphia, Pennsylvania 19103-1815 STOCK LISTING Bryn Mawr Bank Corporation common stock is traded over-the-counter and is listed on the NASDAQ National Market System under the symbol BMTC. TRANSFER AGENT The Bryn Mawr Trust Company 801 Lancaster Avenue Bryn Mawr, Pennsylvania 19010-3396 REGISTRAR Mellon Bank N.A. P.O. Box 444 Pittsburgh, Pennsylvania 15230-0929 FORM 10-K A copy of the Corporation's Form 10-K, including financial statement schedules as filed with the Securities and Exchange Commission, is available without charge to shareholders upon written request to Samuel C. Wasson, Jr., Secretary, Bryn Mawr Bank Corporation, 801 Lancaster Avenue,Bryn Mawr, Pennsylvania 19010-3396. SHAREHOLDER RELATIONS Samuel C. Wasson, Jr. Secretary (610)526-2343 MARKET MAKERS F. J. Morrissey & Co., Inc. Philadelphia, Pennsylvania Herzog, Heine, Geduld, Inc. New York, New York Janney Montgomery Scott, Inc. Philadelphia, Pennsylvania Legg Mason Wood Walker, Inc. Philadelphia, Pennsylvania McConnell Budd & Downes Morristown, New Jersey The Bryn Mawr Trust Company 801 Lancaster Avenue Bryn Mawr, Pennsylvania 19010-3396 (610)525-1700 SENIOR MANAGEMENT: Robert L. Stevens * Chairman, Chief Executive Officer, and President Peter H. Havens Executive Vice President, Trust Robert J. Ricciardi * Executive Vice President, Community Banking Samuel C. Wasson, Jr. * Executive Vice President and Secretary, Loans Joseph H. Bachtiger Senior Vice President, Trust Administration Joseph G. Keefer Senior Vice President, Commercial & Real Estate Lending Services Paul M. Kistler, Jr. Senior Vice President, Human Resources, Facilities, & Marketing Donald B. Krieble Senior Vice President, Consumer Credit Services Thomas M. Petro Senior Vice President, Information Management Joseph W. Rebl* Senior Vice President and Treasurer, Finance Walter Smedley, III Senior Vice President, Member Banking Credit Services William J. Fink Group Vice President, Commercial & Real Estate Lending Services Geoffrey L. Halberstadt, Sr. Group Vice President, Commercial & Real Estate Lending Services William R. Mixon Group Vice President, Information Systems Leo M. Stenson Vice President and Auditor William F. Mannion, Jr. Managing Director, BMT Mortgage Company Richard I. Sichel Managing Director and Chief Investment Officer, Investment Counselors of Bryn Mawr * Also officer of the Corporation. BRANCH OFFICES: 801 Lancaster Avenue Bryn Mawr, Pennsylvania 19010-3396 (610)525-1700 18 West Eagle Road Havertown, Pennsylvania 19083 (610)789-1840 39 West Lancaster Avenue Paoli, Pennsylvania 19301 (610)640-9920 330 East Lancaster Avenue Wayne, Pennsylvania 19087 (610)341-1400 312 East Lancaster Avenue Wynnewood, Pennsylvania 19096 (610)896-6435 LIMITED SERVICE OFFICES: Beaumont at Bryn Mawr Retirement Community Bryn Mawr, Pennsylvania Bellingham Retirement Living West Chester, Pennsylvania Martins Run Life Care Community Media, Pennsylvania One Tower Bridge West Conshohocken, Pennsylvania The Quadrangle Haverford, Pennsylvania Radnor Corporate Center Radnor, Pennsylvania Waverly Heights Gladwyne, Pennsylvania