[LOGO OF BRYN MAWR BANK APPEARS HERE]
98
[GRAPHIC APPEARS HERE]
BRYN MAWR BANK CORPORATION
1998 Annual Report
Bryn Mawr Bank Corporation
Consolidated Financial
Highlights
[LOGO OF BMT APPEARS HERE]
CONTENTS:
- ----------------------------------------
2. Chairman's Letter
4. The Year in Review
11. Bank Information
12. Corporate Information
Five-Year
Compound
FOR THE YEAR 1998 1997 Change Growth Rate
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Net interest income $ 20,462 $ 18,368 11% 8%
Other income 14,720 11,749 25 11
Other expenses 24,695 20,837 19 8
Net income 6,857 6,130 12 13
AT YEAR-END
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Total assets $391,840 $374,210 5% 4%
Total net loans 277,085 264,484 5 8
Total deposits 342,357 328,806 4 3
Shareholders' equity 42,221 39,349 7 11
PER COMMON SHARE
- ------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ 1.58 $ 1.40 13% 13
Earnings per common
share-assuming dilution $ 1.51 $ 1.34 13 12
Dividends declared 0.465 0.36 29 36
Book value 9.81 9.00 9 12
Closing price 27.25 25.50 7 27
SELECTED RATIOS
- ------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.91% 1.74%
Return on average
shareholders' equity 17.06% 16.45%
* Per share data restated to reflect the effect of the 2-for-1 stock split,
effective September 1, 1998
1
Bryn Mawr Bank Corporation
- --------------------------------------------------------------------------------
Dear Shareholder:
[PHOTO APPEARS HERE]
We enjoyed another year of improved earnings, expanded services, and the recent
acquisition of two fine businesses and the start-up of another. These new
companies importantly expand our capacity to provide financial services to
families.
Net income per share, on a fully diluted basis, was up 13% this year, and when
all the non-operating related elements are taken from both years' results, we
made a 14% gain in net income. So though we've been building in new financial
services--insurance, tax counsel, expanded investment management, and financial
planning--we've still been able to increase our earnings nicely.
What We Are
For a long while, our belief has been that there's a place for a small financial
institution which can provide its clients--businesses, institutions, and
families--a full range of first-quality financial services in a thoughtful,
warm, and personal way. Every effort is centered, not on our needs, but on the
needs of the client and the client's family. Our interest is that our clients'
goals are fully met. If by us, excellent; if better by someone else, we'll help
make that connection. Our clients' needs carry the day.
This Year
This year was an exciting one. Insurance Counsellors of Bryn Mawr started its
operations in January. We sold both property/casualty and life insurance, and
learned a lot about how different the commissioned based insurance business is
compared to our traditional banking business. We wound up the year with a
$25,000 loss, though we saved more than that in our own employee and corporate
coverages. Insurance is a business we like, because it plays a vital part in the
well-being of our clients' financial lives, especially with respect to estate
planning.
As the year ended, three new additions were made to the range of financial
services we provide our clients. Bryn Mawr Brokerage Co., Inc. was established
at year end. We can now meet family financial needs which do not require the
investment management skills housed
2
1998 ANNUAL REPORT
- -------------------------------------------------------------------------------
in Investment Counsellors of Bryn Mawr. We also acquired CDC Capital Management,
Inc., an organization appropriately categorized as a "manager of managers." A
manager of managers does not pick individual securities, but assembles
information about various investment managers' styles and performances. With CDC
Capital Management, we've acquired the expertise to choose from a pool of top
performing managers from around the world. Bryn Mawr's "large cap growth"
management style has produced excellent results--over the last five years, our
benchmark results have exceeded the Standard and Poor 500 record--the CDC
addition allows us in-house capacity to better diversify clients' investments.
And, Joseph W. Roskos & Co. agreed to join the Corporation's family, effective
January 1, 1999. This accounting firm traces its beginnings to the early 1900's,
and provides individuals and families full financial accounting and tax
preparation, and other family financial services. The Roskos firm is the premier
family office accounting firm in our marketplace.
So, we're on the move with a full range of family financial services: insurance,
tax counsel, fiduciary services, investment management, brokerage, family office
services, and our traditional personal and business banking services.
A Look Ahead
We're fully aware that our independent existence depends upon our capacity to
increase earnings. We shoot for a 15% net income growth as we plan the year
ahead, but recognize that doubling our net income every five years or so is an
aggressive target.
There are challenges on our path. Challenges that could become either stepping
stones or stumbling blocks. Technology, office space, staff capacities and
competence, and probably the most challenging, actually getting the Corporation
to fully function, be fully alive, and perfectly meet the needs of the clients
we're privileged to serve. We've engaged professional help and are committing
serious time to reshaping ourselves to better communicate, function, grow, and
perform as individuals and as teams.
A World of Difference
We are all but unique in the world of banking--a world of difference for those
we serve.
As the years pass, I grow more and more proud of what we have become, and feel
deeply indebted to our entire staff, for the good they do, and the part they
play in making us what we are. We have 25 men and women now attending their
fifth class in an advanced financial planning course started two years ago, and
presented by The American College here in Bryn Mawr. These people have given up
much to meet the rigor of the program, and have learned a lot about how to help
clients and their families improve their financial lives. Also, we've twelve men
and women who have achieved their Series 6 and 63-NASD licenses to sell
securities.
Y2K looms, and has, and will continue to, cost us money. But I'm fully confident
of the safety of your money here when the year-end change comes.
We've signed a 29 year lease on buildings 2 and 6 South Bryn Mawr Avenue, two
office buildings which lie between the Bank building and the Investment
Management and Trust building at 10 South Bryn Mawr Avenue. We need to do
extensive renewal of the second floor of our corporate headquarters building,
and will start that work this year. This will be expensive and disruptive, but
essential.
I hope you will call me if ever you have a question. I'm at 610-526-2300. Thank
you for your support, your interest, and, if appropriate, your business. If you
don't bank with us, come in! See what it feels like to bank where people really
care about you and your family's financial well being. There is a world of
difference, right here in Bryn Mawr.
Sincerely,
/s/ Robert L. Stevens
Robert L. Stevens
Chairman
February 24, 1999
3
Bryn Mawr Bank Corporation
- --------------------------------------------------------------------------------
[PHOTO OF JOSEPH W. ROSKOS APPEARS HERE]
[PHOTO OF J. MICHEAL DEVINE APPEARS HERE]
- --------------------------------------------------------------------------------
Above: Joseph W. Roskos, Joseph W. Roskos & Co.
Below: J. Micheal Devine, CDC Capital Management, Inc.
The Year in Review
In 1998, Bryn Mawr Bank Corporation continued to enhance its ability to provide
businesses, individuals, families and foundations with a complete spectrum of
financial services including loans, checking accounts, cash management,
investment management, estate planning, fiduciary services, tax planning advice
and tax preparation. The Corporation's capabilities were enhanced by the
addition of highly qualified staff members, the upgrading of the skills of our
existing staff, the introduction of new services, and the addition of new and
supporting initiatives.
4
1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
New Acquisitions
In November, Bryn Mawr Bank Corporation announced its intention to acquire
Joseph W. Roskos & Co., a well-known accounting firm that provides family
business office services including accounting, consulting, tax services, and
fiduciary support for high-net-worth individuals and families. The organization,
which has a staff of twenty-five, traces its roots back to the earliest part of
the twentieth century. Joseph W. Roskos, CPA, has served as its president since
1991. He holds a BS in accounting from Syracuse University, a JD from Temple
University Law School, and a Master of Laws in Taxation, from Villanova Law
School. In January of 1999, in the Bank's Centennial Wing, Mr. Roskos presented,
for a select group of Bryn Mawr Trust customers, a program that outlined the
scope of the specialized services available through the Roskos organization.
Early in 1999, Bryn Mawr Bank Corporation announced the successful completion of
the acquisition of CDC Capital Management, Inc., an investment advisory firm
registered with the United States Securities and Exchange Commission. CDC has in
excess of $200 million under advisement and maintains strategic business
alliances with Callan Associates Independent Advisor Group and the SEI
Investment Select Advisor Council. Callan Associates of San Francisco, is one of
the world's preeminent investment consulting firms. SEI, with headquarters in
Oaks, PA, offers a variety of services for the investment management and trust
industry. With CDC, the Corporation has acquired the expertise to bring our
clients the same investment processes and global specialist money management as
used by the nation's largest pools of assets. Founded in 1993, CDC is headed up
by J. Michael Devine. Norman S. MacQueen, III, heads up CDC's client services.
[BAR GRAPH APPEARS HERE]
5
[PHOTO OF PETER H. HAVENS APPEARS HERE]
[PHOTO OF F. CHRISTOPHER CAMPBELL, III, APPEARS HERE]
Above: Peter H. Havens, Investment Management & Trust
Below: F. Christopher Campbell, III, Bryn Mawr Brokerage Company, Inc.
Offshore Trust Company Established
As a result of an initiative spearheaded by Peter H.Havens, executive vice
president, Investment Management & Trust, The Bryn Mawr Trust Company (Jersey),
Ltd. was established in September 1998, to provide Bryn Mawr Trust clients with
the opportunity to participate in offshore trusts. Offshore trusts are
established for a variety of reasons, such as the preservation of family wealth,
investing in foreign securities, and protecting confidentiality. Bryn Mawr Trust
(Jersey), Ltd., is located on the Island of Jersey in the Channel Islands near
the United Kingdom.
Bank Enters Securities Brokerage Business
Bryn Mawr Brokerage Company, Inc., was formed in December of 1998. The new
subsidiary was created to offer securities products, including mutual funds,
annuities, individual stocks and bonds, and retirement plans through the Bank's
branch system. Twenty branch service representatives became licensed by the
National Association of Securities Dealers to sell and service investment
products. Thomas M. Petro, senior vice president of Community Banking assumed
the additional role of president of the new company. He was joined by F.
Christopher Campbell, vice president, who has considerable experience in
securities brokerage and retirement services. An extensive training program has
been developed to prepare the newly licensed bankers to effectively sell and
support their clients' investment needs. The new company has partnered with
UVEST Financial Services, Inc., a broker-dealer headquartered in Charlotte,
North Carolina.
Superior Investment Performance
The performance record of our investment managers continued to be impressive.
Indata, a nationally recognized monitor of investment fund performance, has
again ranked the Bryn Mawr Trust Qualified Equity Fund in the first quartile of
funds analyzed.
6
1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
[PHOTO APPEARS HERE]
From Left to Right:
Carmen L. Fiorentino, James J. Egan, J. David Peterson, Commercial & Real Estate
Lending Services
Leadership In Commercial Real Estate Lending
Due to the efforts of a team of our commercial lending professionals, Bryn Mawr
Trust has become the lead bank in a co-operative financing venture for a new
multi-sports center in Downingtown, Pennsylvania, that provides complete indoor
and outdoor facilities for a variety of sports for instruction, leagues, camps,
clinics and tournaments. The center includes four private meeting rooms, a
viewing mezzanine, a full-service restaurant, a retail specialty sporting goods
store, and a sports medicine center. Sharing the client's vision, our lending
officers obtained the necessary support from three other banks which
participated in the financing of this project.
TRUST ASSETS
In millions of dollars
[BAR CHART APPEARS HERE]
LOANS SERVICED FOR OTHERS
In millions of dollars
[BAR CHART APPEARS HERE]
7
Bryn Mawr Bank Corporation
- --------------------------------------------------------------------------------
[GROUP PHOTO APPEARS HERE]
From Left to Right:
Robert M. Fedoris, Joseph W. Roskos & Co.
Lorraine T. "Jane" Gardner, Insurance Counsellors of Bryn Mawr
June M. Falcone, Banking Operations
John M. Grib, Investment Counsellors of Bryn Mawr
R. Ross Collins, Jr., Tax Counsellors of Bryn Mawr
Doris P. Theune, Investment Management & Trust
8
1998 Annual report
- --------------------------------------------------------------------------------
Improving The Workplace In order
In order to create a working environment where people are more creative,
effective, interactive and satisfied, the Bank has employed the services of a
professional consulting firm. In September, 233 employees completed a working
environment questionnaire. Twenty-five employees were personally interviewed,
and senior management participated in a special training session. The results of
these fact-gathering efforts were carefully analyzed by the outside experts. The
process was designed to provide a baseline from which Bryn Mawr Trust can
improve performance, become more competitive, and provide a more meaningful work
life for all employees. A pilot program, "Working Together to Build a Better
BMT," kicked off in February 1999, to focus on organizational development. This
process will continue throughout the year.
Facilities Upgrades
In October, Investment Counsellors of Bryn Mawr moved from its rather cramped
quarters at Two Tower Bridge in Conshohocken to offices in the newly constructed
Four Tower Bridge in West Conshohocken. The new office space features nine
private offices, two handsome conference rooms, a file room, well-appointed
reception area, and efficient open office area for support staff.
During 1998, our West Conshohocken service office, at One Tower Bridge, was
closed down temporarily, expanded, refurbished, and reopened as a full service
branch office with teller and banking services available five days a week.
New ATM's were installed at the Paoli and Wynnewood branches. The machines will
eventually have the capability to cash checks, dispense coins, coupons and
postage stamps. The entire drive-up facility at the Wynnewood branch was
upgraded.
The third floor of the headquarters building at Bryn Mawr, which formerly housed
the old boardroom, an additional conference room, and ladies lounge, was
completely renovated. The handsomely appointed area features five private
offices, a conference room, and a reception area. Tax Counsellors of Bryn Mawr
moved into these quarters in August.
TOTAL REVENUE STREAMS
In millions of dollars
[BAR GRAPH APPEARS HERE]
TOTAL ASSETS MANAGED
In millions of dollars
[BAR GRAPH APPEARS HERE]
9
Bryn Mawr Bank Corporation
- --------------------------------------------------------------------------------
COMMON STOCK
In millions of dollars
[BAR CHART APPEARS HERE]
Telecommunications Upgraded
In late spring, a new telephone system was installed to provide technologically
improved service for the Bryn Mawr headquarters building, the investment and
trust center in Bryn Mawr, and the corporate operations center and branch office
housed in our Wayne Building. The new system replaced equipment which was at
maximum capacity and was not Year 2000 compliant.
Eye On The Future
From every possible aspect--staff expertise, technology, variety and quality of
services offered--management is taking the necessary steps to provide the
capacity to meet the challenges to be faced in the future. The guiding principle
as we go forward will be to serve the best interest of our clients throughout
the various stages of their lives.
10
1998 ANNUAL REPORT
- ------------------------------------------------
The Bryn Mawr Trust Company
801 Lancaster Avenue
Bryn Mawr, Pennsylvania 19010-3396
610-525-1700
Senior Management:
Robert L. Stevens*
- -------------------------------------------------------
Chairman, Chief Executive Officer,
and President
Samuel C. Wasson, Jr.*
- -------------------------------------------------------
Vice Chairman and Secretary
Peter H. Havens
- -------------------------------------------------------
Executive Vice President,
Investment Management & Trust
Robert J. Ricciardi*
- -------------------------------------------------------
Executive Vice President and Chief
Credit Policy Officer
Joseph H. Bachtiger
- -------------------------------------------------------
Senior Vice President, Trust
Administration
June M. Falcone
- -------------------------------------------------------
Senior Vice President, Banking
Operations
Alison E. Gers
- -------------------------------------------------------
Senior Vice President, Marketing
Joseph G. Keefer
- -------------------------------------------------------
Senior Vice President and Chief
Lending Officer
Paul M. Kistler, Jr.
- -------------------------------------------------------
Senior Vice President, Facilities,
Human Resources, Security and
Compliance
Donald B. Krieble
- -------------------------------------------------------
Senior Vice President, Consumer
Credit Services
Herbert T. McDevitt
- -------------------------------------------------------
Senior Vice President, Family Office
William R. Mixon
- -------------------------------------------------------
Senior Vice President,
Information Systems and
Chief Technology Officer
Thomas M. Petro
- -------------------------------------------------------
Senior Vice President,
Community Banking
Joseph W. Rebl*
- -------------------------------------------------------
Senior Vice President, Treasurer,
and Chief Financial Officer
Walter Smedley, III
- -------------------------------------------------------
Senior Vice President, Commercial
& Real Estate Lending Services
Leo M. Stenson
- -------------------------------------------------------
Senior Vice President and Auditor
Carmen L. Fiorentino
- -------------------------------------------------------
Group Vice President, Commercial &
Real Estate Lending Services
Richard J. Fuchs
- -------------------------------------------------------
Group Vice President, Branch
Operations
Geoffrey L. Halberstadt
- -------------------------------------------------------
Group Vice President, Commercial &
Real Estate Lending Services
*Also officer of the Corporation
Branch Offices:
801 Lancaster Avenue
Bryn Mawr, Pennsylvania 19010-3396
18 West Eagle Road
Havertown, Pennsylvania 19083
39 West Lancaster Avenue
Paoli, Pennsylvania 19301
330 East Lancaster Avenue
Wayne, Pennsylvania 19087
One Tower Bridge
West Conshohocken, Pennsylvania 19428
312 East Lancaster Avenue
Wynnewood, Pennsylvania 19096
Investment Management & Trust Division:
10 South Bryn Mawr Avenue
Bryn Mawr, PA 19010
Limited Service Offices:
Beaumont at Bryn Mawr Retirement Community
Bryn Mawr, Pennsylvania
Bellingham Retirement Living
West Chester, Pennsylvania
Martins Run Life Care Community
Media, Pennsylvania
The Quadrangle
Haverford, Pennsylvania
Waverly Heights
Gladwyne, Pennsylvania
Other Financial Services:
BMT Mortgage Company
- -------------------------------------------------------
A DIVISION OF THE BRYN MAWR TRUST COMPANY
BRYN MAWR, PENNSYLVANIA
William F. Mannion, Jr., Managing Director
Patrick J. Keenan, Managing Director
Bryn Mawr Brokerage Company, Inc.
