Selected Financial Data
(in thousands, except for share and per share data)
For the years ended
December 31, 2001 2000 1999 1998* 1997*
----------------------------------------------------------
Interest income......... $ 30,311 $ 31,985 $ 28,317 $ 26,082 $ 24,960
Interest expense........ 6,302 7,072 5,857 5,976 6,929
----------------------------------------------------------
Net interest income..... 24,009 24,913 22,460 20,106 18,031
Loan loss provision..... 1,200 250 250 150 200
----------------------------------------------------------
Net interest income
after loan loss
provision.............. 22,809 24,663 22,210 19,956 17,831
Other income............ 20,830 17,727 18,086 14,610 12,086
Other expenses.......... 29,743 29,696 28,456 24,229 20,837
----------------------------------------------------------
Income before income
taxes.................. 13,896 12,694 11,840 10,337 9,080
Applicable income
taxes.................. 4,770 4,433 3,879 3,480 2,950
----------------------------------------------------------
Net income.............. $ 9,126 $ 8,261 $ 7,961 $ 6,857 $ 6,130
----------------------------------------------------------
Per share data:
Earnings per common
share:
Basic................. $ 2.11 $ 1.92 $ 1.83 $ 1.58 $ 1.40
Diluted............... $ 2.05 $ 1.85 $ 1.75 $ 1.51 $ 1.33
Dividends declared..... $ 0.72 $ 0.68 $ 0.60 $ 0.465 $ 0.36
Weighted-average shares
outstanding........... 4,325,520 4,292,838 4,349,403 4,327,297 4,392,162
Dilutive potential
common shares......... 127,090 161,408 193,915 225,708 203,660
----------------------------------------------------------
Adjusted weighted-
average shares........ 4,452,610 4,454,246 4,543,318 4,553,005 4,595,822
(in thousands)
At December 31, 2001 2000 1999 1998 1997
----------------------------------------------------------
Total assets............ $ 476,823 $ 444,424 $ 436,820 $ 391,840 $ 374,210
Earning assets.......... 427,805 389,053 395,952 357,683 327,942
Deposits................ 391,059 386,966 371,068 342,357 328,806
Shareholders' equity.... 57,307 50,970 46,719 42,221 39,349
Ratio of equity to
assets................. 12.02% 11.47% 10.70% 10.78% 10.52%
Loans serviced for
others................. 442,373 325,040 306,147 290,675 255,571
For the years ended
December 31, 2001 2000 1999 1998 1997
----------------------------------------------------------
Selected financial
ratios:
Net interest margin..... 5.85% 6.33% 6.12% 5.99% 5.59%
Net income to:
Average total assets... 2.05% 1.94% 2.01% 1.91% 1.74%
Average shareholders'
equity................ 16.95% 17.20% 17.97% 17.06% 16.45%
Average shareholders'
equity to average total
assets................. 12.09% 11.28% 11.10% 11.17% 10.60%
Dividends declared per
share to net income per
basic common share..... 34.12% 35.42% 32.79% 29.43% 25.71%
*Reclassified for comparative purposes.
12
Management's Discussion and Analysis
The following is a discussion of the consolidated results of operations of Bryn
Mawr Bank Corporation and its subsidiaries (the "Corporation") for each of the
three years in the period ended December 31, 2001, as well as the financial
condition of the Corporation as of December 31, 2001 and 2000. The Bryn Mawr
Trust Company (the "Bank"), Bryn Mawr Advisors, Inc.("BMA"), formerly Tax
Counsellors of Bryn Mawr, Inc., Bryn Mawr Brokerage Company, Inc. ("B M
Brokerage"), Bryn Mawr Asset Management, Inc.("BMAM"), formerly CDC Capital
Management, Inc. and Joseph W. Roskos & Co. ("JWR&Co") are wholly owned
subsidiaries of the Corporation. Bryn Mawr Finance, Inc. ("B M Finance") is a
wholly owned subsidiary of JWR&Co, Insurance Counsellors of Bryn Mawr, Inc.
("ICBM") is a wholly owned subsidiary of the Bank. This discussion should be
read in conjunction with the Corporation's consolidated financial statements
beginning on page 30.
Significant Items for 2001
- --------------------------------------------------------------------------------
Frederick C. "Ted" Peters II Named President and CEO
In January 2001, the Corporation's and Bank's Boards of Directors named Ted
Peters President and CEO of both companies, replacing former President and CEO
Robert L. Stevens, who remains as Chairman of the Boards of both the
Corporation and the Bank. During his first year as CEO Mr. Peters focused on
continued earnings growth through the building of the Wealth Management segment
of the Corporation's business line, as well as expense reduction. The Wealth
Management segment of the Corporation includes the trust and investment
management products and services that help our customers to protect and enhance
their assets. During the fourth quarter of 2001, four new wealth consultants
were added as a sales force, with a goal of growing the Wealth Management
assets under management and the respective revenue stream. John Roman, has been
named the head of the Wealth Management segment of the Bank. In an effort to
reduce expenses, staffing levels of the Corporation's subsidiaries were reduced
to 256 full-time-equivalent ("FTEs") staff as of December 31, 2001 compared to
269 FTEs as of December 31, 2000.
Dividend Increase
Based on a continued growth in record earnings, the Corporation increased its
quarterly dividend payment for 2001 by 6%, from $0.17 per share in 2000 to
$0.18 per share in 2001. The Corporation's dividend payout ratio was 34.12% of
basic earnings per share for 2001, compared to 35.42% for 2000.
Continuation of the Stock Repurchase Program
In 1997, the Corporation established its first stock repurchase program and
repurchased 164,800 shares of common stock at a cost of $3,830,000. The second
stock repurchase program ran from March 2000, through October 2001, pursuant to
which it purchased 214,755 shares at a cost of $5,319,000. In October 2001,
management was authorized to repurchase up to an additional 5% of the
outstanding shares as of October 2001, while not spending more than $7,500,000.
This latest stock repurchase program is authorized to extend for a five-year
period, with annual reviews by the Corporation's Board of Directors. The
Corporation's stock repurchasing activity, from 1997 through December 31, 2001,
resulted in the repurchase of a total of 413,850 shares of the Corporation's
common stock, at a cost of $11,753,000 for an average purchase price of $28.40
per share. The use of the Corporation's capital to repurchase stock is a
catalyst to increasing the Corporation's return on equity.
Strong Asset Quality
The Corporation consistently strives to enhance the quality of its loan
portfolio. The loan portfolio continues to grow and the average loan size has
increased substantially which necessitates the constant review of both the
credit standards and the loan loss reserve. The state of the economy is taken
into consideration in the evaluation of the adequacy of the loan loss reserve.
During 2001 economic growth slowed considerably and resulted in a substantial
decrease in the prime rate. Complicating the deterioration in the economy were
the events of September 11, 2001. In addition to evaluating the credit quality
of the loan portfolio, the deteriorating state of the economy at December 31,
2001 was considered in evaluating the adequacy of the loan loss reserve. Since
1997, nonperforming assets have decreased from $1,994,000 to $43,000 at year-
end 2001. Other real estate owned ("OREO") balances amounting to $25,000 at
year-end 1997 had been totally eliminated by year-end 1999 and there were no
such balances at December 31, 2001. Nonperforming loans have decreased 95% over
the prior five years to $43,000 at year-end 2001. Nonperforming loans as a
percentage of total loans amounted to 1 basis point at December 31, 2001.
Delinquencies, 30 days or more past due, amounted to 11 basis points of total
outstanding loans at December 31, 2001. At December 31, 2000 nonperforming
loans, as a percentage of total loans amounted to 2 basis points and
delinquencies amounted to 20 basis points.
13
Results of Operations
- --------------------------------------------------------------------------------
Overview
The Corporation reported a 10% increase in net income to $9,126,000 for the
year ended December 31, 2001, the seventh consecutive year of record earnings
for the Corporation. Net income for 2000 amounted to $8,261,000.
Basic earnings per share amounted to $2.11 in 2001, a 10% increase over $1.92
for 2000. Diluted earnings per share increased by 11% to $2.05 for 2001 from
$1.85 for 2000. The dilutive potential common shares added to the weighted-
average shares outstanding were 127,090 and 161,408 for 2001 and 2000,
respectively.
These record earnings results for 2001 were due to a number of factors. As
presented on Table 1, profits from the mortgage-banking segment grew by 254%.
During 2001, the Bank's prime rate decreased 50% to 475 basis points. Interest
rates on residential mortgage loans also recorded significant decreases,
helping to produce a significant increase in the mortgage refinance activity in
the mortgage-banking segment of the Corporation. Mortgage loan sales for 2001
were ahead of 2000 by 356% and responsible for a 188% increase in other income
in the mortgage-banking segment. The decrease in the prime rate, referred to
above, was primarily responsible for a 5% decrease in the banking segments net
interest income. This decrease in net interest income is the primary reason for
an 18% decrease in the banking segment's profit for 2001, compared to 2000.
Fees from Wealth Management services decreased by $236,000 or 3% over similar
revenues for 2000. A combination of a decline in the value of assets under
management, thereby lowering trust fees, and the lack of growth in new trust
business are the primary reasons for the decline in trust fees in 2001,
compared to 2000. The sluggish new business growth was related to the timing of
hiring the wealth sales consultants. This decline in fee income was primarily
responsible for the 11% decline in Wealth Management segment profits in 2001
compared to 2000.
Return on average assets ("ROA") for the year was 2.05%, compared to 1.94% in
2000, while return on average equity ("ROE") for 2001 was 16.95% compared to
17.20% in 2000. The ROA is being enhanced by the additional income generated
during 2001, while the ROE declines as the Corporation's equity grows.
Earnings Performance
- --------------------------------------------------------------------------------
Lines of Business
The Corporation continues to have four significant business segments or lines
from which it derives its earnings, one of which is the Banking line of
business. Additional earnings streams are obtained from its Wealth Management
line of business and its Mortgage Banking line of business--the origination,
servicing and sale of mortgage loans to the secondary mortgage market. The
fourth segment, included in "All Other" in the following segmentation analysis,
derives net revenues from financial services and products, offered through the
Corporations subsidiaries, as well as the Bank's subsidiary, ICBM and JWR&Co's
subsidiary, B M Finance.
TABLE 1 - Lines of Business Segment Analysis
2001
------------------------------------------
Mortgage All
(dollars in thousands) Banking Wealth Banking Other Consolidated
------------------------------------------
Net interest income.......... $23,480 $ -- $ 243 $ 286 $24,009
Less loan loss provision..... 1,200 -- -- -- 1,200
------------------------------------------
Net interest income after
loan loss provision......... 22,280 -- 243 286 22,809
Other income:
Fees for investment
management and trust
services.................... -- 8,737 -- -- 8,737
Service charges on deposit
accounts.................... 1,540 -- -- -- 1,540
Other fees and service
charges..................... 294 -- 424 -- 718
Net gain on sale of loans.... 3 -- 5,218 -- 5,221
Gain on sale of other real
estate owned................ -- -- -- -- --
Other operating income....... 1,547 11 -- 3,476 5,034
------------------------------------------
Total other income........... 3,384 8,748 5,642 3,476 21,250
Other expenses:
Salaries--regular............ 8,201 3,010 883 1,954 14,048
Salaries--other.............. 1,505 202 252 77 2,036
Fringe benefits.............. 1,853 585 66 315 2,819
Occupancy.................... 3,109 632 178 444 4,363
Other operating expenses..... 4,061 1,088 746 1,002 6,897
------------------------------------------
Total other expenses......... 18,729 5,517 2,125 3,792 30,163
------------------------------------------
Segment profit/(loss)........ $ 6,935 $3,231 $3,760 $ (30) $13,896
------------------------------------------
% of segment profit (loss)... 50% 23% 27% 0% 100%
2000
------------------------------------------
Mortgage All
(dollars in thousands) Banking Wealth Banking Other Consolidated
------------------------------------------
Net interest income.......... $24,684 $ -- $ 216 $ 17 $24,917
Less loan loss provision..... 250 -- -- -- 250
------------------------------------------
Net interest income after
loan loss provision......... 24,434 -- 216 17 24,667
Other income:
Fees for investment
management and trust
services.................... -- 8,973 -- -- 8,973
Service charges on deposit
accounts.................... 1,144 -- -- -- 1,144
Other fees and service
charges..................... 295 -- 729 -- 1,024
Net gain on sale of loans.... 8 -- 1,232 -- 1,240
Gain on sale of other real
estate owned................ 14 -- -- -- 14
Other operating income....... 925 -- -- 4,789 5,714
------------------------------------------
Total other income........... 2,386 8,973 1,961 4,789 18,109
Other expenses:
Salaries--regular............ 7,826 3,175 538 2,320 13,859
Salaries--other.............. 750 211 30 52 1,043
Fringe benefits.............. 850 616 70 313 1,849
Occupancy.................... 3,401 472 142 502 4,517
Other operating expenses..... 5,505 880 334 2,095 8,814
------------------------------------------
Total other expenses......... 18,332 5,354 1,114 5,282 30,082
------------------------------------------
Segment profit/(loss)........ $ 8,488 $3,619 $1,063 $ (476) $12,694
------------------------------------------
% of segment profit (loss)... 67% 29% 8% (4%) 100%
Bryn Mawr Bank Corporation, Bryn Mawr Advisors, Inc., Insurance Counsellors of
Bryn Mawr, Inc., Bryn Mawr Brokerage Company, Inc., Bryn Mawr Asset Management,
Inc. Bryn Mawr Finance, Inc. and Joseph W. Roskos & Co. have all been
aggregated in All Other.
14
The table reflects operating profits or losses of each Corporate line of
business before income taxes and excluding inter-company interest income and
expense, related to inter-company borrowings.
The Banking segment's percentage of operating profits stood at 50% for 2001,
compared to 67% for 2000. The Wealth Management segment's percentage of
operating profit was 23%, down from 29% for 2000. The Mortgage Banking
segment's share of operating profits increased from 8% in 2000 to 27% in 2001,
while the "All Other" segment, including the Corporation and all non-banking
subsidiaries, went from (4%) in 2000 to 0% in 2001.
Banking Line of Business
The Bank's average outstanding earning assets for 2001 of $400,650,000
increased 4% from $383,695,000 for 2000. Average outstanding loans grew by 6%
in 2001. The largest dollar increase in average outstanding loans occurred in
commercial and industrial loans, up $19,056,000 or 15% over 2000 average
balances. Average residential mortgage loan balances grew by $16,466,000 or 59%
in 2001, compared to similar average outstanding balances in 2000. Commercial
mortgage loans increased by $2,887,000 or 5% from 2000 average balances and
average construction loans increased by $2,234,000 or 15% from similar average
balances for 2000. The average outstanding balances of the Bank's consumer loan
portfolio decreased by $25,370,000 or 24% from 2000's average outstanding
balances. As residential mortgage loan interest rates decreased in 2001, many
fixed rate home equity borrowers, in the consumer loan portfolio, chose to
refinance their existing loan balances into lower rate residential first
mortgage loans. Lower demand for indirect automobile loans, due to increased
competition from automobile manufacturers for new automobile loans, was also
responsible for the decrease in average consumer loan balances in 2001. The
average outstanding balances of federal funds sold increased by 22% in 2001
compared to 2000 levels. Average outstanding investments decreased by 14% for
2001 compared to 2000. The decrease in investments partially funded the growth
in the loan portfolio.