- -------------------------------------------------------
A SUBSIDIARY OF BRYN MAWR BANK CORPORATION
BRYN MAWR, PENNSYLVANIA
Thomas M. Petro, President and Chief Executive Officer
CDC Capital Management, Inc.
- -------------------------------------------------------
A SUBSIDIARY OF BRYN MAWR BANK CORPORATION
450 Sentry Parkway
Suite 105, P.O. Box 1212
Blue Bell, Pennsylvania 19422
J. Michael Devine, President and Chief Executive Officer
Insurance Counsellors of Bryn Mawr, Inc.
- -------------------------------------------------------
A SUBSIDIARY OF THE BRYN MAWR TRUST COMPANY
BRYN MAWR, PENNSYLVANIA
John G. Daniel, President and Chief Executive Officer
Investment Counsellors of Bryn Mawr
- -------------------------------------------------------
A DEPARTMENT OF THE INVESTMENT
MANAGEMENT & TRUST DIVISION
Four Tower Bridge
200 Barr Harbor Drive, Suite 225
West Conshohocken, Pennsylvania 19428
Richard I. Sichel, Senior Managing Director and
Chief Investment Officer
Betty K. Taylor, Senior Managing Director
Joseph W. Roskos & Co.
- -------------------------------------------------------
A SUBSIDIARY OF BRYN MAWR BANK CORPORATION
2011 Renaissance Boulevard, Suite 200
King of Prussia, Pennsylvania 19406
Joseph W. Roskos, President and Chief Executive Officer
Tax Counsellors of Bryn Mawr, Inc.
- -------------------------------------------------------
A SUBSIDIARY OF BRYN MAWR BANK CORPORATION
BRYN MAWR, PENNSYLVANIA
William H. Giese, President and Chief Executive Officer
11
Bryn Mawr Bank Corporation
--------------------------------------------------------
Corporate Information
Directors:
Richard B. Cuff
- -------------------------------------------------------
Chairman, Cuffco, Inc.
Warren W. Deakins
- -------------------------------------------------------
Self-Employed, Insurance Sales
John D. Firestone
- -------------------------------------------------------
Partner, Secor Group;
Director, Allied Capital Corporation;
Director, Security Storage Company of
Washington, DC; and
Director, Business Mortgage Investors, Inc.
William Harral, III
- -------------------------------------------------------
Chairman, C&D Technologies, INC.*
Senior Counselor, The Tierney Group
Peter H. Havens
- -------------------------------------------------------
Executive Vice President, The Bryn Mawr Trust
Company
Wendell F. Holland, Esq.
- -------------------------------------------------------
Vice President, American Water Works Service
Company, Inc.
Sherman R. Reed, 3rd
- -------------------------------------------------------
Builder and Developer
Phyllis M. Shea
- -------------------------------------------------------
Attorney-at-Law, Shea and Shea
Robert L. Stevens
- -------------------------------------------------------
Chairman, Chief Executive Officer, and
President of Bryn Mawr Bank Corporation and
The Bryn Mawr Trust Company
B. Loyall Taylor, Jr.
- -------------------------------------------------------
President, Taylor Gifts, Inc.
Nancy J. Vickers
- -------------------------------------------------------
President, Bryn Mawr College
Samuel C. Wasson, Jr.
- -------------------------------------------------------
Secretary of Bryn Mawr Bank Corporation and
Vice Chairman and Secretary of The Bryn Mawr
Trust Company
Thomas A. Williams
- -------------------------------------------------------
Vice President, Secretary/Treasurer
Houghton International, Inc.
* Commencing April 1, 1999
Annual Meeting:
The Annual Meeting of Shareholders of Bryn Mawr Bank Corporation will be held in
the Gregg Conference Center, at The American College, located at 270 South Bryn
Mawr Avenue, in Bryn Mawr, Pennsylvania, on Tuesday, April 20, 1999, at 2:00
p.m.
Market Makers:
Herzog, Heine, Geduld, Inc.
- -------------------------------------------------------
New York, New York
Knight Securities, Inc.
- -------------------------------------------------------
New York, New York
Ryan Beck and Company, Inc.
- -------------------------------------------------------
West Orange, New Jersey
F.J. Morrissey & Co., Inc.
- -------------------------------------------------------
Philadelphia, Pennsylvania
McConnell Budd & Downes
- -------------------------------------------------------
Morristown, New Jersey
Janney Montgomery Scott, Inc.
- -------------------------------------------------------
Philadelphia, Pennsylvania
Corporate Headquarters
801 Lancaster Avenue
Bryn Mawr, Pennsylvania 19010-3396
610-526-2302
Auditors
PricewaterhouseCoopers LLP
- -------------------------------------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103-2962
Legal Counsel
Monteverde, McAlee, FitzPatrick, Tanker & Hurd, P.C.
- -------------------------------------------------------
One Penn Center at Suburban Station
1617 John F. Kennedy Boulevard
Suite 1500
Philadelphia, Pennsylvania 19103-1815
Stock Listing
Bryn Mawr Bank Corporation common stock is traded over-the-counter and is listed
on the NASDAQ National Market System under the symbol BMTC.
Registrar & Transfer Agent
ChaseMellon Shareholder Services, L.L.C.
- -------------------------------------------------------
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
Form 10-K
A copy of the Corporation's Form 10-K, including financial statement schedules
as filed with the Securities and Exchange Commission, is available without
charge to shareholders upon written request to Samuel C. Wasson, Jr., Secretary,
Bryn Mawr Bank Corporation, 801 Lancaster Avenue, Bryn Mawr, Pennsylvania
19010-3396, or via e-mail to swasson@bmtc.com.
Equal Employment Opportunity
The Corporation continues its commitment to equal opportunity employment and
does not discriminate against minorities or women with respect to recruitment,
hiring, training, or promotion. It is the policy of the Corporation to comply
voluntarily with the practices of Affirmative Action.
12
Financial Section
Bryn Mawr Bank Corporation
1998 Annual Report
Contents
1 Selected Financial Data
2 Management's Discussion and Analysis
18 Consolidated Balance Sheets
19 Consolidated Statements of Income
20 Consolidated Statements of Cash Flows
21 Consolidated Statements of Changes in Shareholders' Equity
23 Notes to Consolidated Financial Statements
35 Report of Independent Accountants
Selected Financial Data
(in thousands, except for share and per share data)
For the years ended December 31, 1998 1997 1996 1995 1994
-------------------------------------------------------------------------
Interest income ......................................... $ 26,438 $ 25,297 $ 24,337 $ 23,617 $ 20,378
Interest expense ........................................ 5,976 6,929 6,490 7,246 5,077
-------------------------------------------------------------------------
Net interest income ..................................... 20,462 18,368 17,847 16,371 15,301
Loan loss provision ..................................... 150 200 350 500 500
-------------------------------------------------------------------------
Net interest income after loan loss provision ........... 20,312 18,168 17,497 15,871 14,801
Other income ............................................ 14,720 11,749 10,423 9,197 8,383
Other expenses .......................................... 24,695 20,837 18,978 18,325 17,535
-------------------------------------------------------------------------
Income before income taxes .............................. 10,337 9,080 8,942 6,743 5,649
Applicable income taxes ................................. 3,480 2,950 2,900 2,100 1,600
-------------------------------------------------------------------------
Net income .............................................. $ 6,857 $ 6,130 $ 6,042 $ 4,643 $ 4,049
-------------------------------------------------------------------------
Per share data*:
Earnings per common share:
Basic ........................................... $ 1.58 $ 1.40 $ 1.38 $ 1.06 $ 0.93
Diluted ......................................... $ 1.51 $ 1.34 $ 1.33 $ 1.04 $ 0.92
Dividends declared ................................... $ 0.465 $ 0.36 $ 0.46 $ 0.25 $ 0.16
Weighted-average shares outstanding .................. 4,327,297 4,392,162 4,385,094 4,377,056 4,367,800
Dilutive potential common shares ..................... 225,708 203,660 151,698 90,740 26,352
-------------------------------------------------------------------------
Adjusted weighted-average shares ..................... 4,553,005 4,595,822 4,536,792 4,467,796 4,394,152
(in thousands)
At December 31 1998 1997 1996 1995 1994
-------------------------------------------------------------------------
Total assets ............................................ $ 391,840 $ 374,210 $ 345,747 $ 354,956 $ 333,180
Earning assets .......................................... 357,683 327,942 305,911 314,089 298,385
Deposits ................................................ 342,357 328,806 303,183 317,601 301,337
Shareholders' equity .................................... 42,221 39,349 35,808 31,903 27,146
For the years ended December 31 1998 1997 1996 1995 1994
-------------------------------------------------------------------------
Selected financial ratios:
Net income to:
Average total assets ................................. 1.91% 1.74% 1.79% 1.39% 1.26%
Average shareholders' equity ......................... 17.06% 16.45% 18.16% 15.79% 15.70%
Average shareholders' equity to average total assets .... 11.17% 10.60% 9.88% 8.79% 8.06%
Dividends declared per share to
net income per basic common share .................... 29.43% 25.71% 33.33% 23.58% 17.57%
* Share and per share data have been reclassified to reflect the effect of
the 2-for-1 stock split, effective September 1, 1998.
1
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, 1998, as well as the financial
condition of the Corporation as of December 31, 1998 and 1997. The Bryn Mawr
Trust Company (the "Bank"), Tax Counsellors of Bryn Mawr, Inc. ("TCBM") and The
Bryn Mawr Trust Company (Jersey), Ltd. ("BMTC (Jersey)") are wholly-owned
subsidiaries of the Corporation. 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 18.
Significant Items For 1998
- --------------------------
Stock Repurchase Program Offsets Potential Dilution of EPS
During 1997, the Corporation established a stock repurchase program, authorizing
management to repurchase up to 5% of the then outstanding common shares of the
Corporation, not to exceed $4,000,000 (the "Stock Repurchase Program"). During
1998, the Corporation repurchased 99,900 shares of the Corporation's common
stock, at a cost of $2,519,000. The acquisition of these shares more than offset
the dilutive effect of the issuance of 32,500 new common shares either through
the Corporation's stock option plan or the issuance of stock in payment of the
Corporation's directors' retainer for 1998. While net income grew by 12% over
1997's net income, both basic and diluted earnings per share were up 13% over
1997.
Growth of Non-interest Revenue Streams
A strategic goal of the Corporation continues to be providing its customer base
with financial services and products that are designed to meet the ever evolving
needs of the Corporation's customers. The addition of new financial services and
products creates new sources of non-interest revenue. In July 1997, the
Corporation established TCBM to provide tax planning services to its customer
base, thereby increasing its non-interest revenue streams. In January 1998, the
Bank established ICBM to provide insurance services and products to its
customers. During the fourth quarter of 1998, the Corporation established BMTC
(Jersey), providing offshore trust services to the Bank's Investment Management
and Trust customers. The Bank's Investment Management and Trust line of business
also expanded it's business base, growing assets under management by 26%, from
$1,666,472,000 at December 31, 1997 to $2,101,251,000 at December 31, 1998.
The Corporation's other non-interest related line of business, BMT Mortgage
Company, a division of the Bank, dedicated to the origination and sale of
residential mortgage loans to the secondary mortgage market, also showed
significant growth in revenue streams for 1998, compared to 1997. As residential
mortgage interest rates decreased during 1998, BMT Mortgage Company generated
significant refinancing opportunities in residential mortgage lending,
originating and selling $134,676,000 in residential mortgage loans in 1998, a
77% increase over $75,874,000 sold in 1997. This increase in loan sale activity
increased the related net gains and fees earned on these sales by $429,000 or
57% over similar revenues for 1997.
Exclusive of gains on the sale of other real estate owned ("OREO"), reported in
both periods, the growth in non-interest revenues resulted in an increase in the
percentage of non-interest revenues earned in 1998, compared to total revenues,
to 41% from 38% for 1997.
Dividend Increase
Based on a continued growth in record earnings, the Corporation increased its
quarterly dividend payment for 1998 by 33%, from $0.09 per share in 1997 to
$0.12 per share in 1998. These per share amounts have been restated to reflect
the effect of a 2-for-1 stock split, effective on September 1, 1998. The
Corporation's dividend payout ratio was 29.43% of basic earnings per share for
1998, compared to 25.71% for 1997.
Results Of Operations
- ---------------------
Overview
The Corporation reported a 12% increase in net income of $6,857,000 for the year
ended December 31, 1998, a record year for Corporation earnings. Net income for
1997 amounted to $6,130,000.
During 1997, the Financial Accounting Standards Board ("FASB") issued Statement
on Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 requires the computation of both basic earnings per share and
diluted earnings per share. Basic earnings per share is computed by dividing the
Corporation's net income (numerator) by the weighted-average number of common
shares outstanding for the period (denominator). Dilutive earnings per share
adds to the weighted-average outstanding number of shares the number of
additional common shares that would have been outstanding if the dilutive common
shares had been issued. The dilutive common shares added to the weighted-average
shares outstanding were 225,708 and 203,660 for 1998 and 1997, respectively.
Earnings per common share amounted to $1.58 in 1998, a 13% increase over $1.40
for 1997. Earnings per common share, assuming dilution were $1.51 and $1.34 for
1998 and 1997, respectively.
These record earnings results for 1998 were due primarily to a 20% increase in
Investment Management and Trust revenues over similar revenues for 1997, an 11%
increase in net interest income and, with the exception of OREO related
revenues, all
2
non-interest revenue streams increased over their respective levels for 1997.
Net interest income grew $2,094,000 over 1997 levels. Exclusive of OREO related
revenues, total other income increased by $3,126,000 or 27% over similar
revenues for 1997. Other expenses increased $3,858,000 or 19% in 1998, compared
to 1997. This increase in other expense is partially due to the addition of both
TCBM and ICBM. TCBM operated for the last six months of 1997 and ICBM was not in
operation during 1997.
Return on average assets for the year increased to 1.91% from 1.74% in 1997,
while return on average equity for 1998 was 17.06% compared to 16.45% in 1997.
Earnings Performance
- --------------------
Lines of Business
The Corporation continues to have three significant business lines from which it
derives its earnings. Its core business line is the Banking line of business.
Additional earnings streams are received from its Investment Management and
Trust line of business and its Mortgage Banking line of business.
Following is a segmentation analysis of the results of operations for those
lines of business for 1998 and 1997:
TABLE 1 - Lines Of Business Analysis
1998
---------------------------------------------------------------------
Mortgage All
(dollars in thousands) Banking Trust Banking Others Consolidated
---------------------------------------------------------------------
Net interest income ....................... $20,103 $ -- $ 356 $ 3 $20,462
Less loan loss provision .................. 150 -- 0 0 150
---------------------------------------------------------------------
Net interest after
loan loss provision ...................... 19,953 0 356 3 20,312
Other income:
Fees for investment management
and trust services ...................... 0 9,272 -- -- 9,272
Service charges on
deposit accounts ........................ 1,169 -- -- -- 1,169
Other fees and
service charges ......................... 571 -- 1,209 -- 1,780
Net gain on sale of loans ................ 35 -- 783 -- 818
Gain on sale of other
real estate owned ....................... 224 -- -- -- 224
Other operating income ................... 631 -- -- 1,079 1,710
---------------------------------------------------------------------
Total other income ........................ 2,630 9,272 1,992 1,079 14,973
Other expenses:
Salaries--regular ........................ 6,489 2,863 417 520 10,289
Salaries--other .......................... 1,692 386 117 180 2,375
Fringe benefits .......................... 1,232 549 74 53 1,908
Occupancy ................................ 2,793 422 62 180 3,457
Other operating expenses ................. 5,003 898 400 618 6,919
---------------------------------------------------------------------
Total other expenses ...................... 17,209 5,118 1,070 1,551 24,948
---------------------------------------------------------------------
Segment profit (loss) ..................... $ 5,374 $ 4,154 $ 1,278 ($469) $10,337
=====================================================================
% of segment profit ....................... 52% 40% 12% -4% 100%
1997*
---------------------------------------------------------------------
Mortgage All
(dollars in thousands) Banking Trust Banking Others Consolidated
---------------------------------------------------------------------
Net interest income ....................... $18,031 $ -- $ 337 $ -- $18,368
Less loan loss provision .................. 200 -- -- -- 200
---------------------------------------------------------------------
Net interest after
loan loss provision ...................... 17,831 0 337 0 18,168
Other income:
Fees for investment management
and trust services ...................... -- 7,698 -- -- 7,698
Service charges on
deposit accounts ........................ 1,124 -- -- -- 1,124
Other fees and
service charges ......................... 503 -- 875 -- 1,378
Net gain on sale of loans ................ 43 -- 466 -- 509
Gain on sale of other
real estate owned ....................... 379 -- -- -- 379
Other operating income ................... 528 -- 4 370 902
---------------------------------------------------------------------
Total other income ........................ 2,577 7,698 1,345 370 11,990
Other expenses:
Salaries--regular ........................ 5,858 2,415 235 96 8,604
Salaries--other .......................... 1,347 215 93 -- 1,655
Fringe benefits .......................... 1,237 501 45 8 1,791
Occupancy ................................ 2,543 361 39 223 3,166
Other operating expenses ................. 4,730 733 233 166 5,862
---------------------------------------------------------------------
Total other expenses ...................... 15,715 4,225 645 493 21,078
---------------------------------------------------------------------
Segment profit (loss) ..................... $ 4,693 $ 3,473 $ 1,037 ($123) $ 9,080
=====================================================================
% of segment profit ....................... 52% 38% 11% -1% 100%
Bryn Mawr Bank Corporation, Tax Counsellors of Bryn Mawr, Inc., Insurance
Counsellors of Bryn Mawr, Inc. and The Bryn Mawr Trust Company (Jersey), Ltd.
have been aggregated in All Other.