Average outstanding total deposits increased 3% in 2001 compared to 2000. The
largest dollar increase occurred in the Bank's higher cost certificates of
deposit ("CDs") balances, up $7,262,000 or 10%. Average outstanding non-
interest demand deposit balances increased by $6,662,000 or 7%, while average
money market account balances increased by $389,000 or 1%. Average outstanding
balances of NOW accounts decreased by $962,000 or 1%. Average outstanding
savings deposits decreased 3% or $1,325,000. In order to meet loan funding and
liquidity requirements, the Bank increased its reliance on short-term
borrowings, increasing the combined average outstanding borrowings of short-
term borrowings and federal funds purchased by $1,630,000 or 14%. The increases
in the average balances of higher costing CDs and short-term borrowings were
more than offset by lower rates on the remainder of the interest-bearing
deposits, which is the primary reason for the cost of funds decreasing 30 basis
points. However, decreases in the prime rate during 2001, partially offset by
increases in earning assets, specifically in higher yielding loans, are
primarily responsible for a decrease in the net interest margin to 5.85% in
2001 from 6.33% for 2000. An expanded discussion of net interest income follows
under the section entitled "Net Interest Income".
Other income from the Banking segment increased by 42% in 2001 compared to
2000. Service charges on deposit accounts increased 35%, due primarily to both
a decrease in the earnings credit applied to deposit accounts, thereby allowing
the Bank to generate additional service charges, and an overall increase in the
fee structure for service charges on checking accounts.
Total other expenses of the Banking line of business increased by 3% in 2001
compared to 2000 levels. This was due to an increase in regular salaries,
fringe benefits and incentive salaries of 5%, 118%, and 101%, respectively.
Offsetting these increases were decreases in occupancy, advertising and other
current operating expenses. A planned effort to contain expenses and a recovery
of costs associated with a prior problem loan are the main drivers of these
decreases.
The decrease in net interest income, related to declining rates of interest
during 2001, was the main cause of the operating profits of the Banking line of
business to decreased 17% in 2001 compared to 2000.
Wealth Management Line of Business
The Wealth Management Division reported an 11% decrease in operating profit for
2001 compared to 2000 levels. A $236,000 or 3% decrease in total investment
management and trust fee income was primarily responsible for this decline in
profitability. An overall decline in asset values related to a decline in the
values of the stock market was the primary cause for this decrease. The market
value of assets managed decreased from $1,760,000,000 at December 31, 2000, to
$1,707,000,000 as of December 31, 2001.
Other expenses of the Wealth Management line of business increased by $163,000
or 3% in 2001 over
15
2000 levels. The primary reason for this increase was a rebuilding of the
Wealth Management staff, specifically the hiring cost for the wealth sales
consultants and the wealth management head, as well as, the salary expense for
the time they were employed in 2001.
Mortgage Banking Line of Business
The operating profit of the Bank's Mortgage Banking line of business increased
254% in 2001 compared to 2000. During 2001, mortgage interest rates declined
making refinancing more attractive to borrowers. In 2001, the Mortgage Banking
line of business had a 356% increase in the dollar volume of loans sold to the
secondary mortgage market and a 13 basis point decrease in the yield on sales,
compared to 2000 levels. The increase in the volume of loans sold is the main
reason for the increase in the mortgage banking segment's profitability.
Following is a table showing the volume of residential mortgage loans
originated and sold to the secondary mortgage market, the total net gains
realized, and the yield on these loan sales:
TABLE 2 - Summary of Loan Sale Activity
(dollars in thousands) 2001 2000
-----------------
Volume of loans sold......................................... $327,296 $71,737
Loan fees and net gains on sales............................. 5,218 1,232
Yield on sales............................................... 1.59% 1.72%
As of December 31, 2001, the Bank serviced $406,093,000 in residential mortgage
loans for others, compared to $291,903,000 in loans serviced for others at
year-end 2000.
Bryn Mawr Bank Corporation
The Corporation is a one-bank holding company, generating intercompany revenues
from the rental of Corporation owned properties to the Bank. The Corporation's
expenses are primarily of an administrative nature. During 2000, the
Corporation wrote-off $155,000 in goodwill due to changes in the management of
BMAM. No such write-off was included in 2001.
Bryn Mawr Advisors, Inc. (Formerly Tax Counsellors of Bryn Mawr, Inc.)
In July 1997, the Corporation established a new wholly owned subsidiary, TCBM,
in order to add professional tax planning to its array of financial products
and services offered to its customers. TCBM employed CPAs and an attorney (the
"Tax Professionals"), having significant tax planning, preparation and
financial planning capabilities. During 2001, an arrangement was reached
between Corporation management and the Tax Professionals terminating the
Agreement. Pursuant to the arrangement, the net assets of TCBM,(all assets,
excluding cash less all liabilities) as of December 31, 2000, were sold to the
Tax Professionals in exchange for a note in favor of TCBM. The present face
value of the note is $218,000 with a rate of 9% and a due date of September 1,
2004. Net income of $14,000 was earned from interest income on the outstanding
balance of the note during 2001.
Insurance Counsellors of Bryn Mawr, Inc.
In January 1998, the Bank established a new wholly owned subsidiary, ICBM (a
full-service insurance agency), to enable the Bank to offer insurance products
and related services to its customer base. ICBM offers a full line of life,
property and casualty and commercial lines to its customer base. During 2001,
ICBM entered into a marketing agreement with Powers, Craft, Parker & Beard, a
full service insurance agency located in the Corporation's immediate market
area ("PCP&B"). Under this agreement, commissions earned from business
referrals from ICBM, to be underwritten and serviced by PCP&B are split 50% to
ICBM and 50% to PCP&B (the "Marketing Agreement"). ICBM also markets employee
benefits and life insurance products (the "Life Products"). PCP&B does not
participate in commissions earned from the Life Products. During 2001, ICBM
earned commissions from traditional business and the sale of Life Products
resulting in a net profit of $23,000 compared to a loss of $65,000 reported for
2000 and a net profit of $65,000 in 1999.
Bryn Mawr Brokerage Company, Inc.
The Corporation established B M Brokerage in January 1999, in order to make
brokerage services available to its client base through an affiliation with an
independent broker-dealer. During 2001, B M Brokerage expanded its client base
and produced a net profit of $15,000 compared to losses of $40,000 and $6,000
in 2000 and 1999, respectively.
Bryn Mawr Asset Management, Inc. (Formerly CDC Capital Management, Inc.)
On January 6, 1999, the Corporation acquired BMAM for $281,000 in Corporation
stock. BMAM was acquired to enable the Corporation to enhance its array of
financial services and products by offering investment advisory services to its
clients. Goodwill of $177,000 was recorded on the corporation's books, to be
amortized over a 10-year life. During 2000, there were changes in BMAM's
management. Based on the foregoing events, in June 2000 the balance of the
remaining goodwill of $155,000
16
was written-off of the Corporation's books. During 2001, a decision was made to
discontinue the operation of BMAM and reallocate the remaining client accounts
to other business lines of the Corporation. BMAM reported a net loss of
$213,000 for 2001, compared to a net loss of $65,000 for 2000 and a $6,000 net
profit in 1999.
Joseph W. Roskos & Co.
On April 1, 1999, the Corporation acquired JWR&Co, effective January 1, 1999,
for $4,195,000, through a combination of Corporation stock and cash. Goodwill
in the amount of $3,300,000 was recorded on the Corporation's books, to be
amortized over a 20-year life. JWR&Co was acquired to expand the products and
services being offered by the Corporation through its subsidiaries. JWR&Co
provides family business office services to high-net-worth individuals,
including accounting and tax preparation services, consulting and fiduciary
support services. During 2001, JWR&Co reported a net profit of $292,000,
compared to $295,000 in 2000 and $344,000 in 1999, before the amortization of
$164,000 of goodwill in each period and inter-company interest expense, paid to
its subsidiary, B M Finance.
Bryn Mawr Finance, Inc.
B M Finance was incorporated on December 20, 2001, as a wholly owned subsidiary
of JWR&Co. Its primary purpose is to provide financing opportunities to the
Corporation and its subsidiaries. Exclusive of inter-company interest income
from JWR&Co and the Bank, B M Finance had a loss of $9,000.
Critical Accounting Policy
The Corporation's most critical accounting policy is the allowance for loan
loss. The allowance for loan loss represents management's estimate on the
losses that may occur. This is consistently monitored to determine its
adequacy. Ongoing review of credit standards, the level of delinquencies on
loan products and loan segments, and the current state of the economy are
included in this review. Actual losses may differ from management's estimates.
This is explained in more detail on page 19.
Net Interest Income
During 2001, the Bank's prime rate decreased by 475 basis points and this
decrease was primarily responsible for a 5% or $1,674,000 decrease in interest
income. A decline in interest rates paid on deposits during 2001 was primarily
responsible for an 11% or $770,000 decrease in interest expense for the year
ended December 31, 2001. This resulted in an overall decrease in net interest
income of 4% or $904,000 over the year ended December 31, 2000. Average earning
assets grew 4% in 2001, compared to 2000 levels. Higher yielding commercial
loan balances grew by 15%. The average outstanding balances of federal funds
sold increased by 22%, while average investments decreased by 14%. The yield on
earning assets decreased by 70 basis points.
Total average deposits increased 3%. The largest increase occurred in the
Bank's CDs, which increased 10%. Average outstanding non-interest bearing
demand deposits were up by 7%, followed by average money market accounts, up by
1%. Average outstanding NOW and savings deposits decreased by 1% and 3%,
respectively. In an effort to increase liquidity, average outstanding short-
term borrowings grew by 14% over similar balances for 2000. While average
higher costing short-term borrowings and CDs grew in 2001, the ability to lower
overall interest rates paid for costing deposits and short-term borrowings was
primarily responsible for a 30 basis point decrease in the average cost of
funds for 2001, compared to 2000. The decrease in the yield on earning assets,
partially offset by the decreased cost of funds was directly responsible for
the Bank's net interest margin, defined as net interest income exclusive of
loan fees as a percentage of average earning assets, decreasing from 6.33% for
2000 to 5.85% for 2001.
17
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 $574,000, $625,000 and $465,000 in 2001, 2000 and 1999 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.
TABLE 3 - Analyses of Interest Rates and Interest Differential
2001 2000 1999
-----------------------------------------------------------------------------
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.................. $ 25,006 $ -- % $ 22,345 $ -- % $ 22,060 $ -- %
Interest-bearing
deposits with other
banks*................. 623 21 3.4 1,623 90 5.5 2,173 103 4.7
Federal funds sold*..... 7,521 321 4.3 6,174 373 6.0 12,272 609 5.0
Investment securities
available for sale:
Taxable*............... 23,331 1,302 5.6 26,482 1,558 5.9 30,440 1,698 5.6
Tax-exempt*............ 1,604 66 4.1 2,495 108 4.3 4,162 183 4.4
-----------------------------------------------------------------------------
Total investment
securities ........... 24,935 1,368 5.5 28,977 1,666 5.7 34,602 1,881 5.4
-----------------------------------------------------------------------------
Loans* ................. 367,571 28,601 7.8 346,921 29,856 8.6 310,214 25,724 8.3
Less allowance for loan
losses................. (4,636) -- -- (4,352) -- -- (4,257) -- --
-----------------------------------------------------------------------------
Net loans.............. 362,935 28,601 7.9 342,569 29,856 8.7 305,957 25,724 8.4
Other assets ........... 24,479 -- -- 23,897 -- -- 21,997 -- --
-----------------------------------------------------------------------------
Total assets........... $445,499 $30,311 -- $425,585 $31,985 -- $399,061 $28,317 --
-----------------------------------------------------------------------------
Liabilities:
Demand deposits,
noninterest-bearing.... $102,877 $ -- % $ 96,215 $ -- % $ 92,098 $ -- %
Savings deposits........ 190,242 2,023 1.1 192,141 2,697 1.4 184,505 2,533 1.4
Time deposits .......... 78,081 3,768 4.8 70,819 3,596 5.1 65,000 3,008 4.6
Short term borrowings... 11,959 467 3.9 10,342 693 6.7 4,658 266 5.7
Federal funds
purchased.............. 1,296 44 3.4 1,283 86 6.7 954 50 5.2
Other liabilities ...... 7,202 -- -- 6,765 -- -- 7,554 -- --
-----------------------------------------------------------------------------
Total liabilities ..... 391,657 6,302 -- 377,565 7,072 -- 354,769 5,857 --
Shareholders' equity ... 53,842 -- -- 48,020 -- -- 44,292 -- --
-----------------------------------------------------------------------------
Total liabilities and
shareholders' equity.. $445,499 $ 6,302 -- $425,585 $ 7,072 -- $399,061 $ 5,857 --
-----------------------------------------------------------------------------
Total earning assets*
...................... $400,650 -- -- $383,695 -- -- $359,261 -- --
Interest income to
earning assets......... -- -- 7.6% -- -- 8.3% -- -- 7.9%
Interest expense to
earning assets......... -- -- 1.6 -- -- 1.8 -- -- 1.6
Net yield on interest-
earning assets........ -- -- 6.0 -- -- 6.5 -- -- 6.3
Average effective rate
paid on interest-
bearing liabilities.... -- -- 2.2 -- -- 2.6 -- -- 2.3
Average effective cost
on total deposits and
short term borrowings.. -- -- 1.6 -- -- 1.9 -- -- 1.7
Net interest margin..... -- -- 5.85 -- -- 6.33 -- -- 6.12
Earning assets to
interest-bearing
liabilities............ -- -- 1.42 -- -- 1.40 -- -- 1.41
- -------
*Indicates earning assets.
18
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 (decreases) increases in fees on
loans of ($51,000) in 2001, $160,000 in 2000, and $52,000 in 1999.
TABLE 4 - Rate/Volume Analyses
(in thousands) 2001 vs. 2000 2000 vs. 1999
----------------------------------------------
Increase/(decrease) Volume Rate Total Volume Rate Total
----------------------------------------------
Interest income:
Interest-bearing deposits with other banks................................... $ (43) $ (26) $ (69) $ (29) $ 16 $ (13)
Federal funds sold........................................................... 69 (121) (52) (343) 107 (236)
Investment securities available for sale:
Taxable..................................................................... (179) (77) (256) (228) 88 (140)
Tax-exempt.................................................................. (37) (5) (42) (71) (4) (75)
Loans........................................................................ 1,676 (2,931)* (1,255) 3,479 653* 4,132
----------------------------------------------
Total interest income........................................................ 1,486 (3,160) (1,674) 2,808 860 3,668
----------------------------------------------
Interest expense:
Savings deposits............................................................. (30) (644) (674) 164 -- 164
Time deposits................................................................ 379 (207) 172 265 323 588
Short term borrowings........................................................ 96 (322) (226) 373 54 427
Fed funds purchased.......................................................... 1 (43) (42) 20 16 36
----------------------------------------------
Total interest expense....................................................... 447 (1,217) (770) 822 393 1,215
----------------------------------------------
Interest differential........................................................ $1,039 $(1,943) $ (904) $1,986 $467 $2,453
--------------------------------------------------
----------------------------------------------
* Included in the loan rate variance was an increase (decrease) in interest
income related to non-performing loans of $55,000 and $(25,000) in 2001 and
2000, respectively. The variances due to rate include the effect of
nonaccrual loans because no interest is earned on such loans.
The 5% decline in interest income for 2001 was primarily attributable to a 70
basis point decline in the average yield on earning assets, from 8.3% in 2000
to 7.6% for 2001. A 4% increase in average earning assets from $383,695,000 for
2000 to $400,650,000 for 2001 helped offset the decline in interest income due
to decreases in interest rates. Primarily due to the decreases in the prime
rate, interest income related to the rate variance decreased by $3,160,000. A
$1,486,000 increase in interest income, attributable to volume growth, was the
result of a 6% increase in average outstanding loans. The average yield on
loans decreased 80 basis points from 8.6% in 2000 to 7.8% in 2001. The average
yield on federal funds sold decreased 170 basis points to 4.3% for 2001,
compared to 6.0% for 2000. The yield on the investment portfolio decreased by
20 basis points from 5.7% in 2000 to 5.5% in 2001.
As of December 31, 2001, outstanding loans balances increased 13% over December
31, 2000. The most significant loan growth occurred in permanent mortgage
loans, including commercial mortgage loans, fixed rate home equity loans and
residential mortgage loans, which increased by 33%. Commercial mortgage loans
increased by 46%, while residential mortgage loan balances, spurred on by
increases in refinancing of residential mortgage loans due to declining
residential mortgage loan rates in 2001, increased by 71% and fixed rate home
equity loans decreased by 10%, as homeowners took the opportunity to refinance
these balances into lower costing residential first mortgages. Commercial and
industrial loans grew by 14% and construction loan outstanding balances
increased 92%. A 29% decrease in outstanding consumer loans is due primarily to
continued run-off of indirect automobile loans, which was planned by the Bank,
as well as the repayment by home equity loan borrowers, as they chose to
refinance these balances into first mortgages. The yield on average earning
assets decreased by 70 basis points from 8.3% in 2000 to 7.6% in 2001.
Average deposits increased $12,025,000 or 3% during 2001. Average outstanding
CD balances increased by 10%. Average outstanding money market account balances
grew by 1% and average non-interest-bearing demand deposits were up by 7%.
Average outstanding NOW account and savings account balances decreased by 1%
and 3%, respectively. Average outstanding short-term borrowings and federal
funds purchased increased by 14%. The cost of funds for the Bank averaged 1.6%
for 2001 compared to 1.9% for 2000, a 30 basis point decrease.
Loan Loss Provision
The Bank increased its annual loan loss provision from $250,000 for 2000 to
$1,200,000 for 2001. During 2001 the Bank had write-offs totaling $1,169,000.
The majority of this write-off was to one commercial borrower. A small recovery
was received on the charged-off loan. In addition to replenishing the provision
for the amount written-off, the provision was increased to allow for additional
loan deterioration within the existing loan portfolio, associated with a
decline in the economy and the growth in the loan portfolio. The allowance for
loan losses was $4,928,000 and $4,320,000 as of December 31, 2001 and 2000,
respectively. Delinquencies, as a percentage of outstanding loans, amounted to
11 basis points and 20 basis points as of December 31, 2001 and 2000,
respectively. Nonperforming loans amounted to $43,000 at December 31, 2001, a
47% decrease from $81,000 at December 31, 2000. There was no OREO recorded on
the Bank's books at either year-end. The allowance for loan losses, as a
percentage of outstanding loans, was 1.23% as of December 31, 2001, compared to
1.22% as of December 31, 2000. Bank management has
19
determined that the 2001 loan loss provision was sufficient to maintain an
adequate level of the allowance for loan losses during 2001.
A summary of the changes in the allowance for 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 Loan Losses
December 31,
----------------------------------------
(dollars in thousands) 2001 2000 1999 1998 1997
----------------------------------------
Allowance for loan losses:
Balance, January 1................ $4,320 $4,400 $4,100 $4,074 $4,182
----------------------------------------
Charge-offs:
Commercial and industrial......... (940) (32) (10) (42) (196)
Real estate--construction......... -- -- -- -- --
Real estate--mortgage............. (51) (12) 22* (22) --
Consumer.......................... (178) (355) (209) (179) (237)
----------------------------------------
Total charge-offs................. (1,169) (399) (197) (243) (433)
----------------------------------------
Recoveries:
Commercial and industrial......... 63 3 87 100 102
Real estate--construction......... 476 -- 116 -- --
Real estate--mortgage............. -- -- -- -- --
Consumer.......................... 38 66 44 19 23
----------------------------------------
Total recoveries.................. 577 69 247 119 125
----------------------------------------
Net recoveries/ (charge-offs)..... (592) (330) 50 (124) (308)
Provision for loan losses......... 1,200 250 250 150 200
----------------------------------------
Balance, December 31.............. $4,928 $4,320 $4,400 $4,100 $4,074
----------------------------------------
Net recoveries/(charge-offs) to
average loans.................... (0.16)% (0.10)% 0.02% (0.05)% (0.12)%
* The negative charge-off of $22,000 in real estate--mortgage loans in 1999
reflects the adding back to the loan loss reserve of an amount previously
charged off, in conjunction with the acquisition of other real estate owned.
TABLE 6 - Allocation of the Allowance for Loan Losses
The table below allocates the balance of the allowance for 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,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------
% % % % %
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
(dollars in thousands) Loans Loans Loans Loans Loans
--------------------------------------------------------------------
Balance at end of period
applicable to:
Commercial and
industrial............. $2,729 39.1% $1,193 41.5% $ 151 39.7% $ 427 31.8% $ 316 28.1%
Real estate--
construction........... 214 5.1 7 3.0 33 4.2 81 4.7 1,111 5.1
Real estate--mortgage... 1,019 45.0 56 38.3 228 35.4 161 39.3 184 38.2
Consumer................ 316 10.8 248 17.2 279 20.7 301 24.2 465 28.6
Unallocated............. 650 -- 2,816 -- 3,709 -- 3,130 -- 1,998 --
--------------------------------------------------------------------
Total.................. $4,928 100.0% $4,320 100.0% $4,400 100.0% $4,100 100.0% $4,074 100.0%
--------------------------------------------------------------------
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. As a part of the internal loan review
process, loans considered impaired under SFAS No. 114 are individually reviewed
and, when deemed appropriate, a specific portion of the loan loss reserve is
allocated to the respective impaired loans.
Refer to page 34 for further discussion of the Corporation's loan review
process.
20
Other Income
The following table details other income for the years ended December 31, 2001
and 2000, and the percent change from year to year:
TABLE 7 - Other Income
(dollars in thousands) 2001 2000 % Change
--------------------
Fees for trust services................................ $ 8,737 $ 8,973 (3%)
Service charges on deposit accounts.................... 1,540 1,144 35%
Other fees and service charges......................... 718 1,024 (30%)
Net gain on sale of loans.............................. 5,221 1,240 321%
Gain on the sale of other real estate owned............ -- 14 (100%)
Fees earned from family business office services....... 2,564 2,429 6%
Investment advisory and brokerage fees................. 296 957 (69%)
Tax consulting fees.................................... -- 793 (100%)
Insurance commission income............................ 252 191 32%
Other operating income................................. 1,502 962 56%
--------------------
Total other income.................................... $20,830 $17,727 18%
--------------------
In addition to net interest income, the Bank's three operating segments, as
well as BMA, ICBM, B M Brokerage, BMAM, JWR&Co, and BM Finance generate various
streams of fee-based income, including investment management and trust income,
service charges on deposit accounts, loan servicing income, consulting fees and
gains/losses on loan sales.
As discussed in the "Lines of Business" section on pages 14-16, the increase in
other income in 2001 from 2000 levels was primarily a result of an increase in
revenues from gains on the sale of residential mortgage loans in the secondary
market.
Fees for investment management and trust services declined $236,000 or 3% from
year to year. Refer to the discussion under the heading "Wealth Management Line
of Business" on page 15 of this report.
As discussed in the "Mortgage Banking Line of Business" section, the $3,981,000
or 321% increase in gains on the sale of residential mortgage loans was
directly attributable to a $255,559,000 or 356% increase in the volume of
residential mortgages sold, compared to 2000, partially offset by a 13 basis
point decrease in the yield on the sale of residential mortgage loans to the
secondary mortgage market.
Fees from the JWR&Co family office business amounted to $2,564,000 for 2001, a
$135,000 or 6% increase from fees earned in 2000. This increase is directly
attributable to increased client activity during 2001 compared to 2000.
Service charges on deposit accounts increased $396,000 or 35%, due primarily to
a decrease in the earnings credit applied to offset charges to deposit
accounts. This decrease allowed the Bank to increase its actual fees charged
over 2000 levels. The Bank also revised its fee schedule for services in 2001,
thereby increasing fee income.
Investment advisory and brokerage fees declined $661,000 or 69% from $957,000
for 2000 to $296,000 for 2001. The primary reason for this decline was the
decision to discontinue the operations of BMAM during 2001.
Insurance commission income increased $61,000 or 32% from $191,000 for 2000 to
$252,000 for 2001. During 2001, ICBM entered into the Marketing Agreement with
PCP&B, thereby expanding their base of business. ICBM has also generated new
client relationships in both the property and casualty line of business, as
well as the life and employee benefits line of business.
Other operating income increased $540,000 or 56% in 2001 from 2000 levels,
primarily due to sweep fees paid on the commercial and personal accounts, which
grew by $380,000. This fee growth is directly attributable to the fees charged
for the movement of bank's customers balances to off-balance sheet mutual
funds. The funds being moved increased from $126,752,000 at December 31, 2000
to $168,337,000 at December 31, 2001.
Other fees and services decreased $306,000 or 30% from 2000 levels. As
borrowers chose to refinance residential mortgage loans during 2001,
unamortized mortgage servicing rights ("MSRs"), associated with the loans being
paid off had to be fully amortized. The significant volume of refinancing
activity referred to under the Mortgage Banking section was primarily
responsible for a reduction in income of $581,000 in MSRs in 2001 compared to
$45,000 in 2000. BMT Mortgage Company, a division of the Bank, refinanced a
large portion of the loans paid off. Therefore, as the new residential mortgage
loans were sold, the MSR balances were replaced.
Other Expenses
The following table details other expenses for the years ended December 31,
2001 and 2000, and the percent change from year to year:
21
TABLE 8 - Other Expenses
(dollars in thousands) 2001 2000 % Change
---------------------
Salaries - regular.................................... $14,048 $13,859 1%
Salaries - other...................................... 2,036 1,043 95%
Employee benefits..................................... 2,819 1,849 52%
Occupancy expense..................................... 2,111 2,100 1%
Furniture, fixtures and equipment..................... 1,964 2,140 (8%)
Advertising........................................... 959 1,235 (22%)
Professional fees..................................... 552 1,667 (67%)
Computer processing................................... 596 556 7%
Stationery and supplies............................... 360 391 (8%)
Insurance............................................. 163 526 (69%)
Goodwill.............................................. 165 324 (49%)
Net cost of operation of other real estate owned...... -- (1) (100%)
Other operating expenses.............................. 3,970 4,007 (1%)
---------------------
Total other expenses................................. $29,743 $29,696 0%
---------------------
Other expenses increased for the year ended December 31, 2001, by $47,000,
practically even with 2000. Regular salaries, consisting of regular, part time
and overtime salary expense, the largest component of other expenses, rose 1%.
Increases in regular salary expenses for 2001 were partially offset by the
elimination of regular salary expense associated with BMA, whose operations
were discontinued at December 31, 2000. As of December 31, 2001, the
Corporation's consolidated full-time equivalent staffing level was 256.0
compared to 269.0 as of December 31, 2000.
Other salaries increased $993,000 or 95% from 2000 to 2001. The increase in
2001 was directly related to incentive-based compensation, which is directly
related to corporate profitability.
Employee benefit costs increased $970,000 or 52% in 2001 from 2000 levels. Of
this increase, $770,000 relates to the Corporation's pension plan, which
produced net income of $74,000 in 2001 compared to net income of $843,000 in
2000. As presented in Note 11 of this report "Pension and Postretirement
Benefits", a number of factors are responsible for this decrease in net
pension income. Interest costs, associated with the pension plan, increased by
$156,000 for 2001, compared to 2000 and the amortization of the actuarial gain
decreased by $559,000. These two items account for $715,000 of the $770,000
decrease in net pension income from 2000 to 2001. Pension assets are invested
in a variety of investments including equity stocks, bonds and cash
equivalents. Primarily due to the economic impact on the stock market during
2001, pension assets declined in value by $1,598,000. Partially offsetting
this decrease was a 75 basis point increase in the expected return on plan
assets, from 8.5% for 2000 to 9.25% for 2001. The expected rate of return is
determined based on a number of factors, including the mix of investments held
in the portfolio and recent historical rates earned on the respective
investments. The cost of the Bank's medical insurance rose by $70,000.
Occupancy expense was practically level with similar expenses in 2000, growing
by $11,000. Furniture, fixtures and equipment expenses decreased by $176,000
or 8% from 2000 to 2001. Limited capital expenditures are primarily
responsible for this decrease.
Advertising decreased $276,000 or 22%, reflecting a reduction in the
Corporation's advertising campaign in 2001, compared to 2000.
The cost of professional fees declined by $1,115,000 or 67%. The primary
reasons for this decrease was a decline of $351,000 in the Bank's legal fees
and a $422,000 decrease in professional fees associated with BMAM. The
decrease in Bank legal fees was the result of a reduction of fees in 2001
compared to 2000 and a recovery in 2001 of $221,000 in legal fees related to a
prior problem loan. The reduction in BMAM's professional fees was due to the
termination of relationships with outside business solicitors during 2000.
Insurance expense decreased by $363,000 or 69%. 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 coverage. FDIC insurance premiums decreased $5,000 or 7% from 2000
to 2001. The cost of the Bank's business insurance premiums decreased by
$244,000 or 57% in 2001 compared to 2000 premium levels, due to lower premiums
being negotiated for the 2001 insurance renewals.
During 2000, because of the changes in management, the remaining balance of
goodwill related to the acquisition of BMAM was written-off of the
Corporation's books. This is the reason for the $159,000 decrease in goodwill
expense in 2001, compared to 2000. The remaining goodwill relates to the
acquisition of JWR&Co, which has an amortization period of 20 years. Under
Statement of Financial Accounting Standard No. 142--"Goodwill and Other
Intangible Assets", unless impairment of goodwill is indicated, goodwill will
no longer be written off. Therefore, in 2001 goodwill was being amortized on a
straight-line method and in subsequent years, unless impairment of the
goodwill is indicated, will no longer be written off.
Other operating expenses decreased $37,000 or 1% from 2000 to 2001. During
2001, the Bank reported a recovery of other expenses associated with a prior
problem loan of $134,000. Exclusive of this recovery, other operating expenses
increased by 2% in 2001, compared to 2000.
22
Income Taxes
Federal income taxes for 2001 were $4,770,000, compared to $4,325,000 for 2000.
This represents an effective tax rate of 34.3% and 34.0% for 2001 and 2000,
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 10 to the consolidated financial statements.
FINANCIAL CONDITION
Investment Securities
Management has elected to classify 100% of the investment portfolio as
available for sale. Therefore, the investment portfolio was carried at its
estimated market value of $26,222,000 and $26,907,000 as of December 31, 2001
and 2000, respectively. The amortized cost of the portfolio as of December 31,
2001 was $25,807,000, resulting in net unrealized gains of $415,000. The
amortized cost of the portfolio at December 31, 2000 was $26,971,000, resulting
in net unrealized losses of $64,000.