*Reclassified for comparative purposes.
The table reflects operating profits of each line of business before income
taxes.
Each significant business segment reported growth in segment profits for 1998,
compared to 1997. There was a strong increase in both Investment Management and
Trust segment profits and the Mortgage Banking line's segment profits in 1998,
compared to 1997, up 20% and 23%, respectively. The Banking line's segment
profits grew by 15% from 1997 levels. The Banking segment's percentage of
segment profits remained level at 52% for both 1998 and 1997. Investment
Management and Trust's percentage of segment profit increased from 38% in 1997
to 40% in 1998. The Mortgage Banking segment's share of segment profits
increased from 11% in 1997 to 12% in 1998.
Banking Line of Business
The Bank's average outstanding earning assets of $328,605,000 increased 4% from
$315,548,000 for 1997. Average outstanding loans grew by 6% in 1998. The largest
increase in average outstanding loans occurred in commercial and industrial
loans, up $13,713,000 or 19% over 1997 average balances. Commercial mortgage
loans grew by $10,589,000 or 32% over 1997 average balances and average
outstanding construction loans rose by $4,725,000 or 54% over similar average
outstanding balances for 1997. Offsetting these increases were decreases in the
average
3
outstanding balances of the Bank's consumer loan portfolio, down $9,326,000 or
8% from 1997's average outstanding balances and residential mortgage loans, down
by $4,179,000 or 24%. Lower consumer loan demand, caused by increased
competition from automobile manufacturers for new automobile loans was primarily
responsible for the reduction in average outstanding loans in the consumer loan
portfolio in 1998, while increased sales of residential mortgage loans to the
secondary mortgage loan market was responsible for the decrease in average
outstanding residential mortgage loans. The average outstanding balances of
federal funds sold decreased by 8% in 1998 compared to 1997 levels. Average
outstanding investments decreased by 5% for 1998, compared to 1997. Average
outstanding total deposits increased 2% in 1998 compared to 1997. The largest
increase occurred in the Bank's low costing NOW account balances and non-
interest bearing demand deposits, up $10,968,000 or 15% and $6,697,000 or 9%,
respectively. Partially offsetting these increases was a $12,289,000 or 17%
decrease in the average outstanding balances of higher costing certificates of
deposit ("CDs"). Average outstanding savings deposits increased 3% or
$1,252,000. The change in the mix of average outstanding deposits, away from
higher costing CDs into low costing NOW and savings deposits and non-interest
bearing demand deposits, led to a decrease in interest expense and an increase
in the net interest margin to 5.99% in 1998 from 5.59% for 1997. An expanded
discussion of net interest income follows under the section entitled "Net
Interest Income."
Other income increased by 2% in 1998 compared to 1997. Exclusive of OREO gains,
reported in each period, total other income for the Banking segment increased by
9%.
Total other expenses of the Banking line of business increased 10% in 1998
compared to 1997 levels. Overall, the operating profits of the Banking line of
business increased 15% in 1998 compared to 1997.
Investment Management and Trust Line of Business
The Bank's Investment Management and Trust Division reported a 20% increase in
segment profit for 1998 compared to 1997 levels. Total Investment Management and
Trust fee income rose 20% in 1998. This was primarily due to an 26% increase in
the market value of assets managed, from $1,666,472,000 at December 31, 1997, to
$2,101,251,000 as of December 31, 1998.
Other expenses of the Investment Management and Trust line of business increased
21% in 1998 over 1997 levels. The primary reasons for this increase in expenses
were required staffing additions during 1998 and an increase in the Investment
Management and Trust Division's incentive compensation, associated with the
acquisition of new business and directly related to the Division's overall
profitability. The Trust incentive compensation amounted to $386,000 for 1998,
compared to $215,000 for 1997. Exclusive of the cost of the Trust incentive in
each period, Investment Management and Trust Division expenses increased 18% in
1998, compared to 1997.
Mortgage Banking Line of Business
The segment profit of the Bank's Mortgage Banking line of business increased 23%
in 1998 compared to 1997. During 1998, mortgage interest rates decreased enough
to make refinancing attractive to borrowers. In 1998, the Mortgage Banking line
of business had a 77% increase in the volume of loans sold in the secondary
mortgage market, partially offset by a 12 basis point decrease in the yield on
sales, compared to 1997 levels and yields. The result was a 57% increase in loan
fees and net gains on sales. This is the reason for the 23% increase in
operating profit for the Mortgage Banking line of business. As of December 31,
1998, the Bank serviced $290,675,000 in residential mortgage loans for others,
compared to $234,061,000 in loans serviced for others at year-end 1997.
Following is a table showing the volume of residential mortgage loans originated
and sold in the secondary mortgage market, the total loan fees and net gains
realized, and the yield on these loan sales:
TABLE 2 - Summary of Loan Sale Activity
(dollars in thousands) 1998 1997
-----------------------
Volume of loans sold .................... $134,676 $ 75,874
Loan fees and net gains on sales ........ $ 1,187 $ 758
Yield on sales .......................... .88% 1.00%
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. Expenses are
primarily of an administrative nature. In 1998, the Corporation incurred
expenses directly related to the start up or acquisition of new subsidiaries,
both in 1998 and planned for 1999. These additional costs are the primary reason
for the Corporation's loss of $291,000 for 1999 compared to $81,000 for 1997.
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 employs CPAs (the "Tax Professionals"),
having significant tax planning and preparation background and formerly employed
by a "Big Five" accounting firm. As a part of the formation of TCBM, a profit
sharing agreement was developed that allows the Tax Professionals to retain the
net revenues generated by existing clients brought to TCBM. For the first full
year of operation, TCBM exceeded the revenue goals established in the profit
sharing agreement, adding $10,000 to the Corporation's net income for 1998,
compared to a break even for 1997.
4
Insurance Counsellors of Bryn Mawr, Inc.
In January 1998, the Bank established a new wholly-owned subsidiary, ICBM, to
enable the Bank to offer insurance related products and services to its customer
base. ICBM offers a full line of life, property and casualty and commercial
lines to its customer base. For its first year of operation, ICBM had a loss of
$26,000.
The Bryn Mawr Trust Company (Jersey), Ltd.
In September 1998, the Corporation established a new wholly-owned subsidiary,
BMTC (Jersey), to enable the Corporation to offer alternative off-shore
investing opportunities through the Bank's Investment Management and Trust
Division. BMTC (Jersey) had a loss of $8,000 for 1998.
Net Interest Income
A 5% or $1,141,000 increase in interest income, combined with a 14% or $953,000
decrease in interest expense from year to year resulted in an overall increase
in net interest income of 11% or $2,094,000. Average earning assets grew 4% in
1998, compared to 1997 levels. Higher yielding average outstanding loan balances
grew by 6%. The average outstanding balances of investments and federal funds
sold decreased by 5% and 8%, respectively. Total average deposits increased 2%.
The largest increase occurred in the Bank's lower costing average outstanding
NOW balances, up by 15%. Non-interest bearing demand deposits increased by 9%,
while average savings deposits increased by 3%. This growth in average low cost
and non-interest bearing deposits was partially offset by a 17% decrease in
outstanding CD balances for 1998, compared to 1997 levels. This change in the
mix of average deposit balances, away from higher costing CDs into lower costing
NOW and demand deposits is primarily responsible for a 30 basis point decrease
in the average cost of funds for 1998, compared to 1997. This decrease in the
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, increasing from 5.59% for 1997 to 5.99% for 1998.
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 $769,000, $742,000 and $789,000 in 1998, 1997 and 1996 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
1998 1997
---------------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(dollars in thousands) Balance Expense Paid Balance Expense Paid
---------------------------------------------------------------------------------
Assets:
Cash and due from banks ................... $ 19,065 $ -- --% $ 23,329 $ -- --%
Interest-bearing deposits with other banks* 1,345 68 5.1 176 8 4.5
Federal funds sold* ....................... 15,665 824 5.3 16,964 935 5.5
Investment securities available for sale:
Taxable* .............................. 31,760 1,880 5.9 32,693 1,988 6.1
Tax-exempt* ........................... 4,953 224 4.5 5,868 283 4.8
------------------------- -------------------------
Total investment securities .............. 36,713 2,104 5.7 38,561 2,271 5.9
------------------------- -------------------------
Loans* .................................... 274,882 23,441 8.5 259,847 22,083 8.5
Less allowance for loan losses ............ (4,088) -- -- (4,247) -- --
------------------------- -------------------------
Net loans ................................ 270,794 23,441 8.7 255,600 22,083 8.6
Other assets .............................. 16,278 -- -- 16,807 -- --
------------------------- -------------------------
Total assets ............................. $ 359,860 $ 26,437 -- $ 351,437 $ 25,297 --
------------------------- -------------------------
Liabilities:
Demand deposits, noninterest-bearing ...... $ 82,773 $ -- --% $ 76,076 $ -- --%
Savings deposits .......................... 169,785 2,924 1.7 158,752 3,058 1.9
Time deposits ............................. 61,503 3,052 5.0 73,792 3,871 5.2
Federal funds purchased ................... 18 -- -- 5 -- --
Other liabilities ......................... 5,595 -- -- 5,550 -- --
------------------------- -------------------------
Total liabilities ........................ 319,674 5,976 -- 314,175 6,929 --
Shareholders' equity ...................... 40,186 -- -- 37,262 -- --
------------------------- -------------------------
Total liabilities and shareholders' equity $ 359,860 $ 5,976 -- $ 351,437 $ 6,929 --
------------------------- -------------------------
Total earning assets* .................... $ 328,605 -- -- $ 315,548 -- --
Interest income to earning assets ......... -- -- 8.0 -- -- 8.0
Interest expense to earning assets ........ -- -- 1.8 -- -- 2.2
Net yield on interest-earning assets ..... -- -- 6.2 -- -- 5.8
Average effective rate paid on interest-
bearing liabilities ...................... -- -- 2.6 -- -- 3.0
1996
--------------------------------------------------------
Average
Interest Rates
Average Income/ Earned/
Balance Expense Paid
---------------------------------------------------------
Assets:
Cash and due from banks ................... $ 21,942 $ -- --%
Interest-bearing deposits with other banks* 94 4 4.3
Federal funds sold* ....................... 4,660 257 5.5
Investment securities available for sale:
Taxable* .............................. 36,680 2,157 5.9
Tax-exempt* ........................... 8,142 406 5.0
----------------------------------
Total investment securities .............. 44,822 2,563 5.7
----------------------------------
Loans* .................................... 251,679 21,513 8.5
Less allowance for loan losses ............ (4,017) -- --
----------------------------------
Net loans ................................ 247,662 21,513 8.7
Other assets .............................. 17,539 -- --
----------------------------------
Total assets ............................. $ 336,719 $ 24,337 --
----------------------------------
Liabilities:
Demand deposits, noninterest-bearing ...... $ 73,034 $ -- --%
Savings deposits .......................... 161,577 3,187 2.0
Time deposits ............................. 60,930 3,203 5.3
Federal funds purchased ................... 1,824 100 5.5
Other liabilities ......................... 6,085 -- --
----------------------------------
Total liabilities ........................ 303,450 6,490 --
Shareholders' equity ...................... 33,269 -- --
----------------------------------
Total liabilities and shareholders' equity $ 336,719 $ 6,490 --
----------------------------------
Total earning assets* .................... $ 301,255 -- --
Interest income to earning assets ......... -- -- 8.1
Interest expense to earning assets ........ -- -- 2.2
Net yield on interest-earning assets ..... -- -- 5.9
Average effective rate paid on interest-
bearing liabilities ...................... -- -- 2.9
*Indicates earning assets
5
The following table shows the effect of changes in volumes and rates on interest
income and interest expense. Variances which were not specifically attributable
to volume or rate were allocated proportionately between volume and rate.
Interest income on loans included increases (decreases) in fees on loans of
$27,000 in 1998, ($47,000) in 1997, and ($9,000) in 1996.
TABLE 4 - Rate/Volume Analyses
(in thousands) 1998 vs. 1997 1997 vs. 1996
---------------------------------------------------------------------------------------
Increase / (decrease) Volume Rate Total Volume Rate Total
---------------------------------------------------------------------------------------
Interest Income:
Interest-bearing deposits
with other banks ............... $ 59 $ 1 $ 60 $ 4 $ -- $ 4
Federal funds sold .............. (75) (36) (111) 678 -- 678
Investment securities
available for sale:
Taxable ...................... (50) (58) (108) (241) 72 (169)
Tax-exempt ................... (42) (17) (59) (108) (15) (123)
Loans ........................... 1,358 0* 1,358 830 (260)* 570
---------------------------------------------------------------------------------------
Total interest income ........... 1,250 (110) 1,140 1,163 (203) 960
---------------------------------------------------------------------------------------
Interest expense:
Savings deposits ................ 199 (333) (134) (33) (96) (129)
Time deposits ................... (665) (154) (819) 725 (57) 668
Federal funds purchased ......... -- -- -- (100) -- (100)
---------------------------------------------------------------------------------------
Total interest expense .......... (466) (487) (953) 592 (153) 439
---------------------------------------------------------------------------------------
Interest differential ............ $ 1,716 $ 377 $ 2,093 $ 571 $ (50) $ 521
=======================================================================================
* Included in the loan rate variance was a decrease in interest income
related to non-performing loans of $230,000 and $154,000 in 1998 and 1997,
respectively. The variances due to rate include the effect of nonaccrual
loans because no interest is earned on such loans.
The 5% growth in interest income for 1998 was attributable to a 4% increase in
average earning assets from $315,548,000 for 1997 to $328,605,000 for 1998. The
yield on average outstanding earning assets remained level for 1998, compared to
1997, at 8.0% for both periods. The average yield on loans also remained level
in 1998, when compared to 1997, at 8.5%. The average yield on federal funds sold
decreased 20 basis points, to 5.3% for 1998, compared to 5.5% for 1997. The
yield on the investment portfolio decreased by 20 basis points from 5.9% in 1997
to 5.7% in 1998. This is due to the maturity of older, higher yielding
investments in the portfolio.
The growth in interest income attributable to volume was the result of a 6%
increase in average outstanding loans. Partially offsetting this increase in the
volume variance was a reduction in interest income related to the rate variance.
An increase in commission and fee income, directly related to increased
residential loan sale activity in 1998, also contributed to a 5% increase in
total interest income in 1998 over 1997 levels.
As of December 31, 1998, outstanding loans increased 5%. The most significant
loan growth came in commercial and industrial loans, which grew by 18% year-end
to year-end. Permanent mortgage loans, including both commercial mortgage loans
and residential mortgage loans increased by 8%. Commercial mortgage loans grew
by 29%, while residential mortgage loan balances increased by 2%. Construction
loan outstanding balances decreased 3%. A 12% decrease in outstanding consumer
loans is due primarily to a 12% decrease in short-term indirect automobile loan
balances at year-end 1998 compared to year-end 1997. Increased competition from
automobile manufacturers' financing facilities and incentives was the primary
reason for this decrease.
Average deposits increased $5,441,000 or 2% during 1998. During the first
quarter of 1998, the remainder of the Premier CDs, first issued during the first
quarter of 1996 at highly competitive rates of interest, matured. The Bank did
not offer a premium rate for renewal of these CDs which contributed to a 17%
decrease in average outstanding CD balances in 1998, compared to 1997 average
outstanding CD balances. Partially a reaction to banking consolidations in the
Bank's market area and the acquisition of new commercial and trust accounts, the
Bank's average NOW accounts grew by 15%, while non-interest bearing demand
deposits and average outstanding savings deposits increased by 9% and 3%,
respectively. The change in the mix of average outstanding deposits, decreasing
higher costing CD balances and increasing lower and no cost balances was
primarily responsible for the 14% decrease in interest expense for 1998. The
cost of funds for the Bank averaged 1.9% for 1998 compared to 2.2% for 1997.
Loan Loss Provision
The Bank provided a loan loss provision of $150,000 for 1998, compared to
$200,000 for 1997. The allowance for possible loan losses was $4,100,000 and
$4,074,000 as of December 31, 1998 and 1997, respectively. Due to the low level
of delinquencies during 1998, amounting to 0.46% of outstanding loans as of
December 31, 1998, and the level of the loan loss reserve, management deemed it
appropriate to lower the provision for loan losses during 1998. The ratio of the
loan loss reserve to nonperforming loans was 832% and 349% as of December 31,
1998 and 1997, respectively. Nonperforming loans amounted to $493,000 at
December 31, 1998, a 58% decrease from $1,169,000 at December 31, 1997. The
allowance for possible loan losses, as a percentage of outstanding loans, was
1.46% as of December 31, 1998, compared to 1.52% as of December 31, 1997. Bank
management determined that the 1998 loan loss provision was sufficient to
maintain an adequate level of the allowance for possible loan losses during
1998.