The maturity distribution and weighted average yields on a fully tax-equivalent
basis of investment securities at December, 31, 2001, are as follows:
TABLE 9 - Investment Portfolio
Maturing Maturing
from from
Maturing 2002 2006 Maturing
during through through after
(dollars in thousands) 2002 2006 2011 2011 Total
-------------------------------------------
Obligations of the U.S. Government
and agencies:
Book value........................ $2,044 $20,833 $-- $ -- $22,877
Weighted average yield............ 5.9% 5.3% -- -- 5.4%
State and political subdivisions:
Book value........................ 958 450 -- -- 1,408
Weighted average yield............ 6.3% 6.5% -- -- 6.4%
Other investment securities:
Book value........................ -- -- 87 1,850 1,937
Weighted average yield............ -- -- -- 6.5% 6.2%
-------------------------------------------
Total book value.................. $3,002 $21,283 $87 $1,850 $26,222
Weighted average yield............ 6.0% 5.3% -- 6.5% 5.5%
In addition to $5,365,000 in maturities during 2001, $14,000,000 in investments
were called and $588,000 of Federal Home Loan stock was redeemed as a result of
the level of short term borrowings. During 2001, purchases of investment
securities amounted to $18,793,000. Those transactions, and the $479,000
increase in unrealized gains on the investment portfolio were primarily
responsible for the $685,000 or 3% decrease in the investment portfolio from
December 31, 2000, to December 31, 2001. At December 31, 2001, approximately
86% of the investment portfolio consisted of fixed rate U.S. Government and
U.S. Government Agency securities. The Corporation does not own any derivative
investments and does not plan to purchase any of those 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 lines of credit (the Bank's "CreditLine" product)
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) 2001 2000 1999 1998 1997
--------------------------------------------
Real estate loans:
Permanent mortgage loans......... $177,450 $135,777 $134,495 $110,535 $102,474
Construction loans............... 20,416 10,642 14,398 13,204 13,647
Commercial and industrial loans.. 167,452 147,398 119,835 89,368 75,474
Consumer loans................... 35,521 60,767 70,211 68,078 76,963
--------------------------------------------
Total............................ $400,849 $354,584 $338,939 $281,185 $268,558
--------------------------------------------
The maturity distribution of the loan portfolio, excluding loans secured by
one-family residential property and consumer loans, at December 31, 2001, is
shown below.
Maturing
from
Maturing 2003 Maturing
during through after
(in thousands) 2002 2006 2006 Total
-----------------------------------
Commercial, financial, and agricultural... $ 88,971 $40,862 $37,619 $167,452
Real estate--construction................. 11,534 8,882 -- 20,416
Real estate--other........................ 610 15,178 52,118 67,906
-----------------------------------
Total..................................... $101,115 $64,922 $98,737 $255,774
-----------------------------------
Interest sensitivity on the above loans:
Loans with predetermined rates............ $ 7,246 $41,747 $36,908 $ 85,901
Loans with adjustable or floating rates... 93,869 23,175 52,829 169,873
-----------------------------------
Total..................................... $101,115 $64,922 $89,737 $255,774
-----------------------------------
There are no scheduled prepayments on the loans included in the maturity
distributions.
23
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........... $ 62,038 $ -- -- $ 62,038 $ -- $ -- $ -- $ 342
Commercial............ 67,867 39 -- 67,906 -- -- -- 373
Home equity........... 47,414 87 15 47,516 15 -- 15 304
-------------------------------------------------------------------------------------
Total permanent
mortgage loans......... 177,319 126 15 177,460 15 -- 15 1,019
Construction mortgage
loans:
Residential........... 13,675 -- -- 13,675 -- -- -- 143
Commercial............ 6,741 -- -- 6,741 -- -- -- 71
-------------------------------------------------------------------------------------
Total construction
mortgage loans......... 20,416 -- -- 20,416 -- -- -- 214
-------------------------------------------------------------------------------------
Total real estate
loans.................. 197,735 126 15 197,876 15 -- 15 1,233
Commercial and
industrial loans....... 167,452 -- -- 167,452 -- -- -- 2,729
-------------------------------------------------------------------------------------
Total commercial and
industrial loans....... 167,452 - -- 167,452 -- -- -- 2,729
-------------------------------------------------------------------------------------
Consumer loans:
Direct................ 6,398 13 8 6,419 8 -- 8 57
Indirect.............. 24,508 244 17 24,769 17 -- 17 220
CreditLine............ 4,329 1 3 4,333 3 -- 3 39
-------------------------------------------------------------------------------------
Total consumer loans... 35,235 258 28 35,521 28 -- 28 316
Unallocated reserve for
loan loss.............. -- -- -- -- -- -- -- 650
-------------------------------------------------------------------------------------
Total................... $400,422 $ 384 $ 43 $400,849 $ 43 $ -- $ 43 $ 4,928
-------------------------------------------------------------------------------------
* 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
$43,000 includes the $43,000 in loans past due 90 days or more, on which
certain borrowers have paid interest regularly. There are no loans less
than 90 days delinquent included in nonperforming loans.
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, 2001 increased 13% to $400,849,000 from
$355,006,000 as of December 31, 2000.
The largest growth in outstanding balances occurred in permanent mortgage
loans, which consist of commercial and residential mortgages, as well as home
equity loans. These balances increased by 31% or $41,683,000 during 2001, from
$135,777,000 at December 31, 2000, to $177,460,000 at December 31, 2001. This
growth was due primarily to a $25,778,000 or 71% increase in residential
mortgage loans and a $21,437,000 or 46% increase in outstanding commercial
mortgage loans. Included in the $25,778,000 increase in residential mortgage
loans was $22,058,000 in residential second mortgage loans and $4,103,000 in
residential mortgage loans classified as available-for-sale from year-end 2000
to year-end 2001. The Bank began making residential second mortgage loans in
2001. Partially offsetting these increases were decreases in the balances of
residential mortgage loans that were classified as held to maturity.
Commercial and industrial loan balances grew $20,054,000 or 14% from
$147,398,000 at December 31,2000 to $167,452,000 at December 31, 2001.
Continued increased business development in the Bank's commercial lending
market area is the primary reason for this strong growth.
Consumer loans, consisting of loans to individuals for household, automobile,
family, and other consumer needs, as well as purchased indirect automobile
paper from automobile dealers in the Bank's market area, decreased $25,668,000
or 42%, from $61,189,000 at December 31, 2000, to $35,521,000 at December 31,
2001. A $20,772,000 or 46% decrease in outstanding indirect automobile paper,
from $45,096,000 at December 31, 2000 to $24,324,000 at December 31, 2001, is
primarily responsible for this decrease. Competition from automobile
manufacturers' credit facilities and lower costing financing from home equity
loans continues to be a source of major competition for this product.
As of December 31, 2001, the construction loans portfolio increased by
$9,774,000 or 92%, from $10,642,000 at December 31, 2000, to $20,416,000 at
24
December 31, 2001. As of December 31, 2001 and 2000, the construction lending
portfolio had neither any nonperforming loans nor any loans delinquent 30 days
or more.
Off-Balance Sheet Commitments
The Bank has financial instruments with off-balance sheet risk that are
necessary to help our customers meet their financing needs. These instruments
have elements of credit risk that exceed the amount recognized in the
consolidated statements of financial condition. These financial instruments
include commitments to extend credit, subject to certain terms and conditions,
of $138,805,000 at December 31, 2001 and $126,522,000 at December 31, 2000.
Stand-by letters of credit were $9,637,000 and $10,699,000 as of December 31,
2001 and December 31, 2000, respectively. Please refer to note 14 for expanded
discussion of off-balance sheet commitments.
Deposits
The Bank attracts deposits from within its market area by offering various
deposit instruments, including savings accounts, NOW accounts, money market
accounts, and certificates of deposit.
Total deposits increased 1% to $391,059,000 at December 31, 2001, from
$386,966,000 at year-end 2000. Short-term borrowings increased by $20,000,000
from December 31, 2000 to December 31, 2001. The increase in short-term
borrowings is a result of the increase in loan balances. A more meaningful
measure of the change in deposits and short-term borrowings is average daily
balances. As illustrated in Table 12, average daily deposit balances increased
3%. While average higher costing short-term borrowings and CDs grew in 2001,
the ability to lower overall interest rates paid for interest-bearing deposits
and short-term borrowings was primarily responsible for a 30 basis point
decrease in the average cost of funds for 2001, compared to 2000. The average
cost of funds for 2001 was 1.6% compared to 1.9% for 2000.
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 2000
(dollars in thousands) 2001 2000 2001 vs. 2000 1999 vs. 1999
--------------------------------------------
Demand deposits,
non-interest-bearing........ $102,877 $ 96,215 6.9% $ 92,098 4.5%
--------------------------------------------
Market rate accounts......... 51,022 50,633 0.8 49,871 1.5
NOW accounts................. 99,196 100,158 (1.0) 93,769 6.8
Regular savings.............. 40,024 41,350 (3.2) 40,865 1.2
--------------------------------------------
190,242 192,141 (1.0) 184,505 4.1
--------------------------------------------
Time deposits................ 78,081 70,819 10.3 65,000 9.0
--------------------------------------------
Total........................ $371,200 $359,175 3.3% $341,603 5.1%
--------------------------------------------
The following table shows the maturity of certificates of deposit of $100,000
or greater as of December 31, 2001:
TABLE 13 - Maturity of Certificates of Deposit of $100,000 or Greater
(in thousands)
Three months or less................................................... $16,180
Three to six months.................................................... 3,168
Six to twelve months................................................... 3,895
Greater than twelve months............................................. 122
-------
Total.................................................................. $23,365
-------
Capital Adequacy
At December 31, 2001, total shareholders' equity of the Corporation was
$57,307,000, a $6,337,000 or 12% increase over $50,970,000 at December 31,
2000. Increasing the capital was the addition of earnings, less dividends for
the year, as well as the increase in the market value of the investment
securities year to year. As of December 31, 2001, shareholders' equity included
unrealized gains on investment securities, net of deferred taxes, of $274,000
compared to unrealized losses on investment securities, net of taxes, of
$42,000 at December 31, 2000. This change caused a $316,000 increase to
shareholders' equity from December 31, 2000 to December 31, 2001.
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, 2001 and 2000 are listed
below. These ratios are all in excess of the minimum required capital ratios,
also listed below.
TABLE 14 - Risk-based Capital Ratios
2001 2000
Minimum Minimum
Actual Required Actual Required
-----------------------------
Tier I capital ratio............................ 10.34% 4.00% 9.77% 4.00%
Total capital ratio............................. 11.53 8.00 10.91 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,
2001 and 2000, the Bank exceeded the levels required to meet the definition of
a "well-capitalized" bank.
25
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 ability to declare 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) 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, 2001.
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 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. Table 6 presents the percentage
of outstanding loans, by loan type, compared to total loans outstanding as of
December 31, 2001.
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. Loan and deposit growth is also
generated in 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 loans were $43,000 at December 31, 2001, a 47% decrease from
$81,000 at December 31, 2000. There were no OREO properties on the Bank's books
as of December 31, 2001 or 2000.
Total nonperforming assets, which include nonaccruing and past due loans and
other real estate owned, are presented in the table below for each of the five
years in the period ended December 31, 2001.
TABLE 15 - Nonperforming Assets
December 31,
--------------------------
(in thousands) 2001 2000 1999 1998 1997
--------------------------
Loans past due 90 days or more not on nonaccrual
status:
Real estate--mortgage.............................. $15 $18 $ 19 $ 84 $ 72
Consumer........................................... 28 63 53 56 27
Loans on which the accrual of interest has been
discontinued:
Commercial and industrial.......................... -- -- -- -- 347
Real estate--mortgage.............................. -- -- 720 353 723
Real estate--construction.......................... -- -- -- -- --
--------------------------
Total nonperforming loans........................... 43 81 792 493 1,169
Other real estate owned and in-substance foreclosed
properties *....................................... -- -- -- 271 25
--------------------------
Total nonperforming assets.......................... $43 $81 $792 $764 $1,194
--------------------------
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 $84,000 for the year ended December 31, 2001. Interest earned
and included in interest income on these loans prior to their nonperforming
status amounted to $24,000 in 2001.
* 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, impaired loans, and loans criticized by
the Bank's regulators. An independent consultant is retained to review both the
loan portfolio as well as the overall adequacy of the loan loss reserve. The
methodology used to arrive at an appropriate allowance for loan loss involves a
high degree of management judgement. It is the goal of this loan loss reserve
adequacy process to provide a loan loss reserve sufficient to address the
Bank's risk of loan losses, in the existing loan portfolio, during various
economic cycles. During the review of the loan loss reserve, the Committee
considers allocations of the loan loss reserve to specific loans on a loan-by-
loan basis. Also considered is an inherent loan loss in specific pools of
similar loans, based on prior historical loss activity and the impact of the
current economic environment. The sum of all analyzed loan components is
compared to the loan loss reserve balance, and any adjustments deemed necessary
to the loan loss reserve balance are made on a timely basis.
The Corporation is regulated and periodically inspected by The Federal Reserve
Board. The Bank, a state member bank of the Federal Reserve System and the
26
Pennsylvania Department of Banking, is also regulated and periodically examined
by both these entities. There are no recommendations by the regulators, which
would have a material effect on the Corporation's asset quality, liquidity,
capital resources, or results of operations.
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
compliance.
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 a rising interest 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 the following table, the Bank is presently asset interest rate
sensitive in the short-term, 30 days or less, category.
TABLE 16 - Interest Rate Sensitivity Analysis as of December 31, 2001
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................. $ 516 $ -- $ -- $ -- $ -- $ -- $ 516
Federal funds sold..... -- -- -- -- -- -- --
Investment securities.. 83 5,500 1,500 6,950 10,025 2,164 26,222
Loans.................. 141,862 9,946 15,745 42,098 191,416 (4,928) 396,139
Cash and due from
banks................. -- -- -- -- -- 28,157 28,157
Other assets........... -- -- -- -- -- 25,789 25,789
-----------------------------------------------------------------------
Total assets.......... $142,461 $ 15,446 $ 17,245 $ 49,048 $201,441 $ 51,182 $476,823
-----------------------------------------------------------------------
Liabilities and
shareholders' equity:
Demand, noninterest-
bearing............... $ 24,081 $ -- $ -- $ -- $ -- $ 86,483 $110,564
Savings deposits....... 6,828 13,657 20,485 40,971 122,911 -- 204,852
Time deposits.......... 13,264 15,198 16,342 23,612 7,227 -- 75,643
Other liabilities...... 20,000 -- -- -- -- 8,457 28,457
Shareholders' equity... -- -- -- -- -- 57,307 57,307
-----------------------------------------------------------------------
Total liabilities and
shareholders' equity. $ 64,173 $ 28,855 $ 36,827 $ 64,583 $130,138 $ 152,247 $476,823
-----------------------------------------------------------------------
Gap..................... $ 78,288 $(13,409) $(19,582) $(15,535) $ 71,303 $(101,065) $ --
Cumulative gap.......... $ 78,288 $ 64,879 $ 45,297 $ 29,762 $101,065 $ -- $ --
Cumulative earning
assets as a ratio of
interest-bearing
liabilities............ 222% 170% 135% 115% 131% 100% --
27
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, loan prepayments, and deposit
withdrawals. As of year-end 2001, based on an analysis of the results from the
simulation models, the Bank's interest rate risk was within the acceptable
range as established by the Bank's Asset/Liability 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 to the secondary market, and borrowing from the
Federal Home Loan Bank of Pittsburgh (the "FHLB").
The Bank's liquid assets include cash and cash equivalents, as well as certain
unpledged investment securities. Bank management has developed a liquidity
measure, incorporating its ability to borrow from the FHLB to meet liquidity
needs and goals. Periodically, ALCO reviews the Bank's liquidity needs,
incorporating the ability to borrow from the FHLB and reports these findings to
the Risk Management Committee of the Bank's Board of Directors.
During 2001, cash provided by operations amounted to $5,709,000. This was a
$3,417,000 decrease from $9,126,000 of net income. This decrease was due
primarily to the net use of funds related to loan sale activity, which used
$3,186,000 of net funding in 2001. Cash used for investing activities amounted
to $38,648,000. Investment activity provided $1,160,000 in cash, as the balance
in the investment portfolio decreased by 3% at December 31, 2001, compared to
December 31, 2000. The net funding of loans and purchase of indirect automobile
paper used $38,450,000 in funding. The cost of premises' improvements and the
purchase of equipment used $1,562,000.
Offsetting the decrease in funds from investing activities was an increase in
funds from the Bank's financing activities, which provided $20,239,000 in net
cash, primarily the result of a $20,000,000 increase in short-term borrowings
from the FHLB. The Corporation used $42,000 in repayment of its mortgage debt.
The Corporation received $1,562,000 in proceeds from the issuance of common
stock, related to stock option exercises and used $2,259,000 to repurchase
common stock, pursuant to the Stock Repurchase Program, and $3,115,000 to pay
the dividends in 2001. The Corporation's cash and cash equivalents decreased
from December 31, 2000, to December 31, 2001, by $12,700,000, from $41,373,000
at December 31, 2000 to $28,673,000 at December 31, 2001.
2000 VS. 1999 RESULTS OF OPERATIONS
Net Income
Net income for the year ended December 31, 2000, was $8,261,000, a 4% increase
over net income of $7,961,000 for the year ended December 31, 1999. There were
a number of non-recurring items in both
1999 and 2000 results. Exclusive of these non-recurring items, in each year,
net income grew by 10% in 2000 over 1999. Basic earnings per share rose from
$1.83 in 1999 to $1.92 in 2000. Diluted earnings per share were $1.75 for 1999
compared to $1.85 in 2000. In 1999, the Corporation paid dividends of $0.60 per
share. In 2000, the Corporation paid dividends of $0.68 per share.
Return on average assets was 1.99% for 1999 compared to 1.94% in 2000. Return
on average equity was 17.97% in 1999 versus 17.20% in 2000.
Net Interest Income
Average earning assets grew 7%, primarily in higher yielding loans, which grew
by 12%. The growth in higher yielding earning assets was primarily responsible
for a $3,668,000 or a 13% rise in interest income.
Average outstanding deposits, short-term borrowing and federal funds purchased
also increased by 7%, with non-interest bearing checking accounts growing by 4%
and NOW accounts growing by 7%. Average short-term borrowings increased by
107%. The cost of funds for the Bank averaged 1.90% for 2000 compared to 1.70%
for 1999, a 20 basis point increase.
Net interest income increased 11% and the net interest margin increased from
6.12% for 1999 to 6.33% for 2000.
Loan Loss Provision
The provision for loan losses amounted to $250,000 for both 2000 and 1999. The
ratio of the allowance for loan losses to total outstanding loans was 1.22% and
1.30% at December 31, 2000 and 1999, respectively.
Other Income
Other income decreased $359,000 or 2% in 2000 from 1999 levels. This decrease
in other income was primarily
28
a result of a decrease in revenues from investment management and trust
services. The movement of some client accounts, due to resignations in 1999,
and an overall decline in asset values related to a decline in the values of
the stock market were the primary causes for this decrease.
Other Expenses
Other expenses increased by $1,240,000 or 4% in 2000 over 1999. Regular
salaries increased $1,413,000 or 11%, due primarily to merit increases and
staffing additions. Salaries--other, primarily incentive based, decreased
$1,183,000 or 53%. The decrease was primarily related to a decrease in the
Corporation's overall incentive-based compensation, which decreased $1,109,000
from $1,609,000 at December 31, 1999 to $500,000 at December 31, 2000.
Employee benefit costs decreased by $485,000 or 21%. Of this decrease, $849,000
relates to the Corporation's pension plan, which produced a net income of
$843,000 in 2000 compared to an expense of $6,000 in 1999. The two factors that
contributed to the reduction in the cost of the pension plan were the growth in
the value of the pension plan's assets and strong investment performance by the
pension plan assets. Partially offsetting this income was an increase in the
cost of the Bank's medical insurance, which rose by $173,000.
Occupancy expenses and furniture, fixtures and equipment expenses increased
$172,000 or 9% in 2000, compared to 1999.
The cost of professional fees increased by $519,000 or 45%. The primary reason
for this difference was an increase of $493,000 in legal fees. This was the
result of the combined effect of a recovery in 1999 of $278,000 in legal fees
related to a prior problem loan and an increase in legal fees in 2000 related
to litigation and other legal matters. Stationery and supplies expense
increased $54,000 or 15%, due primarily to additional costs in 2001 for the
production of new product brochures and letterhead for the new subsidiaries.
Insurance, including the Corporation's business coverage premiums and FDIC
deposit insurance premiums, increased by $153,000 or 41% in 2000 compared to
1999. FDIC insurance premiums increased $34,000 or 92%, primarily the result of
increased deposits and an increase in the rates paid for FDIC insurance over
prior year's rates. The Corporation's business insurance premiums accounted for
the remainder of this increase in 2000 compared to 1999 premium levels.
During 2000, because of changes in management, the remaining balance of
goodwill related to the acquisition of BMAM was written off the Corporation's
books. This is the reason for the $141,000 increase in goodwill expense in
2000, compared to 1999.
Other operating expenses increased $423,000 or 12% from 1999 to 2000. The
largest increase was in hiring fees paid for staffing additions, which
increased $198,000 in 2000 compared to 1999.
Income Taxes
The Federal income tax provision for 2000 was $4,325,000, or a 34.0% effective
rate, compared to $3,876,000, or a 32.8% effective rate, for 1999.
29
Consolidated Balance Sheets
(in thousands)
As of December 31 2001 2000*
------------------
Assets
Cash and due from banks.................................... $ 28,157 $ 34,656
Interest-bearing deposits with other banks................. 516 322
Federal funds sold......................................... -- 6,395
Investment securities available for sale, at market value
(amortized cost of $25,807 and $26,971 at December 31,
2001 and 2000, respectively).............................. 26,222 26,907
Loans...................................................... 400,849 354,584
Less: Allowance for loan losses........................... (4,928) (4,320)
------------------
Net loans................................................ 395,921 350,264
------------------
Premises and equipment, net................................ 12,478 12,394
Accrued interest receivable................................ 2,222 2,980
Goodwill................................................... 2,805 2,970
Deferred federal income taxes.............................. 514 772
Mortgage servicing rights.................................. 2,206 373
Other assets............................................... 5,782 6,392
------------------
Total assets............................................. $476,823 $444,425
------------------
Liabilities
Deposits:
Demand, noninterest-bearing............................... $110,564 $115,630
Savings................................................... 204,852 201,434
Time...................................................... 75,643 69,902
------------------
Total deposits........................................... 391,059 386,966
------------------
Short term borrowings...................................... 20,000 --
Other liabilities.......................................... 8,457 6,489
------------------
Total liabilities........................................ 419,516 393,455
------------------
Commitments and contingencies (Note 14)
Shareholders' equity
Common stock, par value $1, authorized, 25,000,000 shares,
issued 5,329,675 shares and 5,203,719 shares as of
December 31, 2001 and 2000, respectively, and outstanding
4,322,121 shares and 4,272,046 shares as of December 31,
2001 and 2000, respectively............................... 5,330 5,204
Paid-in capital in excess of par value..................... 6,676 4,604
Accumulated other comprehensive income (loss) net of
deferred income taxes..................................... 274 (42)
Retained earnings.......................................... 56,499 50,488
------------------
68,779 60,254
------------------
Less: Common stock in treasury, at cost -- 1,007,554 and
931,673 shares at December 31, 2001 and 2000,
respectively.............................................. (11,472) (9,284)
------------------
Total shareholders' equity............................... 57,307 50,970
------------------
Total liabilities and shareholders' equity............... $476,823 $444,425
------------------
The accompanying notes are an integral part of the consolidated financial
statements.
*Reclassified for comparative purposes.
30
Consolidated Statements Of Income
(in thousands, except for share and per share data)
For the years ended
December 31 2001 2000 1999
-----------------------------------------------------
Net interest income:
Interest income:
Interest and fees on
loans.................. $ 28,601 $ 29,856 $ 25,724
Interest on federal
funds sold............. 321 373 609
Interest and dividends
on investment
securities:
Taxable interest income. 1,211 1,512 1,702
Tax-exempt interest
income................. 66 108 183
Dividend income......... 112 136 99
-----------------------------------------------------
Total interest income.. 30,311 31,985 28,317
Interest expense on
deposits............... 5,791 6,300 5,542
Interest expense on
federal funds
purchased.............. 44 86 50
Interest expense on
other borrowings....... 467 686 265
-----------------------------------------------------
Total interest expense. 6,302 7,072 5,857
-----------------------------------------------------
Net interest income...... 24,009 24,913 22,460
Loan loss provision...... 1,200 250 250
-----------------------------------------------------
Net interest income after
loan loss provision..... 22,809 24,663 22,210
-----------------------------------------------------
Other income:
Fees for investment
management and trust
services............... 8,737 8,973 9,784
Service charges on
deposit accounts....... 1,540 1,144 1,156
Other fees and service
charges................ 718 1,024 1,016
Net gain on sale of
loans.................. 5,221 1,240 1,028
Fees earned from family
business office
services............... 2,564 2,429 1,947
Investment advisory and
brokerage fees......... 296 957 1,218
Tax consulting fees..... -- 793 702
Insurance commission
income................. 252 191 326
Other operating income.. 1,502 976 909
-----------------------------------------------------
Total other income..... 20,830 17,727 18,086
-----------------------------------------------------
Other expenses:
Salaries--regular....... 14,048 13,859 12,446
Salaries--other......... 2,036 1,043 2,226
Employee benefits....... 2,819 1,849 2,334
Occupancy expense....... 2,111 2,100 1,928
Furniture, fixtures, and
equipment.............. 1,964 2,140 1,968
Advertising............. 959 1,235 1,290
Professional fees....... 552 1,667 1,148
Computer processing..... 596 556 560
Stationery and supplies. 360 391 408
Insurance............... 163 526 373
Goodwill amortization... 165 324 183
Other operating
expenses............... 3,970 4,006 3,592
-----------------------------------------------------
Total other expenses... 29,743 29,696 28,456
-----------------------------------------------------
Income before income
taxes................... 13,896 12,694 11,840
Applicable income taxes.. 4,770 4,433 3,879
-----------------------------------------------------
Net income............... $ 9,126 $ 8,261 $ 7,961
-----------------------------------------------------
Earnings per common
share................... $ 2.11 $ 1.92 $ 1.83
Diluted earnings per
common share............ $ 2.05 $ 1.85 $ 1.75
Weighted-average shares
outstanding............. 4,325,520 4,292,838 4,349,403
Dilutive potential common
shares.................. 127,090 161,408 193,915
-----------------------------------------------------
Adjusted weighted-average
shares.................. 4,452,610 4,454,246 4,543,318
The accompanying notes are an integral part of the consolidated financial
statements.
31
Consolidated Statements Of Cash Flows
For the years ended December 31 2001 2000 1999
-----------------------------
Operating activities:
Net income..................................... $ 9,126 $ 8,261 $ 7,961
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses..................... 1,200 250 250
Provision for depreciation and amortization... 1,712 1,624 1,319
Loans originated for resale................... (333,289) (80,621) (75,502)
Proceeds from sale of loans................... 330,103 72,978 74,505
Net gain on sale of loans..................... (5,221) (1,241) (1,028)
Net gain on disposal of other real estate..... -- (14) (45)
Provision for deferred income taxes........... (92) (490) (197)
Change in income taxes payable/refundable..... (328) (299) --
Change in accrued interest receivable......... 758 (569) (342)
Change in accrued interest payable............ 78 (43) 179
Other......................................... 1,240 (2,405) 1,057
-----------------------------
Net cash provided (used) by operating
activities.................................. 5,287 (2,569) 8,157
-----------------------------
Investing activities:
Purchases of investment securities............. (18,793) (445) (42,553)
Proceeds from maturities of investment
securities.................................... 5,365 3,509 57,180
Proceeds from sales of investment securities
available for sale............................ 588 252 --
Proceeds from calls of investment securities... 14,000 -- 6,000
Proceeds from repayment of note payable........ 204 -- --
Proceeds on disposition of other real estate
owned......................................... -- 14 45
Captialization of costs of other real estate
owned......................................... -- -- (41)
Net loan (originations) repayments............. (36,484) 7,621 (21,728)
Purchase of automobile retail installment
contracts..................................... (1,544) (15,556) (33,951)
Cost of acquiring new subsidiaries............. -- -- (1,975)
Purchases of premises and equipment............ (1,562) (2,004) (1,104)
-----------------------------
Net cash used in investing activities........ (38,226) (6,609) (38,127)
-----------------------------
Financing activities:
Change in demand and savings deposits.......... (1,648) 24,216 14,216
Change in time deposits........................ 5,741 (8,318) 14,495
Dividends paid................................. (3,115) (2,922) (2,603)
Repayment of mortgage debt..................... (42) (37) (30)
Proceeds from issuance of common stock......... 1,562 76 303
Change in borrowed funds....................... 20,000 (10,000) 10,000
Purchase of treasury stock..................... (2,259) (1,677) (2,530)
-----------------------------
Net cash provided by financing activities.... 20,239 1,338 33,851
-----------------------------
Change in cash and cash equivalents............ (12,700) (7,840) 3,881
Cash and cash equivalents at beginning of year. 41,373 49,213 45,332
-----------------------------
Cash and cash equivalents at end of year....... $ 28,673 $ 41,373 $ 49,213
-----------------------------
Supplemental cash flow information:
Cash paid during the year for:
Income taxes................................. $ 4,200 $ 5,790 $ 2,300
Interest..................................... 6,061 7,115 5,734
Non-cash investing activities:
Common stock issued for business acquisition:
Joseph W Roskos.............................. -- -- $ 2,000
CDC.......................................... -- -- 281
The accompanying notes are an integral part of the consolidated financial
statements.