6
A summary of the changes in the allowance for possible loan losses and a
breakdown of loan loss experience by major loan category for each of the past
five years follows:
TABLE 5 - Allowance for Possible Loan Losses
December 31,
-------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
Allowance for possible loan losses:
Balance, January 1 ....................... $ 4,074 $ 4,182 $ 3,652 $ 3,618 $ 3,601
-------------------------------------------------------------------------------
Charge-offs:
Commercial and industrial ............... (64) (196) (84) (527) --
Real estate--construction ............... -- -- -- -- (229)
Real estate--mortgage ................... -- -- (4) (8) (69)
Consumer ................................ (179) (237) (180) (234) (365)
-------------------------------------------------------------------------------
Total charge-offs ....................... (243) (433) (268) (769) (663)
-------------------------------------------------------------------------------
Recoveries:
Commercial and industrial ............... 100 102 404 236 115
Real estate--construction ............... -- -- -- -- --
Real estate--mortgage ................... -- -- 8 13 20
Consumer ................................ 19 23 36 54 45
-------------------------------------------------------------------------------
Total recoveries ....................... 119 125 448 303 180
-------------------------------------------------------------------------------
Net recoveries / (charge-offs) ........ (124) (308) 180 (466) (483)
Provision for loan losses ................ 150 200 350 500 500
-------------------------------------------------------------------------------
Balance, December 31 ..................... $ 4,100 $ 4,074 $ 4,182 $ 3,652 $ 3,618
===============================================================================
Net recoveries / (charge-offs) to
average loans ........................... (0.05)% (0.12)% (0.07)% (0.21)% (0.24)%
The table below allocates the balance of the allowance for possible loan
losses by loan category and the corresponding percentage of loans to total loans
for each loan category for the last five years:
TABLE 6 - Allocation of Allowance for Possible Loan Losses
December 31,
1998 1997 1996 1995
----------------------------------------------------------------------------------------
% Loans % Loans % Loans % Loans
to Total to Total to Total to Total
(dollars in thousands) Loans Loans Loans Loans
----------------------------------------------------------------------------------------
Balance at end of period applicable to:
Commercial and industrial .......... $ 427 31.8% $ 316 28.1% $ 483 28.8% $1,295 28.7%
Real estate -- construction ........ 81 4.7 1,111 5.1 751 2.9 648 3.8
Real estate -- mortgage ............ 161 39.3 184 38.2 289 36.9 259 36.4
Consumer ........................... 301 24.2 465 28.6 609 31.4 619 31.1
Unallocated ........................ 3,130 -- 1,998 -- 2,050 -- 831 --
----------------------------------------------------------------------------------------
Total ........................ $4,100 100.0% $4,074 100.0% $4,182 100.0% $3,652 100.0%
========================================================================================
1994
-----------------------------
% Loans
to Total
(dollars in thousands) Loans
-----------------------------
Balance at end of period applicable to:
Commercial and industrial ................. $1,289 23.9%
Real estate -- construction ............... 273 2.1
Real estate -- mortgage ................... 332 40.4
Consumer .................................. 680 33.6
Unallocated ............................... 1,044 --
-----------------------------
Total ............................... $3,618 100.0%
=============================
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 12 for further discussion of the Corporation's loan review
process.
Other Income
The following table details other income for the years ended December 31, 1998
and 1997, and the percent change from year to year:
TABLE 7 - Other Income
(dollars in thousands) 1998 1997 % Change
------------------------------
Fees for Trust services .................. $ 9,272 $ 7,698 20%
Service charges on deposit accounts ...... 1,169 1,124 4
Other fees and service charges ........... 1,780 1,378 29
Net gain on sale of loans ................ 818 509 61
Gain on sale of other real estate owned .. 224 379 (41)
Other operating income ................... 1,457 661 120
------------------------------
Total other income ....................... $14,720 $11,749 25%
In addition to net interest income, the Bank's three operating segments, as well
as TCBM and ICBM, generate various streams of fee-based income, including
Investment Management and Trust income, service charges on deposit accounts,
loan servicing income and gains/losses on loan sales.
As discussed in the "Lines of Business" section on pages 3, 4 and 5, the
increase in other income in 1998 from 1997 levels was primarily a result of an
increase in fees for Investment Management and Trust services, as well as
increased other fees and service charges and gains on sale of loans, partially
offset by lower gains on the sale of OREO.
Trust income grew 20% from year to year, primarily due to the acquisition of new
Trust accounts during 1998 and an increase
7
in the market value of Trust assets under management, which grew by 26%, to
$2,101,251,000 at year-end 1998, up from $1,666,472,000 as of December 31, 1997.
As discussed in the "Mortgage Banking Line of Business" section, the 61%
increase in gains on the sale of loans was directly attributable to an 77%
increase in the volume of loans sold in 1998 compared to 1997, partially offset
by an 12 basis point decrease in the yield realized on the sale of loans in 1998
compared to 1997. This residential loan sale activity is also primarily
responsible for a 29% increase in other fees and service charges in 1998,
compared to 1997.
Gains on the sale of OREO decreased by 41%. This is a direct result of the Bank
disposing of the majority of its OREO prior to 1998.
Other operating income increased 120% in 1998 from 1997 levels, primarily due to
new sources of fee income from TCBM and ICBM. The net increase in revenues from
these new ventures amounted to $709,000 from 1997 to 1998. Exclusive of these
new revenue streams, other operating income increased by 17% for 1998, compared
to 1997.
Other Expenses
The following table details other expenses for the years ended December 31, 1998
and 1997, and the percent change from year to year:
TABLE 8 - Other Expenses
1998 1997 % Change
--------------------------------------
Salaries-regular .................. $10,289 $ 8,604 20%
Salaries-other .................... 2,375 1,655 44
Employee benefits ................. 1,908 1,791 7
Occupancy expense ................. 1,392 1,365 2
Furniture, fixtures and equipment.. 1,817 1,565 16
Advertising ....................... 1,283 1,069 20
Computer processing ............... 569 584 (3)
Stationery and supplies ........... 354 322 10
Professional fees ................. 811 822 (1)
Insurance ......................... 213 188 13
Merchant credit card processing ... 466 390 19
Net cost of operation of
other real estate owned .......... 7 9 (22)
Other operating expenses .......... 3,211 2,473 30
--------------------------------------
Total other expenses ............. $24,695 $20,837 19%
======================================
Other expenses increased for the year ended December 31, 1998, by 19% compared
to 1997. Regular salaries, consisting of regular, part time and overtime salary
expense, and the largest component of other expenses, rose 20%, due primarily to
merit increases and staffing additions, including the establishment of TCBM in
July 1997 and ICBM in January 1998. As of December 31, 1998, the Corporation's
consolidated full-time equivalent staffing level was 239.5 compared to 220.0 as
of December 31, 1997.
Other salaries, which primarily consist of incentive compensation, increased 44%
from 1997 to 1998. The $720,000 increase was primarily related to incentive
based compensation, tied to the overall profitability of the Corporation and
specific lines of business. The Bank's overall incentive salaries increased
$388,000 or 27%. A Trust incentive related to acquisition of new Trust business
increased by $171,000 or 80%, as Trust new business referrals grew during 1998.
Other incentive payments, primarily to TCBM under the revenue sharing agreement
between BMBC and TCBM, increased $180,000. Commissions paid to mortgage
originators decreased $21,000 or 98% in 1998. The Mortgage Banking line of
business relied more heavily on mortgage originations through its own employees
or from refinances of existing mortgages, not specifically requiring the
services of a mortgage originator. These changes accounted for $718,000 of the
$720,000 increase in other salary expense from 1997 to 1998.
Employee benefit costs increased $117,000 or 7% in 1998 over 1997 levels.
Decreases of $242,000 in actuarially computed post-retirement benefits costs for
1998 compared to 1997 and $170,000 in the cost of the Corporation's pension
expense were offset by increases in social security taxes expense of $398,000,
the cost of medical and life insurance increasing $111,000 and the cost of the
Corporation's Supplemental Employee Retirement Plan increasing $66,000. An
amendment to the Bank's post-retirement benefit plan, utilizing alternative
resources for providing medical benefits to retirees, was the reason for the
reduction in post-retirement benefits expense in 1998. Strong performance of the
pension plan's assets was primarily responsible for the reduction in pension
expense for 1998, compared to 1997.
Occupancy expenses increased $27,000 or 2% from 1997 to 1998. During 1997, the
Corporation prepaid a mortgage loan on one of its properties, thereby reducing
interest on mortgage loans by $60,000 from 1997 to 1998. There were no other
significant changes in occupancy expense from 1997 to 1998.
Furniture, fixtures and equipment expense increased by $252,000 or 16% in 1998,
compared to 1997. Depreciation expense for the Bank accounted for the largest
increase, up $167,000, reflecting the effect of capital improvements made during
1998. Exclusive of the increase in depreciation expense, the cost of furniture,
fixtures and equipment expense increased 10% from 1997 to 1998.
Advertising increased $214,000 or 20%, reflecting both the establishment of new
marketing initiatives and the continued commitment to both print and electronic
media as a means of increasing the public's awareness of the Bank's array of
products and services.
The cost of merchant credit card processing increased $76,000 or 19% as the
volume of merchant processing increased. These fees are more that offset by
related revenues, included in other operating income.
8
Stationery and supplies expense increased $32,000 or 10% in 1998, compared to
1997, due primarily to additional costs in 1998, associated with the production
of new product brochures as well as letterhead for the new subsidiary companies,
TCBM and ICBM.
Insurance expense increased by $25,000 or 13%. 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 remained level from 1997 to 1998, while the
Bank's business insurance premiums increased $24,000 during 1998, compared to
similar premiums in 1997. Expanded policy limits and the addition of TCBM and
ICBM are responsible for this increase.
Other operating expenses increased $738,000 or 30% from 1997 to 1998. Included
in 1998's expense were expenses related to the acquisition of new subsidiaries,
amounting to $161,000, which were not incurred during 1997. Other increases are
as follows. Appraisal fees, directly related to the increase in mortgage banking
activity, discussed previously, increased $130,000 over 1997 levels. The cost of
programming and related services increased by $79,000, as projects related to
the Corporation's Year 2000 ("Y2K") initiative were implemented. Travel and
entertainment costs grew by $70,000, in a continued effort to acquire new
business relationships and to support both the community and existing business
relationships. Telephone expense increased $64,000 over similar expenses for
1997. During 1998, the Bank converted to a new telephone system, incurring
additional expense in the process. The cost of hiring temporary help also rose
by $45,000.
Income Taxes
The Corporation's provision for federal income taxes is based on the statutory
tax rate of 34%. Federal income taxes for 1998 were $3,480,000, compared to
$2,950,000 for 1997. This represents an effective tax rate of 33.7% and 32.5%
for 1998 and 1997, respectively. Income taxes for financial reporting purposes
differ from the amount computed by applying the statutory rate to income before
taxes, due primarily to tax-exempt income from certain loans and investment
securities. See Note 8 to the consolidated financial statements.
FINANCIAL CONDITION
- -------------------
Investment Securities
The entire investment portfolio is classified as available for sale. Therefore,
the investment portfolio was carried at its estimated market value of
$50,976,000 and $40,666,000 as of December 31, 1998 and 1997, respectively. The
amortized cost of the portfolio as of December 31, 1998, was $50,824,000,
resulting in net unrealized gains of $152,000. The amortized cost of the
portfolio at December 31, 1997, was $40,573,000, resulting in net unrealized
gains of $93,000.
The maturity distribution and weighted average yields on a fully tax-equivalent
basis of investment securities at December 31, 1998, are as follows:
TABLE 9 - Investment Portfolio
Maturing Maturing Maturing
during from 2000 from 2004 Maturing
(dollars in thousands) 1999 through 2003 through 2008 after 2008 Total
-------------------------------------------------------------------------
Obligations of the U.S. Government
and agencies:
Book value ................................ $ 25,810 $ 19,101 $ -- $ -- $ 44,911
Weighted average yield .................... 5.5% 5.7% -- -- 5.7%
State and political subdivisions:
Book value ................................ 1,391 2,834 $ 449 -- 4,674
Weighted average yield .................... 7.2% 6.6% 6.5% -- 6.6%
Other investment securities:
Book value ................................ -- -- -- 1,391 1,391
Weighted average yield .................... -- -- -- 6.2% 6.2%
-------------------------------------------------------------------------
Total book value ............................. $ 27,201 $ 21,935 $ 449 $ 1,391 $ 50,976
Weighted average yield ....................... 5.8% 5.8% 6.5% 6.2% 5.8%
In addition to $11,415,000 in maturities, during 1998, $15,002,000 in municipal
bonds were called. These increases in available funds, combined with an increase
in total deposits for 1998 of $13,551,000, prompted Bank management to purchase
$36,683,000 in U.S. Government or U.S. Government Agency securities. Those
transactions were primarily responsible for the $10,310,000 or 25% increase in
the investment portfolio from December 31, 1997, to December 31, 1998. At
December 31, 1998, approximately 88% 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 CreditLine loans are included in consumer loans.
A breakdown of the loan portfolio by major categories at December 31 for each of
the last five years is as follows:
TABLE 10 - Loan Portfolio
December 31
--------------------------------------------------------------------------------
(in thousands) 1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
Real estate loans:
Permanent mortgage loans ........ $110,535 $102,474 $ 95,588 $ 85,752 $ 92,395
Construction loans .............. 13,204 13,647 7,639 8,905 4,884
Commercial and industrial loans .... 89,368 75,474 74,688 67,507 54,631
Consumer loans ..................... 68,078 76,963 81,512 73,189 76,828
--------------------------------------------------------------------------------
Total ......................... $281,185 $268,558 $259,427 $235,353 $228,738
================================================================================
The maturity distribution of the loan portfolio, excluding loans secured by
one-family residential property and consumer loans, at December 31, 1998, is
shown below.
Maturing Maturing
during from 2000 Maturing
(in thousands) 1999 through 2003 after 2003 Total
--------------------------------------------------------------------
Commercial, financial, and agricultural ....... $ 52,979 $ 19,693 $ 16,696 $ 89,368
Real estate--construction ..................... 8,564 4,117 523 13,204
Real estate--other ............................ 1,374 12,780 36,002 50,156
--------------------------------------------------------------------
Total ........................................ $ 62,917 $ 36,590 $ 53,221 $152,728
====================================================================
Interest sensitivity on the above loans:
Loans with predetermined rates ............... $ 7,480 $ 28,815 $ 13,231 $ 49,526
Loans with adjustable or floating rates ...... 55,437 7,775 39,990 103,202
--------------------------------------------------------------------
Total ........................................ $ 62,917 $ 36,590 $ 53,221 $152,728
====================================================================
There are no scheduled prepayments on the loans included in the maturity
distributions.
9
TABLE 11 - Loan Portfolio and Non-Performing Asset Analysis
Loan Portfolio Nonperforming Assets
-----------------------------------------------------------------------------------------
Past Due Past Due Non- Other Total Non-
30 to 89 90 Days Total Performing Real Estate Performing
(in thousands) Current Days or More Loans Loans * Owned ** Assets
-----------------------------------------------------------------------------------------
Real estate loans:
Permanent mortgage loans:
Residential .......................... $ 15,786 $ 122 $ -- $ 15,908 $ -- $ 50 $ 50
Commercial ........................... 49,772 31 353 50,156 353 221 574
Home equity .......................... 44,329 58 84 44,471 84 -- 84
-----------------------------------------------------------------------------------------
Total permanent mortgage loans ..... 109,887 211 437 110,535 437 271 708
Construction mortgage loans:
Residential .......................... 10,774 -- -- 10,774 -- -- --
Commercial ........................... 2,430 -- -- 2,430 -- -- --
Total construction mortgage loans .. 13,204 -- -- 13,204 -- -- --
-----------------------------------------------------------------------------------------
Total real estate loans ............ 123,091 211 437 123,739 437 271 708
Commercial and industrial loans .......... 89,098 270 -- 89,368 -- -- --
-----------------------------------------------------------------------------------------
Total commercial and industrial
loans ............................. 89,098 270 -- 89,368 -- -- --
-----------------------------------------------------------------------------------------
Consumer loans:
Direct ............................... 8,296 36 10 8,342 10 -- 10
Indirect ............................. 57,641 260 46 57,947 46 -- 46
CreditLine ........................... 1,771 18 -- 1,789 -- -- --
-----------------------------------------------------------------------------------------
Total consumer loans ............... 67,708 314 56 68,078 56 -- 56
Unallocated reserve for loan loss ........ -- -- -- -- -- -- --
=========================================================================================
Total .............................. $ 279,897 $ 795 $ 493 $281,185 $ 493 $ 271 $ 764
Loan Loss
Reserve
-------------
Reserve for
Loan Loss
Allocation
-------------
Real estate loans:
Permanent mortgage loans:
Residential .......................... $ --
Commercial ........................... --
Home equity .......................... --
-------------
Total permanent mortgage loans ..... 161
Construction mortgage loans:
Residential .......................... --
Commercial ........................... --
Total construction mortgage loans .. 81
-------------
Total real estate loans ............ 242
Commercial and industrial loans .......... --
-------------
Total commercial and industrial
loans ............................. 427
-------------
Consumer loans:
Direct ............................... --
Indirect ............................. --
CreditLine ........................... --
-------------
Total consumer loans ............... 301
Unallocated reserve for loan loss ........ 3,130
=============
Total .............................. $ 4,100
* 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 $493,000
includes the $493,000 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.
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, 1998 increased 5% to $281,185,000 from $268,558,000
as of December 31, 1997.
The Bank's commercial and industrial lending had the largest growth in
outstanding loan balances from year to year. Commercial and industrial loan
balances grew $13,894,000 or 18% from $75,474,000 at December 31, 1997 to
$89,368,000 at December 31, 1998. Increased business development in the Bank's
commercial lending market area, the addition of new, experienced commercial
lenders and the emergence of new commercial lending relationships, partially the
result of recent banking mergers in the Bank's market area, are the reasons for
this strong growth.
Permanent mortgage loans, which consist of commercial and residential mortgages
as well as home equity loans, increased by 8% or $8,061,000 during 1998, from
$102,474,000 at December 31, 1997, to $110,535,000 at December 31, 1998. This
growth was due primarily to an $11,182,000 or 29% increase in commercial
mortgage loans. Home equity loans decreased by $3,408,000 or 7%, and residential
mortgage loans increased by $287,000 or 2%.