32
Consolidated Statements Of Changes In Shareholders' Equity
(in thousands, except for shares of common stock)
For the years ended Shares of Unrealized
December 31, 2001, 2000 Common Common Paid-in Retained Gains Treasury
and 1999 Stock issued Stock Capital Earnings (Losses) Stock
-----------------------------------------------------------
Balance, December 31,
1998................... 5,067,078 $5,067 $2,478 $39,791 $100 $ (5,215)
Net income.............. -- -- -- 7,961 -- --
Dividends declared,
$0.60 per share........ -- -- -- (2,603) -- --
Change in unrealized
gains (losses), net of
income taxes of
($252,000)............. -- -- -- -- (489) --
Tax benefit from gains
on stock option
exercise............... -- -- 213 -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- (2,530)
Retirement of treasury
stock.................. (11,059) (11) (241) -- -- 57
Common stock issued..... 123,589 124 2,017 -- -- --
-----------------------------------------------------------
Balance, December 31,
1999................... 5,179,608 5,180 4,467 45,149 (389) (7,688)
Net income.............. -- -- -- 8,261 -- --
Dividends declared,
$0.68 per share........ -- -- -- (2,922) -- --
Change in unrealized
gains (losses), net of
income taxes of
$179,000............... -- -- -- -- 347 --
Tax benefit from gains
on stock option
exercise............... -- -- 196 -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- (1,677)
Retirement of treasury
stock.................. (21,083) (21) (415) -- -- 81
Common stock issued..... 45,194 45 356 -- -- --
-----------------------------------------------------------
Balance, December 31,
2000................... 5,203,719 5,204 4,604 50,488 (42) (9,284)
Net income.............. -- -- -- 9,126 -- --
Dividends declared,
$0.72 per share........ -- -- -- (3,115) -- --
Change in unrealized
gains (losses), net of
income taxes of
$163,000............... -- -- -- -- 316 --
Tax benefit from gains
on stock option
exercise............... -- -- 707 -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- (2,259)
Retirement of treasury
stock.................. (3,609) (4) (67) -- -- 71
Common stock issued..... 129,565 130 1,432 -- -- --
-----------------------------------------------------------
Balance, December 31,
2001................... 5,329,675 $5,330 $6,676 $56,499 $274 ($11,472)
-----------------------------------------------------------
Consolidated Statements Of Comprehensive Income
(in thousands)
For the years ended December 31, 2001 2000 1999
----------------------
Net income............................................. $9,126 $8,261 $7,961
Other comprehensive income:
Unrealized holding gains (losses) arising during the
period............................................... 479 526 (741)
Deferred income tax benefit (expense) on unrealized
holding gains (losses) arising during the period..... (163) (179) 252
----------------------
Comprehensive net income............................... $9,442 $8,608 $7,472
----------------------
The accompanying notes are an integral part of the consolidated financial
statements.
33
Notes to Consolidated Financial Statements
1. Basis of Presentation:
The consolidated financial statements include the accounts of Bryn Mawr Bank
Corporation (the "Corporation"), The Bryn Mawr Trust Company (the "Bank"), Bryn
Mawr Advisers Inc. ("BMA"), Insurance Counsellors of Bryn Mawr, Inc. ("ICBM"),
Bryn Mawr Brokerage Company, Inc. ("B M Brokerage"), Bryn Mawr Asset
Management, Inc, (formerly CDC Capital Management, Inc.) ("BMAM"), Joseph W.
Roskos & Co. ("JWR&Co.")and Bryn Mawr Finance, Inc. ("BMF"). For all years
presented, all adjusting entries required for the fair presentation of the
financial statements were made. All such adjustments were of a normal recurring
nature. 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 GAAP 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 $9,994,000 and $5,460,000 at December 31,
2001 and 2000, respectively.
Investment securities:
Management categorized all of its investment securities as available for sale
as part of its 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. As of December 31, 2001, shareholders' equity was increased
by $274,000 due to unrealized gains (net of $141,000 in deferred income taxes)
of $415,000 in the investment securities portfolio. As of December 31, 2000,
shareholders' equity was decreased by $42,000 due to unrealized losses (net of
$22,000 in deferred income tax benefits) of $64,000 in the investment
securities portfolio.
Loans:
Interest income on loans performing satisfactorily is recognized on the accrual
method of accounting. Non-performing 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 non-
performing loans, except consumer loans, are placed on non-accrual status, and
any outstanding interest receivable at the time the loan is deemed non-
performing is deducted from interest income. Consumer loan principal and
interest balances deemed uncollectable are charged off on a timely basis
against the loan loss reserve. The charge-off policy for all loans, including
non-performing and impaired loans, considers such factors as the type and size
of the loan, the quality of the collateral, and historical creditworthiness of
the borrower.
As a part of its internal loan review process, management, when considering
making a loan an impaired loan, considers a number of factors, such as a
borrower's current financial strength, the value of related collateral and the
ability to continue to meet the original contractual terms of a loan. Major
risk classifications, used to aggregate loans include both credit risk or the
risk of failure to repay a loan and concentration risk. A loan is not
considered impaired if there is merely an insignificant delay or shortfall in
the amounts of payments. An insignificant delay or shortfall is a temporary
delay in the payment process of a loan.
However, under these circumstances, the Bank expects to collect all amounts
due, including interest accrued at the contractual interest rate for the period
of the delay.
When a borrower is deemed to be unable to meet the original terms of a loan,
the loan is considered impaired. While all impaired loans are not necessarily
considered non-performing loans, if a loan is delinquent for 90 days or more,
it is considered both a non-performing and impaired loan. All of the
Corporation's impaired loans, which amounted to $21,000 and $10,000 at December
31, 2001 and 2000, respectively, were put on a non-accrual basis and any
outstanding accrued interest receivable on such loans, at the time they were
put on a non-accrual status, was reversed from income.
Impaired loans are required to be measured based upon the present value of
expected future cash flows, discounted at the loan's initial effective interest
rate, at the loan's market price or fair value of the collateral, if the loan
is collateral dependent. As of December 31, 2001 and 2000, no impaired loans
were measured using the present value of expected future cash flows or at the
loan's market price. Impaired loans measured by the fair value of the loan's
collateral amounted to $21,000 and $10,000, respectively.
34
If the loan valuation is less than the recorded value of the loan, an
impairment reserve is established for the difference. The impairment reserve is
established by an allocation of the reserve for loan losses depending on the
adequacy of the reserve for loan losses. All impairment reserves established in
either 2001 or 2000 were allocated from the existing reserve for loan losses.
As of December 31, 2001 there was $21,000 of impaired loans for which there is
no related allowance for loan losses. There was no related allowance for loan
loss on impaired loans, which totaled $10,000 as of December 31, 2000. Average
impaired loans during both 2001 and 2000 amounted to $499,000 and $337,000,
respectively.
When a loan is classified as impaired, it is put on non-accrual status and any
income subsequently collected is credited to the outstanding principal balance.
Therefore, no interest income was reported on outstanding loans while
considered impaired in either 2001 or 2000. Loans may be removed from impaired
status and returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time and there is a sustained period of repayment performance by the
borrower, with a minimum repayment of at least six months, in accordance with
the contractual terms of interest and principal.
Subsequent income recognition would be recorded under the existing terms of the
loan. Based on the above criteria, $25,000 in loan balances were removed from
impaired status and returned to accrual status during 2001 and $41,000 in loan
balances considered impaired was removed from impaired status during 2000.
Smaller balance, homogeneous loans, exclusively consumer loans, when included
in non-performing loans, for practical consideration, are not put on a non-
accrual status nor is the current accrued interest receivable reversed from
income. Once deemed uncollectable, the outstanding loan and accumulated
interest balances are charged off through the loan loss reserve, on a timely
basis.
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
loan losses including the continuing evaluation of the loan portfolio and the
Bank's past loan loss experience. The allowance for loan losses is an amount
that management believes will be adequate to absorb losses inherent in existing
loans.
Other real estate owned:
Other real estate owned ("OREO") consists of properties acquired by
foreclosure. These assets are carried at the lower of cost or estimated fair
value at the time the loan is foreclosed less estimated cost to sell. The
amounts recoverable from OREO could differ materially from the amounts used in
arriving at the net carrying value of the assets because of future market
factors beyond the control of the Bank. Costs to improve the property are
capitalized, whereas costs of holding the property are charged to expense.
Deferred loan fees:
The Bank defers all loan fees and related direct loan origination costs.
Deferred loan fees and costs are capitalized and amortized as yield adjustment
over the life of the loan using the interest method.
Mortgage servicing rights
Mortgage servicing rights represent the value of the future potential income
recognized for mortgage loans sold where servicing is retained. Mortgage
servicing rights are capitalized at their allocated carrying value and
amortized in proportion to, and over the period of, estimated future net
servicing.
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 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:
The Corporation files a consolidated Federal income tax return with its
subsidiaries. Certain items of income and expense (primarily pension and post
retirement benefits, provision for loan loss and other reserves) are reported
in different periods for tax purposes. Deferred taxes are provided on such
temporary differences existing between financial and income tax reporting,
subject to the deferred tax asset realization criteria required under Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109").
Trust income:
The trust income is recognized on the cash basis of accounting. Reporting such
income on a cash basis does not materially affect net income.
35
Goodwill:
The excess of cost over fair market value of net assets acquired through the
purchase method of accounting (Goodwill) was being amortized on a straight-line
basis over the period of the expected benefit, which ranges from 10 to 20
years. Under the provisions of Statement of Financial Accounting Standard No.
142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), in years
subsequent to 2001, goodwill will no longer be amortized but rather, will be
periodically measured for impairment and if any expected benefit from an
acquisition becomes impaired, the respective amount of impaired goodwill will
be charged-off in the period of impairment.
Recently issued accounting standards:
In June 2001, Statement of Financial Accounting Standard No.141 "Business
Combinations" ("SFAS No.141") was issued. SFAS No.141 supersedes Accounting
Principals Board Opinion No. 16, "Business Combinations" and Financial
Accounting Standard No. 38 "Accounting for Preacquisition Contingencies of
Purchased Enterprises". SFAS No. 141 eliminates the pooling of interest method
for accounting for a business combination. SFAS No. 141 requires that all
business combinations be accounted for by a single method--the purchase method.
SFAS No. 141 requires that intangible assets, arising from a business
combination accounted for under the purchase method of accounting, be
recognized as assets apart from goodwill if they meet one of two criteria. The
criterion are (1) the contractual-legal criterion and (2) the separability
criterion. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001. SFAS No. 141 also applies to business
combinations accounted for using the purchase method, for which the date of
acquisition is July 1, 2001, or later. SFAS No. 141 will not have a material
impact on the financial condition or results of operations of the Corporation.
In June 2001, Statement of Financial Accounting Standard No. 142 "Goodwill and
Other Intangible Assets" ("SFAS No. 142") was issued. SFAS No. 142 supersedes
Accounting Principals Board Opinion No. 17 "Intangible Assets". Under SFAS No.
142, goodwill and some intangible assets having indefinable useful lives will
not be amortized, but rather will be tested annually for impairment. Intangible
assets having finite lives will continue to be amortized over their useful
lives. Goodwill will be tested for impairment at least annually. Should the
annual testing indicate any impairment in goodwill, said impairment will be
written-off against the earnings in the year in which the impairment was
determined. The provisions of SFAS No. 142 are required to be applied starting
with fiscal years beginning after December 15, 2001. Management is presently
assessing the impact of SFAS No. 142 on the financial condition and results of
operations of the Corporation.
In June 2001, Statement of Financial Accounting Standard No. 143 "Accounting
for Asset Retirement Obligations" ("SFAS No. 143") was issued. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
the fair value can be made. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Earlier application is
encouraged. SFAS No. 143 will not have a material impact on the financial
condition or results of operations of the Corporation.
The Corporation recognizes the value of mortgage servicing rights, which
approximates the future potential income on the mortgage loans sold where the
servicing is retained. Management considers economic factors including
prepayments, delinquencies, and default and loss assumptions in the valuation
of mortgage servicing rights. The mortgage servicing rights are reviewed
annually for impairment. Mortgage servicing rights are capitalized at their
allocated carrying value and amortized in proportion to, and over the period
of, estimated future net servicing.
In August 2001, Statement of Financial Accounting Standard No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") was
issued. SFAS No. 144 supersedes Statement of Financial Accounting Standard No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS No. 144 requires the recogition of impairment
in the carrying value of a long-lived aset only if the carrying amount of the
loan-lived asset in not recoverable from its undiscounted cash flows. An
impairment loss related to long-lived assets will be measured as the difference
between the carrying value and the fair value of the asset. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. While early application is encouraged, the provisions of
SFAS No. 144 generally are to be applied prospectively. SFAS No. 144 will not
have a material impact on the financial condition or results of operations of
the Corporation.
36
3. Investment Securities:
The amortized cost and estimated market value of investments, all of which were
classified as available for sale, are as follows:
As of December 31, 2001:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
---------------------------------------
Obligations of the U.S. Government
and agencies........................ $22,502 $375 $ -- $22,877
State & political subdivisions....... 1,386 22 -- 1,408
Other securities..................... 1,919 18 -- 1,937
---------------------------------------
Total................................ $25,807 $415 $ -- $26,222
---------------------------------------
As of December 31, 2000:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
---------------------------------------
Obligations of the U.S. Government
and agencies........................ $23,000 $ 2 $90 $22,912
State & political subdivisions....... 1,753 5 1 1,757
Other securities..................... 2,218 20 -- 2,238
---------------------------------------
Total................................ $26,971 $27 $91 $26,907
---------------------------------------
At December 31, 2001, securities having a book value of $14,666,000 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, 2001, 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.
2001
-------------------
Estimated
Amortized Market
(in thousands) Cost Value
-------------------
Due in one year or less..................................... $ 3,030 $ 3,085
Due after one year through five years....................... 20,942 21,283
Due after five years through ten years...................... 87 87
Due after ten years......................................... -- --
Other securities............................................ 1,748 1,767
-------------------
Total....................................................... $25,807 $26,222
-------------------
There were no sales of debt securities during 2001, 2000 or 1999.
4. Loans:
Loans outstanding at December 31 are detailed by category as follows:
(in thousands) 2001 2000
------------------
Real estate loans:
Permanent
commercial mortgage loans................................. $ 67,906 $ 46,469
second mortgage loans..................................... 22,058 --
mortgage loans available for sale......................... 16,556 12,452
mortgage loans............................................ 71,206 77,192
Construction loans........................................ 20,493 10,717
Commercial and industrial loans............................ 167,452 147,398
Loans to individuals for household, family, and other
consumer expenditures..................................... 35,521 60,767
------------------
Subtotal.................................................. 401,192 354,995
------------------
Less: Allowance for loan losses............................ (4,928) (4,320)
Net deferred loan fees................................... (343) (411)
------------------
Loans, net................................................ $395,921 $350,264
==================
Unadvanced loan funds...................................... $138,805 $126,522
Loans with predetermined rates............................. 197,558 189,810
Loans with adjustable or floating rates.................... 203,291 165,196
------------------
Total..................................................... $400,849 $355,006
------------------
All loans past due 90 days or more, except consumer loans, are placed on
nonaccrual status. Nonperforming loans amounted to $43,000 and $81,000 at
December 31, 2001 and 2000, respectively. Forgone interest on nonaccrual loans
was $84,000, $29,000, and $121,000 in 2001, 2000, and 1999, respectively. There
was one impaired loan at December 31, 2001 amounting to $21,000.
5. Allowance For Loan Losses:
The summary of the changes in the allowance for loan losses is as follows:
(in thousands) 2001 2000 1999
----------------------
Balance, January 1...................................... $4,320 $4,400 $4,100
Charge-offs............................................. (1,169) (399) (197)
Recoveries.............................................. 577 69 247
----------------------
Net recoveries / (charge-offs)......................... (592) (330) 50
Loan loss provision..................................... 1,200 250 250
----------------------
Balance, December 31.................................... $4,928 $4,320 $4,400
----------------------
37
6. Premises and Equipment:
A summary of premises and equipment at December 31 is as follows:
(in thousands) 2001 2000
---------------
Land........................................................... $ 2,973 $ 2,973
Buildings...................................................... 12,688 12,703
Furniture and equipment........................................ 13,058 12,117
Leasehold improvements......................................... 1,027 529
---------------
29,746 28,322
Less accumulated depreciation.................................. 17,268 15,928
---------------
Total.......................................................... $12,478 $12,394
---------------
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
amounted to $1,478,000, $1,489,000 and $1,285,000, respectively. Future minimum
rent commitments under various operating leases are as follows:
2002................................................................. $ 675,000
2003................................................................. $ 597,000
2004................................................................. $ 587,000
2005................................................................. $ 441,000
2006................................................................. $ 306,000
Thereafter........................................................... $5,721,000
As of December 31, 2001, the Corporation has borrowings outstanding of
$559,000. The borrowings are collateralized by a property with a book value of
$1,589,000. The weighted average interest rate on the borrowings was 8.50% in
2001 and 2000, respectively.
7. Deposits:
Following is a summary of deposits as of December 31,
(in thousands) 2001 2000
-----------------
Regular savings.............................................. $ 39,994 $ 40,171
NOW accounts................................................. 111,589 111,087
Market rate accounts......................................... 53,269 50,176
Time deposits (less than $100,000)........................... 52,278 49,790
Time deposits, $100,000 or more.............................. 23,365 20,112
-----------------
Total interest-bearing deposits.............................. 280,495 271,336
Non-interest-bearing deposits................................ 110,564 115,630
-----------------
Total deposits............................................... $391,059 $386,966
-----------------
The aggregate amount of deposit overdrafts included as loans as of December 31,
2001 and 2000 were $1,104 and $3,369, respectively.
Maturity of certificates of deposit:
Less
$100,000 than
or more $100,000
----------------
Maturing during:
2002.......................................................... $23,243 $45,203
2003.......................................................... 122 5,745
2004.......................................................... -- 851
2005.......................................................... -- 287
2006 and thereafter........................................... -- 192
----------------
Total......................................................... $23,365 $52,278
----------------
8. Short Term Borrowings:
The Bank had outstanding short term borrowings from the Federal Home Loan Bank
of Pittsburgh of $20,000,000 as of December 31, 2001 with an interest rate of
3.86%, that maturing in January, 2002. No such borrowings were outstanding as
of December 31, 2000. The Bank subsequently borrowed $20,000,000 for a three
month period, at a rate of 2.00%.
9. 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 is practicable to estimate
that value:
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate their fair values.
Investment securities:
Estimated fair values for investment securities are based on quoted market
price, where available.
Mortgage servicing rights:
The fair value of the mortgage servicing rights approximates the carrying value
in the balance sheet due to management's recording of the asset based on
management's knowledge of activity in the secondary market.
Loans:
For variable rate loans that reprice frequently and which have no significant
change in credit risk, estimated fair
38
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 estimated cash flows as determined by the internal
loan review of the Bank or the appraised market value of the underlying
collateral, as determined by independent third party appraisers.
Deposits:
The estimated fair values disclosed for noninterest-bearing demand deposits,
NOW accounts, and Market Rate accounts are, by definition, equal to the amounts
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of expected monthly maturities on the certificate of deposit.
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.
Short Term Borrowings:
Due to the short term nature of the maturities the carrying amount of the
borrowings approximates the fair value.
Other liabilities:
Estimated fair values of long term mortgages, collateralized by one property
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:
2001 2000
----------------------------------------
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
----------------------------------------
Financial assets:
Cash and due from banks.............. $ 28,157 $ 28,157 $ 34,656 $ 34,656
Interest-bearing deposits with other
banks............................... 516 516 322 322
Federal funds sold................... -- -- 6,395 6,395
Investment securities................ 26,222 26,222 26,907 26,907
Mortgage servicing rights............ 2,206 2,316 373 384
Net loans............................ 395,921 395,719 350,264 353,184
----------------------------------------
Total financial assets............... $453,022 $ 452,930 $418,917 $ 421,848
----------------------------------------
Financial liabilities:
Deposits............................. $391,059 $ 391,543 $386,966 $ 387,049
Short term borrowings................ 20,000 20,000 -- --
Other liabilities.................... 578 578 601 601
----------------------------------------
Total financial liabilities.......... $411,637 $ 412,121 $387,567 $ 387,650
----------------------------------------
Off-balance sheet instruments......... $148,442 $ 148,442 $137,221 $ 137,221
----------------------------------------
10. Applicable Federal Income Taxes:
The components of the net deferred tax asset as of December 31 are as follows:
(in thousands) 2001 2000
-------------
Deferred tax assets:
Loan loss reserve............................................... $1,338 $ 892
Pension and other postretirement benefits....................... 221 --
Deferred compensation........................................... -- 22
Other reserves.................................................. 174 108
Unrealized appreciation on investment securitiesssssssssssssss.. -- 22
-------------
1,733 1,044
Deferred tax liabilities:
Depreciation.................................................... (302) (260)
Pension and other postretirement benefits....................... -- (12)
Originated mortgage servicing rights............................ (772) --
Unrealized depreciation on investment securities................ (145) --
-------------
Total net deferred tax assets.................................... $ 514 $ 772
-------------
No valuation allowance was recorded as of December 31, 2001 and 2000.
39
The provisions for federal income taxes consist of the following:
(in thousands) 2001 2000 1999
----------------------
Currently payable....................................... $4,862 $4,923 $4,076
Deferred................................................ (92) (490) (197)
----------------------
Total.................................................. $4,770 $4,433 $3,879
----------------------
Applicable federal income taxes differed from the amount derived by applying
the statutory federal tax rate to income as follows:
(in thousands) 2001 2000 1999
----------------------
Computed tax expense @ stated rate..................... $4,764 $4,316 $4,026
Benefit reductions in taxes resulting from tax-exempt
income................................................ (78) (121) (164)
Goodwill............................................... 57 110 62
Other, net............................................. 27 128 (45)
----------------------
Actual tax expense..................................... $4,770 $4,433 $3,879
----------------------
11. Pension and Other Postretirement Benefits:
The Corporation sponsors two pension plans and a postretirement benefit plan
for certain of its employees.
The following tables provide a reconcilation of the changes in the plans'
benefits obligation and fair value of assets over the two-year period ending
December 31, 2001, and a statement of funded status as of December 31 of both
years:
Pension Postretirement
Benefits Benefits
---------------- ----------------
2001 2000 2001 2000
(Dollars in thousands) ------- ------- ------- -------
Reconciliation of Benefit Obligation and Plan Assets
- ----------------------------------------------------
Change in benefit obligation
Benefit obligation at January 1............ $16,301 $15,592 $ 1,444 $ 1,132
Service cost............................... 774 733 23 7
Interest cost.............................. 1,279 1,123 166 108
Amendments 59 -- 7 --
Actuarial (gain) loss...................... 1,813 (553) 921 320
Benefits paid.............................. (565) (594) (196) (123)
----------------------------------
Benefit obligation at December 31.......... $19,661 $16,301 $ 2,365 $ 1,444
----------------------------------
Change in plan assets
- ---------------------
Fair value of plan assets at January 1..... $21,566 $23,376 $ -- $ --
Actual return on plan assets............... (1,057) (1,216) -- --
Employer contribution...................... 24 -- 190 123
Plan participants' contribution............ -- -- 6 --
Benefits paid.............................. (565) (594) (196) (123)
----------------------------------
Fair value of plan assets at December 31... $19,968 $21,566 $ -- $ --
----------------------------------
Funded Status Reconciliation and Key Assumptions
Pension Postretirement
Benefits Benefits
-------------- ----------------
2001 2000 2001 2000
----- ------- ------- -------
Reconciliation of funded status
Funded Status................................ $ 307 $ 5,266 $(2,365) $(1,444)
Unrecognized net actuarial (gain) loss....... (433) (5,598) 1,346 533
Unrecognized prior service cost.............. 860 968 -- --
Unrecognized transition obligation (asset)... -- -- 285 311
--------------------------------
Prepaid (accrued) benefit cost............... $ 734 $ 636 $ (734) $ (600)
--------------------------------
Pension Postretirement
Benefits Benefits
--------- ----------------
2001 2000 2001 2000
---- ---- ------- -------
Amounts recognized in financial statements
consists of:
Prepaid benefit cost/(Accrued benefit liability). $359 $619 $ (734) $ (600)
Intangible asset................................. 365 17 -- --
Accumulated other comprehensive income........... 10 -- -- --
--------------------------
Net amount recognized............................ $734 $636 $ (734) $ (600)
--------------------------
The Bank's Supplemental Employee Retirement Plan (the "SERP") was the only
pension plan with an accumulated benefit obligation in excess of plan assets.
The SERP's accumulated benefit obligation was $1,434,774 as of December 31,
2001 and $1,028,667 as of December 31, 2000. There are no plan assets in the
SERP due to the nature of the SERP.
The assumptions used in the measurement of the Corporation's benefit obligation
are shown on the following table:
Pension Postretirement
Benefits Benefits
----------------------------
2001 2000 2001 2000
---- ---- ------- -------
Weighted-average assumptions as of end of year
Discount rate................................... 7.25% 7.65% 7.25% 7.50%
Expected return on plan assets.................. 9.25% 8.50% N/A N/A
Rate of compensation increase................... 5.00% 5.00% N/A N/A
The assumed health care cost trend rate for 2001 and thereafter is 8%,
decreasing by 0.5% per year to an ultimate rate of 5%.
40
The following table provides the components of net periodic cost (income) for
the plans for years ended December 31, 2001, 2000 and 1999:
Postretirement
Pension Benefits Benefits
-----------------------------------------
2001 2000 1999 2001 2000 1999
-----------------------------------------
Service cost......................... $ 774 $ 733 $ 927 $ 23 $ 7 $ 7
Interest cost........................ 1,279 1,123 1,078 166 107 83
Expected return on plan assets....... (1,958) (1,962) (1,739) 0 0 0
Amortization of prior service cost... 167 158 158 0 0 0
Amortization of transition obligation
(asset)............................. 0 0 0 26 26 25
Amortization of net actuarial (gain)
loss................................ (336) (895) (418) 109 36 25
-----------------------------------------
Net periodic (benefit) cost.......... $ (74) $ (843) $ 6 $324 $176 $140
-----------------------------------------
1-Percentage 1-Percentage
D. Sensitivity Analysis, Postretirement Benefits Point Increase Point Decrease
------------------------
Effect on total of service and interest cost
components...................................... $ 22,244 $ (16,966)
Effect on accumulated postretirement benefit
obligation...................................... 249,921 (211,974)
This represents a 1% change in the health care cost trend rate.
12. Stock Option Plan:
At December 31, 1988, the Corporation maintains a stock option and stock
appreciation rights plan (the "Stock Option Plan"), which is described below.
The Corporation applies APB Opinion 25 and related interpretations in
accounting for the Stock Option Plan. Accordingly, no compensation cost has
been recognized for the Stock Option Plan. Had compensation for the
Corporation's Stock Option Plan been determined based on the fair value at the
grant date for awards in 2001, 2000 and 1999, consistent with the optional
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation", the Corporation's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
2001 2000 1999
--------------------
Net income--as reported................................... $9,126 $8,261 $7,961
Net income pro forma...................................... $8,986 $8,037 $7,636
Basic earnings per share--as reported..................... $ 2.11 $ 1.92 $ 1.83
Basic earnings per share--pro forma....................... $ 2.08 $ 1.87 $ 1.76
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants in 1999, 2000 and 2001: dividend yield of
2.68 percent, expected volatility of 18.4 percent, expected life of six years
and risk-free interest rates of 7.1 6.5 and 5.0 percent, respectively.
The Plan had, prior to 1994, up to 216,000 authorized and unissued or Treasury
shares of the Corporation's common stock reserved for issuance under the Plan.
During 1994, the shareholders' approved an additional 217,720 shares for
issuance under the Plan. The option to purchase shares of the Corporation's
common stock was issued to key officers. During 1995, the shareholder's
approved the issuance of 80,000 shares, 20,000 to be granted to outside
directors, for 4 years after each Annual Meeting. The option price was set at
the last sale price for the stock on the 3rd business day following the
Corporation's Annual Meeting. Options totaling 76,000 shares of Corporation
stock were issured under the outside directors' plan. During 1998 and 2001,the
shareholders approved the issuance of up to 217,606 and 192,663 respective
shares available for issuance to both employees and directors. The price will
be determined by the Corporation's Compensation Committee of the Board of
Directors at the time the option is granted.
41
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:
Weighted
Shares Available Average
Under for Price per Exercise
Option Option Share Price
-----------------------------------------
Balance at December 31, 1998........ 406,080 146,726 $ 4.50-$24.50 $12.06
Options granted................... 73,400 (73,400) $ 26.44 $26.44
Options exercised................. (40,200) -- $ 4.50-$26.44 $10.14
Options cancelled................. (10,000) 10,000 $ 24.50-$26.44 --
-----------------------------------------
Balance at December 31, 1999........ 429,280 83,326 $ 4.50-$24.50 $14.08
Options granted................... 83,300 (83,300) $ 21.00-$21.50 $21.05
Options exercised................. (38,000) -- $ 4.50-$16.91 $ 6.04
Options cancelled................. (2,100) 2,100 $ 21.00-$21.50 --
-----------------------------------------
Balance at December 31, 2000........ 472,480 2,126 $ 4.50-$26.44 $16.22
Options authorized................ -- 192,663 -- --
Options granted................... 77,800 (77,800) $24.90-$30.30 $28.36
Options exercised................. (123,880) -- $ 7.35-$26.44 $11.44
Options cancelled................. (12,250) 12,250 $24.90-$ 30.30 $29.86
-----------------------------------------
Balance at December 31, 2001........ 414,150 129,239 -- --
Information pertaining to options outstanding at December 31, 2001 is as
follows:
Weighted
Average Weighted Weighted
Shares Remaining Average Average
Price range of shares under Under Price per Contractual Exercise Number Exercise
option at December 31, 2001: Option Share Life Price Exercisable Price
-------------------------------------------------------------
100,200 $ 7.35-$ 7.94 2.33 $ 7.86 100,200 $ 7.86
30,400 $ 8.00-$12.50 2.95 $10.02 30,400 $10.02
155,000 16.91-$24.90 7.07 $22.45 115,000 $22.45
128,550 $26.44-$30.30 8.41 $27.42 63,000 $26.44
-------------------------------------------------------------
Balance at December 31, 2001. 414,150 $ 7.35-$30.30 6.04 $19.55 -- --
The weighted-average fair value of options granted during 1999, 2000 and 2001
were $6.39, $4.61 and $5.83, respectively.
The number of exercisable shares at December 31, 1999, 2000 and 2001 were
362,280, 389,180 and 348,600 respectively, with respective weighted average
exercise prices of $12.15, $10.18 and $17.80.
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 $.03 per share, $.05 per share and $.07 per share dilutive effect
on earnings per share for the years ended December 31, 2001, 2000 and 1999,
respectively.