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 $8,885,000 or 12%,
from $76,963,000 at December 31, 1997, to $68,078,000 at December 31, 1998. The
largest decrease occurred in the outstanding balances of the indirect automobile
paper. Outstanding indirect automobile paper balances decreased $8,037,000 or
12% from $65,069,000 at December 31, 1997, to $57,032,000 at December 31, 1998.
Competition from automobile manufacturers' credit facilities and lower costing
financing from home equity loans are the primary reasons for this decrease.
In recent years, the Bank had made a decision to reduce its construction loan
balances, to lower its exposure to higher risk loans. As of December 31, 1996,
1997 and 1998, the construction lending portfolio had no nonperforming loans nor
any loans delinquent 30 days or more. The Bank has chosen to selectively return
to the construction lending market. As of December 31, 1998, the construction
loan portfolio decreased by $443,000 or 3%, from $13,647,000 at December 31,
1997, to $13,204,000 at December 31, 1998.
Deposits
The Bank attracts deposits from within its primary market area by offering
various deposit instruments, including savings accounts, NOW accounts, market
rate accounts, and certificates of deposit.
Total deposits increased 4% to $342,357,000 at December 31, 1998, from
$328,806,000 at year end 1997. A more meaningful measure of deposit change is
average daily balances. As illustrated in Table 12, average daily deposit
balances increased 2%. During 1997, the Bank renewed its Premier CD program for
an additional year, maturing during the first quarter of 1998. As a part of its
liquidity plan for 1998, the Bank chose not to offer a premium rate of interest
for the renewal of the Premier CDs.
10
Average CD balances decreased by 17% from 1997 to 1998. Offsetting this decrease
were 15% and 9% increases in the respective average outstanding balances of low
costing NOW accounts and non-interest bearing demand deposit accounts. It is
believed that bank consolidation within the Bank's market area, as well as the
acquisition of new deposit accounts through the growth of new lending and
Investment Management and Trust relationships, are primarily responsible for
this growth in low costing deposits. As previously discussed, this change in the
mix of deposits, away from higher costing CDs, into lower costing NOW accounts
and demand deposit accounts is primarily responsible for a 30 basis point
decrease in the Bank's overall cost of funds and a 40 basis point increase in
the Bank's net interest margin for 1998, compared to 1997.
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
1998 vs. 1997 vs.
(dollars in thousands) 1998 1997 1997 1996 1996
---------------------------------------------------------------
Demand deposits, non-
interest-bearing $ 82,773 $ 76,076 8.8 $ 73,034 4.2
---------------------------------------------------------------
Market rate accounts 44,325 45,903 (3.4) 49,451 (7.2)
NOW accounts ....... 85,317 73,958 15.4 70,549 4.8
Regular savings .... 40,143 38,891 3.2 41,577 (6.5)
---------------------------------------------------------------
169,785 158,752 6.9 161,577 (1.7)
---------------------------------------------------------------
Time deposits ...... 61,503 73,792 (16.7) 60,930 21.1
---------------------------------------------------------------
Total ........... $ 314,061 $ 308,620 1.8 $ 295,541 4.4
===============================================================
The following table shows the maturity of certificates of deposit of $100,000 or
greater as of December 31, 1998:
TABLE 13 - Maturity of Certificates of Deposits of $100,000 or Greater
(in thousands)
Three months or less ..... $12,604
Three to six months ...... 2,207
Six to twelve months ..... 1,303
Greater than twelve months 410
-------
Total ................. $16,524
=======
Capital Adequacy
At December 31, 1998, total shareholders' equity of the Corporation was
$42,221,000, a $2,872,000 or 7% increase over $39,349,000 at December 31, 1997.
In addition to earnings and dividends for the year, the impact of SFAS No. 115
resulted in an increase in shareholders' equity in 1998. As of December 31,
1998, shareholders' equity included unrealized gains on investment securities,
net of deferred taxes, of $100,000 compared to unrealized gains on investment
securities, net of taxes, of $62,000 at December 31, 1997. This change accounted
for a $38,000 increase in total shareholders' equity from December 31, 1997, to
December 31, 1998.
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, 1998 and 1997, are listed
below. These ratios are all in excess of the minimum required capital ratios,
also listed below.
TABLE 14 - Risk-Based Capital Ratios
1998 1997
-----------------------------------------------------------------------
Minimum Minimum
Actual Required Actual Required
-----------------------------------------------------------------------
Tier I capital ratio .......... 12.42% 4.00% 12.21% 4.00%
Total capital ratio ........... 13.67 8.00 13.47 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, 1998 and 1997, the Bank exceeded the levels required to meet the definition
of a "well-capitalized" bank. Management anticipates that the Corporation and
the Bank will continue to be in compliance with all capital requirements and
continue to be classified as "well-capitalized."
The Corporation's 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) potential problem loans, loans not included in
the first category, but where information known by Bank management indicates
that the borrower may not be able to comply with present payment terms, (3)
foreign loans outstanding, and (4) loan concentrations. Table 11 presents a
summary, by loan type, of the Bank's nonaccrual and past due loans as of
December 31, 1998. It is the Bank's policy to promptly place nonperforming loans
on nonaccrual status. Bank management knows of no outstanding loans that
presently would meet the criteria for inclusion in the potential problem loan
category, as indicated under specific category (2) referred to above. The Bank
has no foreign loans, and loan concentrations are presented in Table 6. Table 6
presents the percentage of outstanding loans, by loan type, compared to total
loans outstanding as of December 31, 1998.
Asset Quality
The Bank is committed to maintaining and developing quality assets. Loan growth
is generated primarily within the Bank's market area, which includes Montgomery,
Delaware, and Chester Counties, as well as portions of Bucks and Philadelphia
Counties. The development of quality loan growth is controlled through a
11
uniform lending policy that defines the lending functions and goals, loan
approval process, lending limits, and loan review.
Nonperforming assets amounted to $764,000 at December 31, 1998, a 36% decrease
from $1,194,000 at December 31, 1997. Nonperforming loans were $493,000 at
December 31, 1998, a 58% decrease from $1,169,000 at December 31, 1997. OREO
increased $246,000 to $271,000 at December 31, 1998, from $25,000 at December
31, 1997. Both amounts consist of OREO collateralizing single loans. The
property reported as of December 31, 1997 was disposed of during 1998 and new
properties, collateralizing a single loan were added to the Bank's OREO account
during the fourth quarter of 1998.
Total nonperforming assets, which include non-accruing 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, 1998.
TABLE 15 - Nonperforming Assets
December 31,
-----------------------------------------------------------------------
(in thousands) 1998 1997 1996 1995 1994
-----------------------------------------------------------------------
Loans past due 90 days or more not
on nonaccrual status:
Real estate--mortgage .................... $ 84 $ 72 $ 68 $ -- $ 48
-----------------------------------------------------------------------
Consumer ................................. 56 27 51 155 82
Loans on which the accrual of interest
has been discontinued:
Commercial and industrial ................ -- 347 76 339 --
Real estate--mortgage ................... -- 723 712 117 371
Real estate--construction ............... 353 -- -- -- 275
-----------------------------------------------------------------------
Total nonperforming loans .............. 493 1,169 907 611 776
Other real estate owned and in-substance
foreclosed properties * ................. 271 25 1,523 3,794 3,475
-----------------------------------------------------------------------
Total nonperforming assets ............. $ 764 $1,194 $2,430 $4,405 $4,251
=======================================================================
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
$274,000 for the year ended December 31, 1998. Interest earned and included in
interest income on these loans prior to their nonperforming status amounted to
$44,000 in 1998.
* 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 and impaired loans, loans criticized by
both the Bank's regulators and an independent consultant retained to review both
the loan portfolio as well as the overall adequacy of the loan loss reserve.
During the review of the loan loss reserve, the Committee considers specific
loans on a loan-by-loan basis, pools of similar loans, prior historical
write-off activity, and a supplemental reserve allocation as a measure of
conservatism for any unforeseen loan loss reserve requirements. The sum of these
components is compared to the loan loss reserve balance, and any additions
deemed necessary to the loan loss reserve balance are charged to operating
expenses on a timely basis.
The Corporation is regulated and periodically inspected by The Federal Reserve
Board. During 1996, the Bank became a state member bank of the Federal Reserve
System. The Bank is regulated and periodically examined by the Federal Reserve
Board and the Pennsylvania Department of Banking. There are no recommendations
by the regulators which would have a material effect on the Corporation's
liquidity, capital resources, or results of operations.
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.
12
TABLE 16 - Interest Rate Sensitivity Analysis as of December 31, 1998
Repricing Periods
---------------------------------------------------------------------------------
(dollars in thousands) 0 to 30 31 to 90 91 to 180 181 to 365 Over Non-Rate
Days Days Days Days 1 Year Sensitive Total
---------------------------------------------------------------------------------
Assets:
Interest-bearing deposits with other banks . $ 5,105 $ -- $ 46 $ -- $ -- $ -- $ 5,151
Federal funds sold ......................... 20,372 -- -- -- -- -- 20,372
Investment securities ...................... 17,766 2,004 4,286 3,145 23,759 -- 50,960
Loans ...................................... 82,672 11,609 19,209 28,296 139,399 (4,100) 277,085
Cash and due from banks .................... -- -- -- -- -- 19,807 19,807
Other assets ............................... -- -- -- -- -- 14,262 14,262
---------------------------------------------------------------------------------
Total assets ............................. $ 125,915 $ 13,613 $ 23,541 $ 31,441 $ 163,158 $ 29,969 $ 387,637
---------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Demand, noninterest-bearing ................ $ -- $ -- $ -- $ -- $ -- $ 89,872 $ 89,872
Savings deposits ........................... 71,135 -- -- -- 118,560 -- 189,695
Time deposits .............................. 14,781 10,605 16,025 13,044 9,270 -- 63,725
Other liabilities .......................... -- -- -- -- -- 6,152 6,152
Shareholders' equity ....................... -- -- -- -- -- 38,193 38,193
---------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 85,916 $ 10,605 $ 16,025 $ 13,044 $ 127,830 $ 134,217 $ 387,637
---------------------------------------------------------------------------------
Gap .......................................... $ 39,999 $ 3,008 $ 7,516 $ 18,397 $ 35,328 ($104,248) --
Cumulative gap ............................... $ 39,999 $ 43,007 $ 50,523 $ 68,920 $ 104,248 -- --
Cumulative earning assets as a ratio
of interest bearing liabilities ............ 147% 145% 145% 155% 141% -- --
The Bank uses income simulation models to measure its interest rate risk and to
manage its interest rate sensitivity. The simulation models consider not only
the impact of changes in interest rates on forecasted net interest income, but
also such factors as yield curve relationships, possible loan prepayments, and
deposit withdrawals. As of year-end 1998, 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 Risk Management Policies and
Procedures.
While future interest rate movements and their effect on Bank revenue cannot be
predicted, there are no trends, events, or uncertainties of which the
Corporation's management is currently aware that will have, or are reasonably
likely to have, a material effect on the Corporation's liquidity, capital
resources, or results of operations in the future.
Liquidity
The Bank's liquidity is maintained by managing its core deposits, purchasing
federal funds, selling loans in the secondary market, and borrowing from the
Federal Home Loan Bank of Pittsburgh (the "FHLB").
The Bank's liquid assets include cash and cash equivalents as well as certain
unpledged investment securities. Bank management has developed a revised
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 1998, cash provided by operations amounted to $10,001,000 and was
primarily from net income of $6,857,000 for 1998. Cash used for investing
activities amounted to $27,277,000. Investment activity used $10,266,000 in
cash, as the balance in the investment portfolio increased by 25% at December
31, 1998, compared to December 31, 1997. Loan activity, including the purchase
of $26,206,000 in indirect automobile paper, used $15,252,000 in funds during
1998. The sale and acquisition of OREO properties in 1998 used a net amount of
$22,000 in cash, while the purchase of capital additions used $1,737,000.
Offsetting the decrease in funds from investing activities was an increase in
funds from the Corporation's financing activities, which provided $9,426,000 in
net cash, primarily the result of a $13,551,000 net increase in outstanding
noninterest-bearing demand and savings related deposits. The Corporation used
$26,000 in repayment of its mortgage debt. The Corporation also used $2,519,000
to repurchase treasury stock. The Corporation's cash and cash equivalents
decreased from December 31, 1997, to December 31, 1998, by $7,850,000, from
$53,182,000 at December 31, 1997 to $45,332,000 at December 31, 1998.
13
Other
- -----
Year 2000
The Year 2000 Problem
The Y2K problem is the result of potential difficulty with software and computer
systems or any equipment with computer chips (collectively the "Systems") that
store the year portion of the date as just two digits, rather than four digits
(e.g. 98 for 1998). Systems using the two digit approach will not be able to
determine whether "00" represents the year 2000 or 1900. The problem, if not
corrected, may make those systems fail altogether or, even worse, allow them to
generate incorrect calculations causing a disruption of the operations of the
computer and related systems.
Readiness Efforts
The Corporation began its process of assuring that all its Systems and
applications are Y2K compliant in November 1996. In 1997, a comprehensive
project plan (the "Plan") to address the Y2K problem and issues, relating to the
Bank's and its affiliated operations, was developed, approved by the Board of
Directors and implemented. The Bank, as the primary operating subsidiary of the
Corporation is addressing the Y2K problem and related issues for the Corporation
and all of its subsidiaries. The scope of the Plan includes five phases. They
are as follows: Awareness, Assessment, Renovation, Validation and
Implementation, as defined by the Federal Financial Institutions Examination
Council and the banking regulatory agencies which regulate the Corporation and
its affiliates.
A project team, consisting of key members of the Bank's technology staff,
representatives of functional business units and senior management (the "Team")
was created. Additionally, the duties of the Senior Vice President and Chief
Technology Officer were realigned to serve primarily as the Y2K project manager.
The assessment of the impact of the Y2K issues on the Bank's computer systems
has been completed. The scope of the project also includes other operational and
environmental systems, since they may be impacted if embedded computer chips
control the functionality of those Systems. Based on the assessment, the Bank
has identified and prioritized those Systems deemed to be mission critical or
those that have a significant impact on normal operations.
The Bank relies on third party vendors and service providers (the "Groups") for
its data processing capabilities and to maintain its computer systems. Formal
communications with those Groups and other external counterparties were
initiated in 1997, continued through 1998 and into 1999, to assess the Y2K
readiness of their products and services. Their progress in meeting their
targeted schedules to attain Y2K readiness is being monitored for any indication
that they may not be able to address their Y2K problems in a timely fashion.
Thus far, responses indicate that most of the significant providers in the Group
currently have compliant versions available or are well into the renovation and
testing phases with completion scheduled for not later than March 31, 1999.
However, the Bank can give no guarantee that the systems of the Group on which
the Bank's Systems rely will be timely renovated and be Y2K compliant. The Team
will continue to monitor the progress of the Group in their efforts to become
Y2K compliant.
Additionally, the Bank has designed and completed implementation of a plan to
identify the potential risks posed by the impact of Y2K issues on its
significant deposit customers. The Bank has also designed and substantially
implemented a plan to identify the potential risk posed by the impact of Y2K
issues on its significant borrowing customers. Formal communications have been
initiated and initial findings were reported to the Board of Directors during
the fourth quarter of 1998. At each quarterly Bank Board of Directors meeting,
the Board is presented with an update of the status of the Y2K initiative. On
those months that the Board of Directors does not meet, an update of the Y2K
initiative is presented to the Board's Risk Management Committee.
In the fourth quarter of 1998, the Bank formed a Y2K Communications Committee,
consisting of Bank marketing officers and members of the Y2K Team. This
Committee is developing and implementing plans to educate and inform its
employees, customers and community about the Y2K readiness of the Bank, as well
as the Y2K issues facing the financial services industry and the public at
large.
The Bank employed an outside consultant to review its Y2K project. The report is
being reviewed and the findings are being considered by management.
Current Status
The Team estimates that the Bank's Y2K readiness project is 92% complete and
that the activities involved in assessing external risks and operational issues
are 90% complete overall.
The following table provides a summary of the current status of the five phases
involved and a projected timetable for completion.
Project Phase % Completed Projected Completion Comments
- --------------------------------------------------------------------------------
Awareness 100% Completed
Assessment 100% Completed
Renovation 100% Refer to Note (1)
Validation 80% March 31, 1999 On Schedule
Implementation 80% June 30, 1999 On Schedule
Overall Completion 92%
Note (1) While the Bank's mission critical Systems are 100% completed in the
Renovation phase, the Bank has determined that its third party vendors
and service providers are substantially complete in the Renovation
phase. It is anticipated that the mission critical Group members will
have completed the Renovation phase by March 31, 1999.
14
Costs
The Bank has thus far primarily used and expects to continue to use internal
resources to implement its readiness plan and to upgrade or replace the Systems
affected by the Y2K issue. The total cost to the Bank of these Y2K compliance
activities has not been and is not anticipated to be material to its financial
position or results of operations in any given year. The Bank anticipates
funding the costs of becoming Y2K compliant out of its earnings streams.
Purchased hardware and software is being capitalized and depreciated in
accordance with Bank policy. Other costs related to the project will be expensed
as incurred. The Bank does not anticipate having to reduce or eliminate any of
its existing hardware / software budgeted Systems spending because of the
projected increase in Y2K Systems spending.
There are no significant liabilities that have arisen because of the Y2K
process. To management's knowledge, all Y2K related liabilities have been
recorded on the Bank's books in an appropriate and timely manner.
The Bank is evaluating the adequacy of its loan loss reserve, as it relates to
potential risk posed by the lack of Y2K readiness of its significant borrowing
customers. Bank management currently believes that the loan loss reserve is
sufficient to cover the potential needs of both Y2K and non-Y2K loan loss
activity. Bank management is monitoring the loan loss reserve, as it relates to
Y2K matters on an ongoing basis.