13. Related Party Transactions:
In the ordinary course of business, the Bank has granted loans to principal
officers, directors and their affiliates. Loan activity during 2001 and 2000
was as follows:
Following is a summary of these transactions:
(in thousands) 2001 2000
--------------
Balance, beginning of year...................................... $4,437 $3,937
Additions....................................................... 892 683
Amounts collected............................................... (1,189) (183)
--------------
Balance, end of year............................................ $4,140 $4,437
--------------
Related party deposits amounted to $120,000 and $319,000 at December 31, 2001
and 2000, respectively.
42
14. 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 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, 2001 are $138,805,000. 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 credits 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, 2001 amounted to $9,637,000. There were no outstanding
bankers acceptances as of December 31, 2001.
As of December 31, 2001, 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.
15. 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 those
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 the 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.
43
16. Acqusitions:
Joseph W. Roskos & Co. was acquired as of January 1, 1999. The transaction was
accomplished on April 1, 1999 under the purchase method of accounting. Goodwill
arising from this transaction was recorded on the balance sheet and was being
amortized on a straight line basis over a 20 year period. Beginning in 2002,
under Statement of Financial Accounting Standard No. 142--Goodwill and Other
Intangible Assets ("SFAS No 142"), all components of Goodwill will no longer be
amortized, but rather tested annually for any potential impairment. As such,
the goodwill for JWR & Co. will not be amortized but will be reviewed annually
for any impairment.
Amount Paid
---------------------
Number
Total of Shares
Name of Company Method of Date of Purchase Common Issued or Amortization Amortized
Acquired: Accounting Acqusition Price Cash Stock Issuable Goodwill Period in 2001
------------------------------------------------------------------------------------------------------
Joseph W. Roskos
& Co........... Purchase 01/01/99 $4,195,000 $2,195,000 $2,000,000 74,697 $3,300,000 20 Years $165,000
Joseph W. Roskos & Co. is a firm which offers family business office services,
including accounting, consulting, tax services and fiduciary support to high-
net-worth individuals and families. Due to a change in management and the
effect of lowering revenues for Bryn Mawr Asset Management, Inc. (fromerly CDC
Capital Management, Inc.), ("BMAM"), the Corporation wrote off the remaining
balance of the related goodwill in 2000. During the fourth quarter of 2001,
BMAM was moved to an inactive status.
17. Minimum Regulatory Capital Requirements:
Both the Corporation and the Bank are subject to various regulatory capital
rerquirements, administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if taken, could have a
direct material effect on the Corporations and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
As set forth in the following table, quantitative measures have been
established to ensure captial adequacy ratios required of both the Corporation
and Bank, specifically to define the minimum respective capital ratios as
follows: total capital to total assets (the leverage ratio) of 4%; Tier I
captial to risk weighted assets of 4% and Tier II capital to risk weighted
assets of 8%. Both the Corporation's and the Bank's Tier II capital ratios are
calculated by adding back a portion of the loan loss reserve to the Tier I
capital. Management believes, as of December 31, 2001 and 2000 that the
Corporation and the Bank have met all captial adequacy requirements to which
they are subject. Federal banking regulators have defined specific capital
categories, based on an insitiution's capital ratios. The categories range for
a best of "well capitalized " to a worst of "critically under capitalized". To
be considered "well capitalized", an institution must have a total (Tier II)
captial ratio of 10% or better. Both the Corporation and the Bank have been
classified as "well capitalized" for both periods ending December 31, 2001 and
2000.
44
The Corporation's and the Bank's actual capital amounts and ratios as of
December 31, 2001 and 2000 are presented in the following table:
Minimum
Minimum Capital to be Well
Actual Requirement Capitalized
Amount
--------------------------------
Amount Ratio Amount Ratio
-----------------------------------------
December 31, 2001
Total (Tier II) Capital to
Risk Weighted Assets:
Consolidated............... $59,164 14.03% 8.0% N/A
The Bank................... 47,969 11.53% $ 33,289 8.0% $41,611
Tier I Captial to Risk
Weighted Assets:
Consolidated............... 54,228 12.86% 4.0% N/A
The Bank................... 43,033 10.34% 16,644 4.0% 21,974
Total Capital to Total
Assets (Leverage Ratio):
Consolidated............... 57,307 12.02% 4.0% N/A
The Bank................... 43,310 9.25% 18,728 4.0% 21,408
December 31, 2000
Total (Tier II) Capital to
Risk Weighted Assets:
Consolidated............... $52,363 13.61% 8.0% N/A
The Bank................... 41,240 10.91% $ 30,231 8.0% $37,789
Tier I Captial to Risk
Weighted Assets:
Consolidated............... 48,043 12.49% 4.0% N/A
The Bank................... 36,920 9.77% 15,116 4.0% 22,674
Total Capital to Total
Assets (Leverage Ratio):
Consolidated............... 50,970 11.47% 4.0% N/A
The Bank................... 36,879 8.56% 16,675 4.0% 20,844
18. Selected Quarterly Financial Data (unaudited):
Quarters ending 2001
---------------------------
(In thousands, except per share data) 3/31 6/30 9/30 12/31
---------------------------
Interest income.................................... $7,635 $7,649 $7,636 $7,391
Interest expense................................... 1,614 1,549 1,689 1,450
Net interest income................................ 6,021 6,100 5,947 5,941
Provision for loan losses.......................... 500 200 200 300
Income before income taxes......................... 3,238 3,383 3,746 3,529
Net income......................................... 2,188 2,159 2,470 2,309
Earnings per common share.......................... $ 0.51 $ 0.50 $ 0.57 $ 0.53
Diluted earnings per common share.................. $ 0.49 $ 0.48 $ 0.55 $ 0.52
Quarters ending 2000
---------------------------
(In thousands, except per share data) 3/31 6/30 9/30 12/31
---------------------------
Interest income.................................... $7,619 $7,897 $8,084 $8,385
Interest expense................................... 1,599 1,677 1,835 1,961
Net interest income................................ 6,020 6,220 6,249 6,424
Provision for loan losses.......................... 63 62 63 62
Income before income taxes......................... 2,945 2,851 3,445 3,453
Net income......................................... 1,960 1,707 2,303 2,291
Earnings per common share.......................... $ 0.45 $ 0.40 $ 0.54 $ 0.54
Diluted earnings per common share.................. $ 0.44 $ 0.38 $ 0.52 $ 0.52
45
19. Condensed Financial Statements:
The condensed financial statements of the Corporation (parent company only) as
of December 31, 2001 and 2000, and for each of the three years in the period
ended December 31, 2001, are as follows:
Condensed Balance Sheets
(in thousands) 2001 2000
----------------
Assets:
Cash........................................................ $ 234 $ 1,044
Investments in subsidiaries, at equity in net assets........ 50,601 43,848
Premises and equipment, net................................. 3,762 3,860
Goodwill.................................................... 2,805 2,970
Other assets................................................ 760 311
----------------
Total assets................................................ $58,162 $52,033
----------------
Liabilities and shareholders' equity:
Mortgages payable........................................... $ 559 $ 601
Other liabilities........................................... 296 462
----------------
Total liabilities........................................... 855 1,063
Common stock, par value $1, authorized 25,000,000 shares as
of December 31, 2001 and 2000, respectively, issued
5,329,675 shares and 5,203,719 shares as of December 31,
2001 and 2000, respectively and outstandng 4,322,121 shares
and 4,272,046 shares as of December 31, 2001 and 2000,
respectively. . 5,330 5,204
Paid-in capital in excess of par value....................... 6,676 4,604
Unrealized investment appreciation (depreciation), net of
deferred income taxes....................................... 274 (42)
Retained earnings............................................ 56,499 50,488
Less common stock in treasury, at cost-- 1,007,554 shares and
931,673 shares as of December 31, 2001 and 2000............. (11,472) (9,284)
----------------
Total shareholders' equity.................................. 57,307 50,970
----------------
Total liabilities and shareholders' equity.................. $58,162 $52,033
----------------
Condensed Statements of Income
(in thousands) 2001 2000 1999
---------------------
Dividends from The Bryn Mawr Trust Company............... $3,116 $9,646 $8,052
Interest and other income................................ 236 236 241
------ ------ ------
Total operating income................................... 3,352 9,882 8,293
Expenses................................................. 707 1,008 730
------ ------ ------
Income before equity in undistributed income of
subsidiaries............................................ 2,645 8,874 7,563
Equity in undistributed income of subsidiaries........... 6,377 (765) 294
------ ------ ------
Income before income taxes............................... 9,022 8,109 7,857
Federal income tax benefit............................... 104 152 104
------ ------ ------
Net income............................................... $9,126 $8,261 $7,961
====== ====== ======
Condensed Statements of Cash Flows
(in thousands) 2001 2000 1999
----------------------
Operating activities:
Net income............................................ $9,126 $8,261 $7,961
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income (losses) of
subsidiaries......................................... (6,377) 765 (294)
Depreciation expense.................................. 98 99 98
Amortization of goodwill.............................. 165 324 183
Other................................................. 408 339 629
------ ------ ------
Net cash provided by operating activities............. 3,420 9,788 8,577
Investing Activities:
Cost of acquiring subsidiaries........................ -- -- (2,195)
Investment in Subsidiaries............................ (376) (4,885) (1,041)
------ ------ ------
Net cash provided by investing activities............. (376) (4,885) (3,236)
Financing activities:
Dividends paid........................................ (3,115) (2,922) (2,603)
Repayment of mortgage debt............................ (42) (37) (30)
Repurchase of treasury stock.......................... (2,259) (1,677) (2,531)
Proceeds from issuance of stock....................... 1,562 76 303
------ ------ ------
Net cash used by financing activities................. (3,854) (4,560) (4,861)
------ ------ ------
Change in cash and cash equivalents................... (810) 343 480
------ ------ ------
Cash and cash equivalents at beginning of year........ 1,044 701 221
------ ------ ------
Cash and cash equivalents at end of year.............. $ 234 $1,044 $ 701
====== ====== ======
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, 2001, the Bank's
retained earnings amounted to $36,446,000. Therefore, as of December 31, 2001,
dividends available for payment to the Corporation are limited to $36,446,000.
Since the primary 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.
46
20. Segment Information:
The Corporation's principal operating segments are structured around the
financial services provided its customers. The banking segment gathers deposits
and makes funds available for loans to its customers. The Banks Investment
Management and Trust segment provides both corporate and individual investment
management and trust products and services. The Bank's mortgage banking segment
originates and sells residential mortgage loans to the secondary mortgage
market.
Segment information for the years ended December 31, 2001, 2000, and 1999 is as
follows:
2001 2000
-------------------------------------------------- --------------------------------------------------
Mortgage All Mortgage All
(in thousands) Banking Wealth Banking Other Consolidated Banking Wealth Banking Other Consolidated
Net interest
income......... $ 23,749 $ -- $ 243 $ 17 $ 24,009 $ 24,684 $ -- $ 216 $ 17 $ 24,917
Less loan loss
provision...... 1,200 -- -- -- 1,200 250 -- -- -- 250
Net interest
income after
loan loss
provision...... 22,280 -- 243 286 22,809 24,434 -- 216 17 24,667
Other income:
Fees for
investment
management and
trust
services...... -- 8,737 -- -- 8,737 -- 8,973 -- -- 8,973
Service charges
on deposit
accounts...... 1,540 -- -- -- 1,540 1,144 -- -- -- 1,144
Other fees and
service
charges....... 294 -- 424 -- 718 295 -- 729 -- 1,024
Net gain on
sale of loans. 3 -- 5,218 -- 5,221 8 -- 1,232 -- 1,240
Gain on sale of
other real
estate owned.. -- -- -- -- -- 14 -- -- -- 14
Other operating
income........ 1,547 11 -- 3,476 5,034 925 -- -- 4,789 5,714
Total other
income......... 3,384 8,748 5,642 3,476 21,250 2,386 8,973 1,961 4,789 18,109
Other expenses:
Salaries-
regular........ 8,201 3,010 883 1,954 14,048 7,826 3,175 538 2,320 13,859
Salaries-other. 1,505 202 252 77 2,036 750 211 30 52 1,043
Fringe
benefits....... 1,853 585 66 315 2,819 850 616 70 313 1,849
Occupancy...... 3,109 632 178 444 4,363 3,401 472 142 502 4,517
Other operating
expenses...... 4,061 1,088 746 1,002 6,897 5,505 880 334 2,095 8,814
Total other
expenses....... 18,729 5,517 2,125 3,792 30,163 18,332 5,354 1,114 5,282 30,082
Segment profit
(loss)......... 6,935 3,231 3,760 (30) 13,896 8,488 3,619 1,063 (476) 12,694
Intersegment
(revenues)
expenses....... 374 181 -- (555) -- 138 181 -- (319) --
Segment profit
after
eliminations... $ 7,309 $3,412 $ 3,760 ($ 585) $ 13,896 $ 8,626 $3,800 $ 1,063 ($ 795) $ 12,694
% of segment
profit (loss).. 53% 24% 27% (4%) 100% 68% 30% 8% (6%) 100%
Total assets at
December 31.... $400,352 $1,267 $66,504 $8,704 $476,827 $392,028 $ 457 $38,123 $13,817 $444,425
Capital
expenditures... $ 569 $ 991 $ 26 $ 48 $ 1,634 $ 2,108 $ 47 $ 16 $ 359 $ 2,530
Depreciation and
amortization... $ 1,138 $ 211 $ 31 $ 169 $ 1,549 $ 1,314 $ 153 $ 34 $ 520 $ 2,021
1999
---------------------------------------------------
Mortgage All
(in thousands) Banking Wealth Banking Other Consolidated
Net interest
income......... $ 22,310$ -- $ 145 $ 5 $22,460
Less loan loss
provision...... 250 -- -- -- 250
Net interest
income after
loan loss
provision...... 22,060 -- 145 5 22,210
Other income:
Fees for
investment
management and
trust
services...... -- 9,784 -- -- 9,784
Service charges
on deposit
accounts...... 1,156 -- -- -- 1,156
Other fees and
service
charges....... 254 -- 762 -- 1,016
Net gain on
sale of loans. 44 -- 984 -- 1,028
Gain on sale of
other real
estate owned.. 45 -- -- -- 45
Other operating
income........ 908 -- -- 4,568 5,476
Total other
income......... 2,407 9,784 1,746 4,568 18,505
Other expenses:
Salaries-
regular........ 7,251 2,852 469 1,874 12,446
Salaries-other. 1,754 230 78 184 2,246
Fringe
benefits....... 1,474 565 80 215 2,334
Occupancy...... 3,090 476 149 456 4,171
Other operating
expenses...... 4,694 948 310 1,726 7,678
Total other
expenses....... 18,263 5,071 1,086 4,455 28,825
Segment profit
(loss)......... 6,204 4,713 805 118 11,840
Intersegment
(revenues)
expenses....... 176 181 -- (357) 0
Segment profit
after
eliminations... $ 6,380$4,894 $ 805 ($ 239) 11,840
% of segment
profit (loss).. 54% 41% 7% (2%) 100%
Total assets at
December 31.... $398,546$ 413 $27,337 $10,524 436,820
Capital
expenditures... $ 759$ 95 $ 14 $ 236 1,104
Depreciation and
amortization... $ 693 $ 162 $ 29 $ 435 1,319
Bryn Mawr Bank Corporation, Bryn Mawr Advisers, Inc., Insurance Counsellors of
Bryn Mawr, Inc., Bryn Mawr Brokerage Company, Inc., Bryn Mawr Asset Management,
Inc. and Joseph W. Roskos & Co have all been aggregated in All Others.
47