A detailed analysis of costs incurred from both 1997 and 1998 in conjunction
with Y2K is being maintained in the Bank's information services area. Based on a
review of this analysis and a discussion with the appropriate Bank officers, it
was determined that the following are the most significant Y2K cumulative
expenditures to date, along with a projection of potential expenditures,
necessary to complete the Y2K compliance requirements.
New Hardware / Software replacement ......................... $270,000
AS/400 for Y2K testing ...................................... 33,000
Modifications to existing systems ........................... 29,000
Other Y2K costs to date ..................................... 103,000
--------
Total expended to date ...................................... 435,000
Anticipated additional costs (1) ............................ 130,000
--------
Total projected Y2K costs ................................... $565,000
========
(1) Primarily associated with contingency and communications related expenses
and an additional staff person to assist in the Y2K project.
The costs and the timetable in which the Bank plans to complete the Y2K
readiness activities are based on management's best estimates, which were
derived using numerous assumptions of future events including the continued
availability of certain resources, third party readiness plans and other
factors. The Bank can make no guarantee that these estimates will be achieved,
and actual results could differ from such plans.
Risk Assessment
Based upon current information related to the Group, management has determined
that the Y2K issues will not pose significant operational problems for its
Systems. This determination is based on the ability of those Group members to
renovate, in a timely manner, the products and services on which the Bank's
Systems rely. However, the Bank can give no guarantee that the systems of the
Group members will be timely renovated and become Y2K compliant.
The potential reasonable worst case scenario, relating to Y2K compliance, would
be if either the Bank's or the separate Investment Management and Trust
Division's mission critical vendors supporting both data processing Systems were
to fail due to a Y2K problem.
Bank management believes, based on information and testing results obtained from
both mission critical vendors, that both are and it is anticipated will remain
Y2K compliant. The Bank will continue to monitor the Y2K compliance of these two
mission critical vendors.
Contingency Plan -- Y2K
Realizing that some disruption may occur despite its best efforts, because of
the Y2K issue, the Bank is in the process of updating contingency plans for each
critical system, in the event one of those systems fails. The Bank's mission
critical vendors have developed contingency plans to provide resources during
the weekend of December 31, 1999 and for a period of time afterward to help
their clients overcome any unforeseen problems, associated with the millennium
change. The Bank's mission critical vendors anticipate the ability to resolve
any potential Y2K related problem in a timely manner. The status of the
contingency planning process was presented to the Executive Committee of the
Bank's Board of Directors in December 1998 and the contingency plan will be
substantially completed by March 31, 1999.
15
1997 vs. 1996 Results of Operations
Net Income
Net income for the year ended December 31, 1997, was $6,130,000, a 1% increase
over net income of $6,042,000 for the year ended December 31, 1996. During the
first quarter of 1996, the Bank sold a commercial property it had acquired in
connection with its workout of a defaulted loan. The Bank recognized a
non-recurring gain on the sale of $1,073,000 which was in part offset by
increases in its OREO and contingency reserves, totaling $155,000, and the
payment of a onetime bonus of $92,000 to certain Bank officers and employees.
The after-tax effect of these transactions added $545,000 to 1996 net income.
Exclusive of these transactions, 1996 net income would have been $5,497,000. Net
income for 1997 was 12% ahead of that amount. Basic earnings per share rose from
$1.38 in 1996 to $1.40 in 1997. The addition of $545,000 to net income,
discussed previously, added $.12 per basic common share to 1996's earnings per
share. Earnings per share - assuming dilution was $1.34 for 1997, compared to
$1.33 in 1996. In 1997, the Corporation paid dividends of $0.36 per share. In
1996, the Corporation paid dividends of $0.46 per share, including a onetime
special dividend of $0.16 per share to pay the after-tax gain on the sale of an
OREO property to the Corporation's shareholders. Exclusive of this onetime
dividend, dividends per share increased 20% for 1997, compared to 1996.
Return on average assets was 1.74% for 1997 compared to 1.79% in 1996. Return on
average equity was 16.45% in 1997 versus 18.16% in 1996, reflecting the effect
of the nonrecurring transaction in 1996, discussed previously.
Net Interest Income
A 5% increase in average earning assets, from 1996 to 1997, combined with
a 10 basis point decrease in the average yield on earning assets, was primarily
responsible of a $960,000 or a 4% rise in interest income.
Interest expense increased 7% or $439,000 from 1996 to 1997. The primary reason
for this increase was a 21% increase in the average outstanding balance of
higher costing CDs.
Net interest income increased 3%, while the net interest margin decreased from
5.67% for 1996 to 5.59% for 1997.
Loan Loss Provision
The provision for loan losses amounted to $350,000 for 1996 and was decreased to
$200,000 for 1997. The allowance for possible loan losses as a percentage of
nonperforming loans amounted to 349% and 461% as of December 31, 1997 and 1996,
respectively. The ratio of the allowance for possible loan losses to total
outstanding loans was 1.52% and 1.61% at December 31, 1997 and 1996,
respectively.
Other Income
Other income increased 13% in 1997 from 1996 levels. Fees for Investment
Management and Trust services increased $1,762,000 or 30%. Net gains on the sale
of mortgage loans increased $111,000 or 28%, due primarily to an increase in the
sale of residential mortgage loans to the secondary mortgage market, from
$55,276,000 in 1996 compared to $75,874,000 in 1997. The sale of a commercial
OREO property, during the first quarter of 1997,caused the elimination of the
OREO revenue stream and is the reason for the $702,000 or 65% decrease in OREO
gains in 1997, compared to 1996. Other operating income increased $88,000 or
15%, primarily due to fee income of $134,000 earned by TCBM from July 1997 to
December 1997. No such fees were earned in 1996. Partially offsetting these fees
was a decrease of $55,000 representing a non-recurring fee for brokering a loan
transaction between two other financial institutions, earned in 1996.
Other Expenses
Other expenses increased by $1,859,000 or 10% in 1997 over 1996. Regular
salaries increased $1,010,000 or 13%, primarily due to merit increases and
staffing additions, including the establishment of TCBM in July 1997.
Salaries-other, primarily incentive based, increased $610,000 or 58%. Increases
in incentive based compensation, tied to overall profitability of the Bank's
lines of business amounted to $642,000. An Investment Management and Trust
incentive, directly related to the acquisition of new business, increased by
$96,000. Offsetting these increases were decreases of $92,000 for a onetime
bonus related to the non-recurring gain on the sale of OREO in 1996 and a
decrease of $36,000 in commissions paid to commissioned residential mortgage
loan originators.
Employee benefit costs increased by $206,000 or 13%, due to a $160,000 increase
in actuarially computed post-retirement benefit costs and a $73,000 and $87,000
increase in the respective costs of social security taxes and medical benefits.
A $150,000 reduction in the cost of the Corporations pension expense partially
offset these increases.
The $319,000 or 26% increase in furniture, fixtures and equipment expense was
primarily due to the additional depreciation on fixed assets and amortization of
EDP conversion costs associated with a first quarter 1996 conversion to an
in-house EDP system. Partially offsetting this increase was a $252,000 or 30%
decrease in computer processing fees. During the first quarter of 1996, the Bank
converted to an in-house data processing system. The expense for 1997 reflects a
full year's benefit from this conversion, compared to a partial year's in 1996.
16
The cost of professional fees increased by $145,000 or 21% in 1997, compared to
1996. The largest increase was in legal fees, up $117,000 during 1997. The
Corporation incurred $97,000 in legal fees, of a non-recurring nature, in
connection with the workout of two problem loans.
Insurance, including the Corporation's business coverage premiums and FDIC
deposit insurance premiums, increased by $29,000 or 18% in 1997 compared to 1996
levels. During 1995, the FDIC announced that the bank insurance fund was
sufficiently funded to provide necessary coverage for insured bank deposits and
for a period of time eliminated further deposit premiums. Beginning in 1997, the
FDIC reinstated deposit premiums at a lower rate than previously charged. During
1997, the Bank paid a deposit insurance premium of $36,000, which was a $34,000
increase in FDIC deposit insurance premiums from the minimum premium of $2,000,
paid in 1996.
Other operating expenses decreased $7,000 from 1996 to 1997. Included in 1996's
expense was $155,000 of non-recurring expenses related to the sale of the OREO
property, discussed previously. Exclusive of these non-recurring expenses, other
operating expense increased $162,000 or 6% over 1996's similar expenses.
Income Taxes
The income tax provision for 1997 was $2,950,000, or a 32.5% effective rate,
compared to $2,900,000, or a 32.4% effective rate, for 1996.
17
Consolidated Balance Sheets
(in thousands)
As of December 31, 1998 1997
----------------------
Assets
- ------
Cash and due from banks ........................................ $ 19,810 $ 34,464
Interest-bearing deposits with other banks ..................... 5,150 2,118
Federal funds sold ............................................. 20,372 16,600
Investment securities available for sale, at market value
(amortized cost of $50,824,000 and $40,573,000 at
December 31, 1998 and 1997, respectively) .................... 50,976 40,666
Loans .......................................................... 281,185 268,558
Less: Allowance for possible loan losses ................... (4,100) (4,074)
----------------------
Net loans ................................................ 277,085 264,484
----------------------
Premises and equipment, net .................................... 12,209 11,790
Accrued interest receivable .................................... 2,069 2,039
Deferred federal income taxes .................................. 1,086 1,086
Other real estate owned ........................................ 271 25
Other assets ................................................... 2,812 938
----------------------
Total assets ............................................... $ 391,840 $ 374,210
======================
Liabilities
- -----------
Deposits:
Demand, noninterest-bearing .................................. $ 88,937 $ 101,188
Savings ...................................................... 189,695 165,739
Time ......................................................... 63,725 61,879
----------------------
Total deposits ............................................. 342,357 328,806
Other liabilities .............................................. 7,262 6,055
----------------------
Total liabilities .......................................... 349,619 334,861
----------------------
Commitments and contingencies (Note 13)
Shareholders' equity
- --------------------
Common stock, par value $1, authorized, 25,000,000 shares
and 5,000,000 shares as of December 31, 1998 and 1997,
issued 5,067,078 shares and 2,519,379 shares as of
December 31, 1998 and 1997, respectively, and
outstanding 4,303,818 shares and 2,185,609 shares as of
December 31, 1998 and 1997, respectively ..................... 5,067 2,519
Paid-in capital in excess of par value ......................... 2,478 4,589
Unrealized investment appreciation, net of deferred income taxes 100 62
Retained earnings .............................................. 39,791 34,946
----------------------
47,436 42,116
Less: Common stock in treasury, at cost-- 763,260 and 333,770
shares at December 31, 1998 and 1997, respectively ........... (5,215) (2,767)
----------------------
Total shareholders' equity ................................. 42,221 39,349
----------------------
Total liabilities and shareholders' equity ................. $ 391,840 $ 374,210
======================
The accompanying notes are an integral part of the consolidated financial
statements.
18
Consolidated Statements of Income
(in thousands, except for share and per share data)
For the years ended December 31, 1998 1997 1996
------------------------------------
Net interest income:
Interest income:
Interest and fees on loans ........................ $ 23,441 $ 22,083 $ 21,513
Interest on federal funds sold .................... 824 935 257
Interest and dividends on investment securities:
Taxable interest income .......................... 1,864 1,916 2,082
Tax-exempt interest income ....................... 224 283 406
Dividend income .................................. 85 80 79
------------------------------------
Total interest income ........................... 26,438 25,297 24,337
Interest expense on deposits ....................... 5,976 6,929 6,490
------------------------------------
Net interest income ................................ 20,462 18,368 17,847
Loan loss provision ................................ 150 200 350
------------------------------------
Net interest income after loan loss provision ...... 20,312 18,168 17,497
------------------------------------
Other income:
Fees for investment management and trust services 9,272 7,698 5,936
Service charges on deposit accounts ............. 1,169 1,124 1,081
Other fees and service charges .................. 1,780 1,378 1,280
Net gain on sale of loans ....................... 818 509 398
Gain on sale of other real estate owned ......... 224 379 1,081
Other real estate owned income .................. 0 0 74
Other operating income .......................... 1,457 661 573
------------------------------------
Total other income ......................... 14,720 11,749 10,423
------------------------------------
Other expenses:
Salaries-regular ................................ 10,289 8,604 7,594
Salaries-other .................................. 2,375 1,655 1,045
Employee benefits ............................... 1,908 1,791 1,585
Occupancy expense ............................... 1,392 1,365 1,537
Furniture, fixtures, and equipment .............. 1,817 1,565 1,246
Advertising ..................................... 1,283 1,069 991
Professional fees ............................... 811 822 677
Computer processing ............................. 569 584 836
Merchant credit card processing ................. 466 390 376
Stationery and supplies ......................... 354 322 355
Insurance ....................................... 213 188 159
Net cost of operation of other real estate owned 7 9 97
Other operating expenses ........................ 3,211 2,473 2,480
------------------------------------
Total other expenses ....................... 24,695 20,837 18,978
------------------------------------
Income before income taxes ......................... 10,337 9,080 8,942
Applicable income taxes ............................ 3,480 2,950 2,900
------------------------------------
Net income ......................................... $ 6,857 $ 6,130 $ 6,042
====================================
Earnings per common share* ......................... $ 1.58 $ 1.40 $ 1.38
Earnings per common share - assuming dilution* ..... $ 1.51 $ 1.33 $ 1.33
Weighted-average shares outstanding* ............... 4,327,297 4,392,162 4,385,094
Dilutive potential common shares* .................. 225,708 203,660 151,698
------------------------------------
Adjusted weighted-average shares* .................. 4,553,005 4,595,822 4,536,792
The accompanying notes are an integral part of the consolidated financial
statements.
*Restated to reflect the effect of the 2-for-1 stock split, effective September
1, 1998.
19
Consolidated Statements of Cash Flows
(in thousands)
For the years ended December 31, 1998 1997 1996
-----------------------------------
Operating activities:
- ---------------------
Net income .................................................... $ 6,857 $ 6,130 $ 6,042
Adjustments to reconcile net income to
Net cash provided by operating activities:
Provision for loan losses ................................... 150 200 350
Provision for depreciation and amortization ................. 1,333 1,091 1,142
Loans originated for resale ................................. (132,175) (78,407) (56,915)
Proceeds from sale of loans ................................. 135,494 75,874 55,276
Net gain on sale of loans ................................... (818) (509) (398)
Net gain on disposal of other real estate owned ............. (224) (379) (1,081)
Provision for deferred income taxes ......................... (20) 194 (161)
Change in income taxes payable/refundable ................... (405) -- --
Change in accrued interest receivable ....................... (30) 125 299
Change in accrued interest payable .......................... 207 (345) 1,443
Other ....................................................... (368) 1,485 (713)
-----------------------------------
Net cash provided by operating activities ................... 10,001 5,459 5,284
-----------------------------------
Investing activities:
- ---------------------
Purchases of investment securities ............................ (36,683) (30,013) (12,086)
Proceeds from maturities of investment securities ............. 11,415 15,200 16,685
Proceeds from sales of investment securities available for sale -- 27 9,502
Proceeds from calls of investment securities .................. 15,002 8,955 9,905
Proceeds on disposition of other real estate owned ............ 249 1,879 3,462
Purchase of other real estate owned ........................... (271) -- (141)
Captialization of costs of other real estate owned ............ -- (2) --
Loan repayments, net of originations .......................... 10,954 26,462 18,974
Purchase of automobile retail installment contracts ........... (26,206) (32,859) (40,831)
Purchases of premises and equipment ........................... (1,737) (1,542) (557)
-----------------------------------
Net cash (used) / provided by investing activities .......... (27,277) (11,893) 4,913
-----------------------------------
Financing activities:
- ---------------------
Change in demand and savings deposits ......................... 11,705 22,622 1,837
Change in time deposits ....................................... 1,846 3,001 (16,255)
Dividends paid ................................................ (2,012) (1,583) (2,017)
Repayment of mortgage debt .................................... (26) (1,809) (54)
Proceeds from issuance of common stock ........................ 432 260 93
Purchase of Treasury Stock .................................... (2,519) (1,329) --
-----------------------------------
Net cash provided / (used) by financing activities .......... 9,426 21,162 (16,396)
-----------------------------------
Change in cash and cash equivalents ........................... (7,850) 14,728 (6,199)
Cash and cash equivalents at beginning of year ................ 53,182 38,454 44,653
-----------------------------------
Cash and cash equivalents at end of year ...................... $ 45,332 $ 53,182 $ 38,454
===================================
Supplemental cash flow information:
- -----------------------------------
Cash paid during the year for:
Income taxes ................................................ $ 3,861 $ 2,153 $ 3,340
Interest .................................................... 5,769 6,835 5,047
The accompanying notes are an integral part of the consolidated financial
statements.
20
Consolidated Statements of Comprehensive Income
(in thousands)
For the years ended December 31, 1998 1997 1996
-----------------------------
Net Income .................................. $ 6,857 $ 6,130 $ 6,042
Other comprehensive income:
Unrealized holding gains (losses)
arising during the period ............. 59 94 (320)
Reclassification adjustment for
gains included in net income .......... -- -- (2)
Deferred income tax (benefit) expense on
unrealized holding gains (losses)
arising during the period ............. (21) (31) 109
-----------------------------
Comprehensive net income .................... $ 6,895 $ 6,193 $ 5,829
=============================
The accompanying notes are an integral part of the consolidated financial
statements.
21
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except for shares of common stock)
Shares of Unrealized
For the years ended December 31, 1998, Common Common Paid-in Retained Gains Treasury
1997 and 1996 Stock issued Stock Capital Earnings (Losses) Stock
------------------------------------------------------------------------------
Balance, December 31, 1995 ....................... 2,493,200 $ 2,493 $ 4,363 $ 26,374 $ 212 $ (1,539)
Net income ....................................... -- -- -- 6,042 -- --
Dividends declared, $0.92 per share ............. -- -- -- (2,017) -- --
Change in unrealized gains (losses), net of income -- -- -- -- -- --
taxes of $109,000 ............................. -- -- -- -- (213) --
Purchase of treasury stock ....................... -- -- -- -- -- (138)
Retirement of treasury stock ..................... (4,975) (5) (133) -- -- 138
Common stock issued .............................. 15,660 16 215 -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1996 ....................... 2,503,885 2,504 4,445 30,399 (1) (1,539)
Net income ....................................... -- -- -- 6,130 -- --
Dividends declared, $0.72 per share ............. -- -- -- (1,583) -- --
Change in unrealized gains (losses), net of income -- -- -- -- -- --
taxes of $32,000 .............................. -- -- -- -- 63 --
Purchase of treasury stock ....................... -- -- -- -- -- (1,329)
Retirement of treasury stock ..................... (2,006) (2) (99) -- -- 101
Common stock issued .............................. 17,500 17 243 -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1997 ....................... 2,519,379 2,519 4,589 34,946 62 (2,767)
Net income ....................................... -- -- -- 6,857 -- --
Dividends declared, $0.465 per share ............ -- -- -- (2,012) -- --
Change in unrealized gains (losses), net of income -- -- -- -- -- --
taxes of $52,000 .............................. -- -- -- -- 38 --
2-for-1 stock split .............................. 2,525,339 2,525 (2,525) -- -- --
Tax benefit from gains on stock option exercise .. -- -- 173 -- -- --
Purchase of treasury stock ....................... -- -- -- -- -- (2,519)
Retirement of treasury stock ..................... (5,740) (5) (163) -- -- 71
Common stock issued .............................. 28,100 28 404 -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1998 ....................... 5,067,078 $ 5,067 $ 2,478 $ 39,791 $ 100 $ (5,215)
==============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
22
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"), Tax
Counsellors of Bryn Mawr Inc. ("TCBM"), Insurance Counsellors of Bryn Mawr, Inc.
("ICBM") and The Bryn Mawr Trust Company (Jersey), Ltd ("BMTC (Jersey)").
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of related revenue and expense during the
reporting period. Actual results could differ from those estimates. 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 $4,909,000 and $10,601,000 at December 31,
1998 and 1997, 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, 1998, shareholders' equity was increased by
$100,000 due to unrealized gains (net of $52,000 in deferred income taxes) of
$152,000 in the investment securities portfolio. As of December 31, 1997,
shareholders' equity was increased by $62,000 due to unrealized gains (net of
$32,000 in deferred income taxes)of $94,000 in the investment securities
portfolio.
Loans:
Interest income on loans performing satisfactorily is recognized on the accrual
method of accounting. Nonperforming loans are loans on which scheduled principal
and/or interest is past due 90 days or more or loans less than 90 days past due
which are deemed to be problem loans by management. All nonperforming loans,
except consumer loans, are placed on nonaccrual status, and any outstanding
interest receivable at the time the loan is deemed nonperforming is deducted
from interest income. The charge-off policy for all loans, including
nonperforming 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 nonperforming and impaired loan. All of the Corporation's
impaired loans, which amounted to $1,718,000 and $3,524,000 at December 31, 1998
and 1997, respectively, were put on a nonaccrual basis and any outstanding
accrued interest receivable on such loans, at the time they were put on a
nonaccrual 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 or at the loan's market price or fair value of the collateral, if the loan
is collateral dependent. As of December 31, 1998 and 1997, 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 $1,718,000 and $3,524,000, respectively.
23
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 either an allocation of the reserve for loan losses or by a provision for
loan losses, depending on the adequacy of the reserve for loan losses. All
impairment reserves established in either 1998 or 1997 were allocated from the
existing reserve for loan losses. As of December 31, 1998 and 1997, there were
$935,000 and $791,000, respectively, of impaired loans for which there is a
related allowance for loan losses. The total related allowance for loan loss on
impaired loans at December 31, 1998 and 1997 was $300,000 and $226,000,
respectively. Impaired loans for which no loan loss allowance was allocated
amounted to $783,000 and $2,733,000 at December 31, 1998 and 1997. Average
impaired loans during both 1998 and 1997 amounted to $2,820,000 and $2,927,000,
respectively.
When a loan is classified as impaired, it is put on nonaccrual 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 1998 or 1997. 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, no loans
considered impaired during 1998 were removed from the impaired loan status and
$409,000 in loan balances were removed from impaired status and returned to
accrual status during 1997.
Smaller balance, homogeneous loans, exclusively consumer loans, when included in
nonperforming loans, for practical consideration, are not put on a nonaccrual
status nor is the current accrued interest receivable reversed from income.
Loan loss provision:
The loan loss provision charged to operating expenses is based on those factors
which, in management's judgement, deserve current recognition in estimating
possible loan losses including the continuing evaluation of the loan portfolio
and the Bank's past loan loss experience. The allowance for possible loan losses
is an amount that management believes will be adequate to absorb losses inherent
in existing loans.
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 generally capitalized and amortized as yield
adjustment over the life of the loan using the interest method.
Premises and equipment:
Premises and equipment are stated at cost, less accumulated depreciation. The
provision for depreciation is computed on a straight-line basis over the
estimated useful lives, as follows: premises--10 to 50 years, and equipment--3
to 20 years. Leasehold improvements are being amortized over the shorter of the
estimated useful life or the term of the lease.
Maintenance and repairs are charged to expense; major renewals and betterments
are capitalized. Gains and losses on dispositions are reflected in current
operations.
Income taxes:
The Corporation files a consolidated Federal income tax return with its
subsidiaries. Certain items of income and expense (primarily loan origination
fees, provision for loan loss and other real estate owned losses) 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:
Trust Division income is recognized on the cash basis of accounting. Reporting
such income on a cash basis does not materially affect net income.
Recently issued accounting standards:
In September 1997, Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130") was issued. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in financial statements. Comprehensive income includes net income and
several other items that current accounting standards require to be recognized
outside of net income, such as unrealized holding gains and losses on
available-for-sale investment securities in accordance with Statement of
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Corporation adopted SFAS No. 130 on
January 1, 1998. When first applying SFAS No. 130, financial statements for
earlier periods that are provided for comparative purposes are required to be
restated to reflect application of the provisions of SFAS No. 130. SFAS No. 130
must be adopted at the beginning of a business enterprise's fiscal year.
24
In September 1997, Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") was issued. SFAS 131 replaces Statement of Financial Accounting Standard
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 requires public business enterprises to report certain information about
their operating segments in a complete set of financial statements to
shareholders. Such financial information is required to be reported on the basis
that it is used internally by the enterprise's chief operating decision maker in
making decisions related to resource allocation and segment performance. SFAS
No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Corporation adopted SFAS No. 131 on January 1, 1998.
Comparative year information is required to be restated in accordance with SFAS
No. 131, if practicable. In 1998, the first year of implementation, SFAS No. 131
was not required to be applied to interim period financial statements and the
Corporation did not do so.
In February 1998, Statement of Financial Accounting Standard No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
No. 132") was issued. This statement supersedes disclosure requirements of
Statements of Financial Standards No. 87, "Employers' Accounting for Pensions";
Statement of Financial Accounting Standard No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and Statement of Financial Accounting Standard No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (the
"Superseded Statements"). SFAS No. 132 addresses the disclosure aspects of the
Superseded Statements and does not address measurement or recognition, as
required under the Superseded Statements. SFAS No. 132, requires employers to
disclose some information not required previously, while eliminating other
requirements that were not considered useful. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. The Corporation adopted SFAS No.
132 on January 1, 1998. Disclosures required by SFAS No. 132 should be provided
for earlier periods presented for comparative purposes, unless that information
in not readily available.
3. Investment Securities:
- -------------------------
The amortized cost and estimated market value of investments, all of which were
classified as available for sale, are as follows:
(in thousands) 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
-----------------------------------------------------
Obligations of the
U.S. Government
and agencies .......... $44,838 $ 99 $ 26 $44,911 $44,911
State & political
subdivisions .......... 4,612 62 -- 4,674 4,674
Other securities ........ 1,374 17 -- 1,391 1,391
-----------------------------------------------------
Total ................. $50,824 $ 178 $ 26 $50,976 $50,976
=====================================================
(in thousands) 1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
-----------------------------------------------------
Obligations of the
U.S. Government
and agencies .......... $35,030 $ 71 $ 29 $35,072 $35,072
State & political
subdivisions .......... 4,270 38 -- 4,308 4,308
Other securities ........ 1,273 13 -- 1,286 1,286
-----------------------------------------------------
Total ................. $40,573 $ 122 $ 29 $40,666 $40,666
=====================================================
At December 31, 1998, securities having a book value of $10,500,000 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, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
(in thousands) 1998
-----------------------
Estimated
Amortized Market
Cost Value
-----------------------
Due in one year or less ........................... $27,168 $27,201
Due after one year through five years ............. 21,860 21,935
Due after five years through ten years ............ 438 449
Due after ten years ............................... -- --
Other securities .................................. 1,358 1,391
-----------------------
Total ........................................ $50,824 $50,976
=======================
Proceeds from sales of debt securities are as follows:
(in thousands) 1998 1997 1996
--------------------------------------
Proceeds ......................... $ -- $ -- $9,502
Gross gains ...................... -- -- 2
Gross losses ..................... -- -- --
4. Loans:
- ---------
Loans outstanding at December 31 are detailed by category as follows:
(in thousands) 1998 1997
-----------------------
Real estate loans:
Permanent mortgage loans ........................... $110,535 $102,474
Construction loans ................................. 13,204 13,647
Commercial and industrial loans .................... 89,368 75,474
Loans to individuals for household,
family, and other consumer expenditures .......... 68,078 76,963
-----------------------
Total .......................................... $281,185 $268,558
=======================
All loans past due 90 days or more, except consumer loans, are placed on
nonaccrual status. Nonperforming loans amounted to $493,000 and $1,169,000 at
December 31, 1998 and 1997, respectively. Forgone interest on nonaccrual loans
was $230,000, $298,000, and $144,000 in 1998, 1997, and 1996, respectively.
25
5. Allowance for Possible Loan Losses:
- --------------------------------------
The summary of the changes in the allowance for possible loan losses is as
follows:
(in thousands) .......................... 1998 1997 1996
----------------------------------
Balance, January 1, ..................... $ 4,074 $ 4,182 $ 3,652
Charge-offs ............................. (243) (433) (268)
Recoveries .............................. 119 125 448
----------------------------------
Net recoveries / (charge-offs) ....... (124) (308) 180
Loan loss provision ..................... 150 200 350
----------------------------------
Balance, December 31, ................... $ 4,100 $ 4,074 $ 4,182
==================================
6. Premises and Equipment:
- --------------------------
A summary of premises and equipment at December 31 is as follows:
(in thousands) ................................. 1998 1997
------------------------
Land ........................................... $ 3,003 $ 2,973
Buildings ...................................... 11,649 10,484
Furniture and equipment ........................ 10,090 9,785
Leasehold improvements ......................... 389 184
------------------------
25,131 23,426
Less accumulated depreciation .................. 12,922 11,636
------------------------
Total ....................................... $12,209 $11,790
========================
During 1997, the Corporation paid off a mortgage loan on its property located at
10 Bryn Mawr Avenue. As of December 31, 1998, the Corporation has borrowings
outstanding of $668,000. The borrowings are collateralized by a property with a
book value of $1,682,000. The weighted average interest rate on the borrowings
was 8.50% and 9.54% in 1998 and 1997, respectively.
7. Disclosure about Fair Value of Financial Instruments:
- --------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of the
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate such value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other market value techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it 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. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
Loans:
For variable rate loans that reprice frequently and which have no significant
change in credit risk, estimated fair values are based on carrying values. Fair
values of certain mortgage loans and consumer loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The estimated
fair value of nonperforming loans is based on discounted 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 and Market Rate Checking accounts are, by definition,
equal to the amounts payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of expected monthly maturities on the
certificate of deposit. SFAS No. 107 defines the fair value of demand deposits
as the amount payable on demand and prohibits adjusting estimated fair value
from any value derived from retaining those deposits for an expected future
period of time.
Other liabilities:
Estimated fair values of long term mortgages, collateralized by 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.
26
Off-balance sheet instruments:
Estimated fair values of the Corporation's off-balance sheet instruments
(standby letters of credit and loan commitments) are based on fees currently
charged to enter into similar loan agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing. Since fees and
rates charged for off-balance sheet items are at market levels when set, there
is no material difference between the stated amount and estimated fair values of
off-balance sheet instruments.
The carrying amount and estimated fair value of the Corporation's financial
instruments at December 31 are as follows:
(in thousands) 1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------------
Financial assets:
Cash and due from banks ........... $ 19,810 $ 19,810 $ 34,464 $ 34,464
Interest-bearing deposits with
other banks ..................... 5,150 5,150 2,118 2,118
Federal funds sold ................ 20,372 20,372 16,600 16,600
Investment securities ............. 50,976 50,976 40,666 40,666
Net loans ......................... 277,085 283,265 264,484 269,656
-----------------------------------------------
Total financial assets ......... $373,393 $379,573 $358,332 $363,504
===============================================
Financial liabilities:
Deposits .......................... $342,357 $342,465 $328,806 $328,644
Other liabilities ................. 668 708 694 719
-----------------------------------------------
Total financial
liabilities ................... $343,025 $343,173 $329,500 $329,363
Off-balance sheet instruments $ 92,920 $ 92,920 $ 80,607 $ 80,607
8. Applicable Federal Income Taxes:
- -----------------------------------
The components of the net deferred tax asset as of December 31 are as follows:
(in thousands) 1998 1997
--------------------------
Deferred tax assets:
Loan loss reserve .......................... $ 710 $ 659
Deferred loan fees ......................... 22 34
Depreciation ............................... 53 15
Other reserves ............................. 353 410
--------------------------
1,138 1,118
Deferred tax liabilities:
Unrealized appreciation on
investment securities ...................... (52) (32)
--------------------------
Total deferred tax assets .................. $ 1,086 $ 1,086
==========================
No valuation allowance was recorded as of December 31, 1998 and 1997.
The provisions for federal income taxes consist of the following:
(in thousands) 1998 1997 1996
-----------------------------------------
Currently payable ............... $ 3,500 $ 2,756 $ 3,061
Deferred ........................ (20) 194 (161)
-----------------------------------------
Total ........................... $ 3,480 $ 2,950 $ 2,900
=========================================
The sources of temporary differences resulting in deferred federal income taxes
and the approximate tax effect of each are as follows:
(in thousands) 1998 1997 1996
-------------------------------------
Other real estate owned .............. $ 0 $ 364 $ (8)
Loan loss provision .................. (51) (68) (119)
Depreciation ......................... 12 (52) (83)
Pension expense ...................... (38) 9 (37)
Deferred loan fees ................... 57 12 27
Other ................................ 0 (71) 59
-------------------------------------
Total ........................... $ (20) $ 194 $(161)
=====================================
Applicable federal income taxes differed from the amount derived by applying the
statutory federal tax rate to income as follows:
1998 1997 1996
---------------------------------------
Statutory federal tax rate ........ 34% 34% 34%
---------------------------------------
(in thousands)
Computed "expected"
tax expense ..................... $ 3,515 $ 3,087 $ 3,040
Benefit reductions in taxes
resulting from tax-exempt
income .......................... (334) (113) (181)
Other, net ........................ 299 (24) 41
---------------------------------------
Actual tax expense ................ $ 3,480 $ 2,950 $ 2,900
=======================================
27
9. 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 reconciliation of the
changes in the plans' benefit obligation and fair value of assets over the
two-year period ending December 31, 1998, and a reconciliation of funded status
as of December 31 of both years:
Pension Benefits Postretirement Benefits
-------------------- -----------------------
(Dollars in thousands) 1998 1997 1998 1997
-------- -------- -------- --------
Reconciliation of Benefit Obligation and Plan Assets
- ----------------------------------------------------
Change in benefit obligation
Benefit obligation at January 1 ....................... $ 12,623 $ 10,174 $ 2,366 $ 1,503
Service cost .......................................... 701 555 9 11
Interest cost ......................................... 900 790 141 165
Amendments ............................................ 50 137 (1,390) --
Actuarial (gain) loss ................................. 881 1,417 390 876
Benefits paid ......................................... (409) (450) (189) (189)
-------- -------- -------- --------
Benefit obligation at December 31 ..................... $ 14,746 $ 12,623 $ 1,327 $ 2,366
-------- -------- -------- --------
Change in plan assets
Fair value of plan assets at January 1 ................ $ 17,527 $ 14,508 $ -- $ --
Actual return on plan assets .......................... 3,580 3,469 -- --
Employer contribution ................................. -- -- 189 189
Benefits paid ......................................... (409) (450) (189) (189)
-------- -------- -------- --------
Fair value of plan assets at December 31 .............. $ 20,698 $ 17,527 $ -- $ --
-------- -------- -------- --------
Funded Status Reconciliation and Key Assumptions
- ------------------------------------------------
Pension Benefits Postretirement Benefits
-------------------- -----------------------
(Dollars in thousands) 1998 1997 1998 1997
-------- -------- -------- --------
Reconciliation of funded status
Funded Status ......................................... $ 5,952 $ 4,904 $ (1,327) $ (2,365)
Unrecognized net actuarial (gain) loss ................ (6,476) (5,579) 452 78
Unrecognized prior service cost ....................... 324 325 -- --
Unrecognized transition obligation (asset) ............ -- -- 363 1,831
-------- -------- -------- --------
Prepaid (accrued) benefit cost ........................ $ (200) $ (350) $ (512) $ (456)
-------- -------- -------- --------
Amounts recognized in financial statements consists of:
Prepaid benefit cost/(Accrued benefit liability) ...... $ (200) $ (350) $ (512) $ (456)
Intangible asset ...................................... -- 29 -- --
-------- -------- -------- --------
Net amount recognized ................................. $ (200) $ (321) $ (512) $ (456)
-------- -------- -------- --------
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 $897,197 as of December 31, 1998
and $736,719 as of December 31, 1997. There are no plan assets in the SERP due
to the nature of the SERP. The Corporation's plan for postretirement benefits
other than pensions also has no plan assets. The aggregate benefit obligation
for that plan was $1,326,728 as of December 31, 1998 and $2,365,556 as of
December 31, 1997.
The assumptions used in the measurement of the Corporation's benefit obligation
are shown on the following table:
Pension Benefits Postretirement Benefits
---------------------- ------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
Weighted-average assumptions as of end of year
Discount rate ................................ 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Expected return on plan assets ............... 8.25% 8.00% 8.00% N/A N/A N/A
Rate of compensation increase ................ 5.00% 5.00% 5.00% N/A N/A N/A
Medical Trend Rate ........................... N/A N/A N/A N/A N/A N/A
The assumed health care cost trend rate used was 7% and was graded down in 1%
increments per year to an ultimate rate of 6% per year.
28
The following table provides the components of net periodic cost (income) for
the plans for years ended December 31, 1998 and 1997:
Pension Benefits Postretirement Benefits
------------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- --------- -------- -------- ---------
Service cost ................................ $ 701 $ 555 $ 489 $ 9 $ 11 $ 11
Interest cost ............................... 900 790 693 141 165 106
Expected return on plan assets .............. (1,428) (1,144) (1,003) -- -- --
Amortization of prior service cost .......... 52 38 108 -- -- --
Amortization of transition obligation (asset) -- -- -- 78 122 122
Amortization of net actuarial (gain) loss ... (375) (266) (179) 17 -- (77)
-------- -------- --------- -------- -------- ---------
Net periodic benefit cost ................... $ (150) $ (27) $ 108 $ 245 $ 298 $ 162
-------- -------- --------- -------- -------- ---------
The prior service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Gains and losses in excess of
10% of the greater of the benefit obligation and the market-related value of
assets are amortized over the average remaining service period of active
participants.
1-Percentage 1-Percentage
Sensitivity Analysis, Postretirement Benefits Point Increase Point Decrease
Effect on total of service and interest cost components ..... $10,154 $ (9,425)
Effect on accumulated postretirement benefit obligation ..... 80,602 (74,774)
Thrift Plan
The Corporation sponsors a thrift and savings plan (the "Thrift Plan") covering
substantially all employees. The Thrift Plan provides for the Corporation to
make incentive contributions equal to the participant's basic contribution, up
to a maximum of 3% of compensation and provides for voluntary employee
contributions.
All contributions and interest earned thereon are vested immediately. The Thrift
Plan expense was approximately $245,000, 208,000 and $180,000 in 1998, 1997 and
1996, respectively.
10. Stock Option Plan:
- ---------------------
At December 31, 1998, 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
1998, 1997 and 1996, 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:
1998 1997 1996
-------------------------------------
Net income - as reported $ 6,857 $ 6,130 $ 6,042
Net Income pro forma $ 6,373 $ 6,003 $ 5,946
Basic earnings per share -
as reported $ 1.58 $ 1.40 $ 1.38
Basic earnings per share -
proforma $ 1.47 $ 1.37 $ 1.32
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 1996, 1997 and 1998: dividend yield of 1.81
percent, expected volatility of 22.5 percent , expected life of seven years and
risk-free interest rates of 5.6, 7.1 and 6.5 percent, respectively.
All option amounts have been restated to reflect the 2-for-1 stock split,
effective September 1, 1998.
29
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 will be set at the last sale
price for the stock on the 3rd business day following the Corporation's Annual
Meeting. During 1998, the shareholders approved the issuance of up to 217,606
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. Options granted may either be "incentive
stock options" within the meaning of the Internal Revenue Service code, or
non-qualified options. The stock options are exercisable over a period
determined by the Board of Directors; however, the option period will not
commence earlier than one year or be longer than ten years from the date of the
grant. The Plan provides that the option price at the date of grant will not be
less than the fair market value of the Corporation's common stock. The following
is a summary of transactions under the Plan:
Shares Available Price Weighted
Under for per Average
Option Option Share Exercise Price
----------------------------------------------------------
Balance at
December 31, 1995 370,920 62,520 $4.50 - $9.30 $7.56
Options granted 18,000 (18,000) $12.50 $12.50
Options exercised (31,320) $6.75 - $8.25 $7.36
-------------------------
Balance at
December 31, 1996 357,600 44,520 $4.50 - $12.50 $7.83
Options granted 18,000 (18,000) $16.60 $16.60
Options exercised (35,000) $7.00 - $12.50 $7.43
-------------------------
Balance at
December 31, 1997 340,600 26,520 $4.50 - $16.94 $8.26
Options authorized 217,606
Options granted 97,400 (97,400) $24.50 $24.50
Options exercised (31,920) $6.75 - $24.50 $10.28
-------------------------
Balance at
December 31, 1998 406,080 146,726 $4.50 - $24.50 $12.06
-------------------------
Weighted-average remaining
contractual life of
options outstanding at
December 31, 1998 .............. 5.14 years
The weighted-average fair value of options granted during 1996, 1997 and 1998
were $10.64, $13.99 and $7.39, respectively.
The number of exercisable shares at December 31, 1998, 1997 and 1996 were
388,480, 279,960 and 239,680, respectively, with respective weighted average
exercise prices of $12.25, $8.39 and $7.71.
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 $.11 per share, $.03 per share and $.02 per share dilutive effect
on earnings per share for the years ended December 31, 1998, 1997 and 1996,
respectively.
11. Related Party Transactions:
- -------------------------------
The Corporation had loans outstanding directly to executive officers, directors
and certain other related parties of $3,836,000 and $3,506,000 at December 31,
1998 and 1997, respectively.
Following is a summary of these transactions:
(in thousands) 1998 1997
---------------------------
Balance, beginning of year $ 3,506 $ 3,465
Additions 1,173 549
Amounts collected (843) (508)
---------------------------
Balance, end of year $ 3,836 $ 3,506
---------------------------
12. 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.
30
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,
1998 are $85,775,000. 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 and
bankers acceptances as of December 31, 1998 amounted to $6,651,000 and $494,000,
respectively.
As of December 31, 1998, the Corporation had no loans sold with recourse
outstanding.
The Corporation grants construction, commercial, residential mortgage, and
consumer loans to customers primarily in Southeastern Pennsylvania. Although the
Corporation has a diversified loan portfolio, its debtors' ability to honor
their contracts is substantially dependent upon the general economic conditions
of the region.
13. Risks and Uncertainties:
- ---------------------------
The earnings of the Corporation depend on the earnings of the Bank. The Bank's
earnings are dependent upon both the level of net interest income and
non-interest revenue streams, primarily fees for trust services, that are earned
annually. Accordingly, the earnings of the Corporation are subject to risks and
uncertainties surrounding both its exposure to changes in the interest rate
environment and movements in financial markets.
Most of the Bank's lending activity is with customers located in southeastern
Pennsylvania. Lending is spread between commercial, consumer and real estate
related loans, including construction lending. While these loan concentrations
represent a potential concentration of credit risk, the Bank's credit loss
experience compares favorably to the Bank's peer group credit loss experience.
Significant estimates are made by management in determining the allowance for
possible loan losses, the carrying value of other real estate owned and employee
benefit plan expense. 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 the 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.
31
14. Selected Quarterly Financial Data (Unaudited):
- -------------------------------------------------
Quarters ending 1998
(In thousands, except ---------------------------------------
per share data) 3/31 6/30 9/30 12/31
---------------------------------------
Interest income .................... $6,510 $6,570 $6,686 $6,672
Interest expense ................... 1,528 1,514 1,507 1,427
Net interest income ................ 4,982 5,056 5,179 5,245
Provision for loan losses .......... 25 25 37 63
Income before income taxes ......... 2,616 2,498 2,657 2,566
Net income ......................... 1,746 1,628 1,732 1,751
Earnings per common share .......... 0.40 0.38 0.40 0.41
Earnings per common share -
assuming dilution .................. 0.38 0.36 0.38 0.39
Quarters ending 1997
(In thousands, except ---------------------------------------
per share data) 3/31 6/30 9/30 12/31
---------------------------------------
Interest income .................... $6,125 $6,255 $6,482 $6,435
Interest expense ................... 1,682 1,776 1,826 1,645
Net interest income ................ 4,443 4,479 4,656 4,790
Provision for loan losses .......... 50 50 50 50
Income before income taxes ......... 2,178 2,075 2,311 2,516
Net income ......................... 1,458 1,390 1,540 1,742
Earnings per common share .......... 0.33 0.32 0.35 0.40
Earnings per common share -
assuming dilution ............... 0.32 0.30 0.34 0.38
15. Condensed Financial Statements:
- ----------------------------------
The condensed financial statements of the Corporation (parent company only) as
of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, are as follows:
Condensed Balance Sheets
(in thousands) 1998 1997
-------------------------
Assets:
Cash ............................................. $ 221 $ 967
Investments in subsidiaries,
at equity in net assets ........................ 38,710 34,922
Premises and equipment, net ...................... 4,056 4,155
Other assets ..................................... 72 --
-------------------------
Total assets ................................... $ 43,059 $ 40,044
=========================
Liabilities and shareholders' equity:
Mortgages payable ................................ $ 668 $ 694
Other liabilities ................................ 170 1
-------------------------
Total liabilities .............................. 838 695
Common stock, par value $1, authorized
25,000,000 shares and 5,000,000 shares
as of December 31, 1998 and 1997,
respectively, issued 5,067,078 shares
and 2,519,379 shares as of December
31, 1998 and 1997, respectively, and
outstanding 4,303,818 shares and
2,185,609 shares as of December 31,
1998 and 1997, respectively ...................... 5,067 2,519
Paid-in capital in excess of par value ............. 2,478 4,589
Unrealized investment appreciation
(depreciation), net of deferred income taxes ..... 100 62
Retained earnings .................................. 39,791 34,946
Less common stock in treasury, at cost -
763,260 shares and 333,770 shares
as of December 31, 1998 and 1997 .............. (5,215) (2,767)
-------------------------
Total shareholders' equity ....................... 42,221 39,349
-------------------------
Total liabilities and
shareholders' equity ........................... $ 43,059 $ 40,044
=========================
Condensed Statements of Income
(in thousands) 1998 1997 1996
-----------------------------------
Dividends from The Bryn
Mawr Trust Company ....................... $4,012 $5,359 $2,017
Interest and other income .................. 236 237 237
-----------------------------------
Total operating income ................... 4,248 5,596 2,254
Expenses ................................... 677 360 445
-----------------------------------
Income before equity in
undistributed income of
subsidiaries ............................. 3,571 5,236 1,809
Equity in undistributed income
of subsidiaries .......................... 3,136 852 4,162
-----------------------------------
Income before income taxes ................. 6,707 6,088 5,971
Federal income tax benefit ................. 150 42 71
-----------------------------------
Net income ................................. $6,857 $6,130 $6,042
-----------------------------------
32
Condensed Statements of Cash Flows
(in thousands) 1998 1997 1996
-----------------------------------
Operating activities:
Net income ............................... $ 6,857 $ 6,130 $ 6,042
Adjustments to reconcile net income
to net cash provided
by operating activities:
Equity in undistributed (earnings)
losses of subsidiaries:
The Bryn Mawr Trust Company ............ (3,135) (852) (4,162)
Tax Counsellors of Bryn Mawr ........... (9) -- --
The Bryn Mawr Trust Company
(Jersey), Ltd. 8 -- --
Depreciation expense ..................... 99 98 98
Other .................................... (1) (1) (56)
---------------------------------
Net cash provided by
operating activities ................. 3,819 5,375 1,922
Investing Activities:
Investment in subsidiaries ............... (440) (75) --
---------------------------------
Net cash provided by
investing activities ................. (440) (75) --
Financing activities:
Dividends paid ........................... (2,012) (1,583) (2,017)
Repayment of mortgage debt ............... (26) (1,809) --
Repurchase of treasury stock ............. (2,519) (1,329) --
Proceeds from issuance of stock .......... 432 260 93
---------------------------------
Net cash used by financing
activities ........................... (4,125) (4,461) (1,924)
---------------------------------
(Decrease) increase in cash and
cash equivalents ......................... (746) 839 (2)
Cash and cash equivalents at
beginning of year ....................... 967 128 130
---------------------------------
Cash and cash equivalents at
end of year .............................. $ 221 $ 967 $ 128
=================================
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 31,1998, the Bank's retained earnings
amounted to $31,330,000. Therefore, as of December 31,1998, dividends available
for payment to the Corporation are limited to $31,330,000. Since the sole source
of dividend funding for the Corporation's dividend payments to its shareholders
is the Bank's dividends, the Corporation is effectively limited as to the amount
of dividends that it may pay to an amount equal to the limits placed on the
Bank, as discussed above.
33
16. 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 Bank's 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, 1998, 1997, and 1996 is as
follows:
1998 1997*
Mortgage All Mortgage All
(in thousands) Banking Trust Banking Other Consolidated Banking Trust Banking Other Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ...... $ 20,103 $ -- $ 356 $ 3 $ 20,462 $ 18,031 $ -- $ 337 $ -- $ 18,368
Less loan loss provision .. 150 -- -- -- 150 200 -- -- -- 200
-------- ------- ------- -------- --------- -------- ------- ------- ------- --------
Net interest income after
loan loss provision ...... 19,953 -- 356 3 20,312 17,831 -- 337 -- 18,168
Other income:
Fees for investment
management and
trust services ......... -- 9,272 -- -- 9,272 0 7,698 -- -- 7,698
Service charges on
deposit accounts ....... 1,169 -- -- -- 1,169 1,124 -- -- -- 1,124
Other fees and service
charges ................ 571 -- 1,209 -- 1,780 503 -- 875 -- 1,378
Net gain on sale of
loans .................. 35 -- 783 -- 818 43 -- 466 -- 509
Gain on sale of other
real estate owned ...... 224 -- -- -- 224 379 -- -- -- 379
Other real estate
owned income ........... -- -- -- -- -- -- -- -- -- 74
Other operating
income ................. 631 -- -- 1,079 1,710 528 -- 4 370 902
-------- ------- ------- -------- --------- -------- ------- ------- ------- --------
Total other income ........ 2,630 9,272 1,992 1,079 14,973 2,577 7,698 1,345 370 11,990
Other expenses:
Salaries- regular ....... 6,489 2,863 417 520 10,289 5,858 2,415 235 96 8,604
Salaries- other ......... 1,692 386 117 180 2,375 1,347 215 93 -- 1,655
Fringe benefits ......... 1,232 549 74 53 1,908 1,237 501 45 8 1,791
Occupancy ............... 2,793 422 62 180 3,457 2,543 361 39 223 3,166
Other operating expenses 5,003 898 400 618 6,919 4,730 733 233 166 5,862
-------- ------- ------- -------- --------- -------- ------- ------- ------- --------
Total other expenses ...... 17,209 5,118 1,070 1,551 24,948 15,715 4,225 645 493 21,078
-------- ------- ------- -------- --------- -------- ------- ------- ------- --------
Segment profit (loss) ..... 5,374 4,154 1,278 (469) 10,337 4,693 3,473 1,037 (123) 9,080
Intersegment (revenues)
expenses ................. (17) 236 -- (219) -- (5) 236 -- (231) --
-------- ------- ------- -------- --------- -------- ------- ------- ------- --------
Segment profit after
eliminations ............. $ 5,357 $ 4,390 $ 1,278 $ (688) $ 10,337 $ 4,688 $ 3,709 $ 1,037 $ (354) $ 9,080
======== ======= ======= ======== ========= ======== ======= ======= ======= ========
% of segment profit (loss) 52% 40% 12% -4% 100% 52% 38% 11% -1% 100%
Toal assets at December 31. $369,556 $ 455 $16,532 $ 5,297 $ 391,840 $368,839 $ 158 $ -- $ 5,213 $374,210
Capital expenditures ...... $ 2,108 $ 370 $ 93 $ 30 $ 2,601 $ 1,462 $ 80 $ -- $ -- $ 1,542
Depreciation and
amortization ..............$ 1,146 $ 139 $ 16 $ 106 $ 1,407 $ 885 $ 105 $ 3 $ 98 $ 1,091
1996*
Mortgage All
(in thousands) Banking Trust Banking Other Consolidated
-----------------------------------------------------------------
Net interest income ...... $ 17,591 $ -- $ 256 $ -- $ 17,847
Less loan loss provision .. 350 -- -- -- 350
--------- --------- --------- ---------- --------
Net interest income after
loan loss provision ...... 17,241 -- 256 -- 17,497
Other income:
Fees for investment
management and
trust services ......... 0 5,936 -- -- 5,936
Service charges on
deposit accounts ....... 1,081 -- -- -- 1,081
Other fees and service
charges ................ 458 -- 822 -- 1,280
Net gain on sale of
loans .................. 35 -- 363 -- 398
Gain on sale of other
real estate owned ...... 1,081 -- -- -- 1,081
Other real estate
owned income ........... 74 -- -- -- 74
Other operating
income ................. 524 -- 53 237 814
--------- --------- --------- ---------- --------
Total other income ........ 3,253 5,936 1,238 237 10,664
Other expenses:
Salaries- regular ....... 5,324 2,066 204 -- 7,594
Salaries- other ......... 809 118 118 -- 1,045
Fringe benefits ......... 1,066 479 40 -- 1,585
Occupancy ............... 2,259 371 44 345 3,019
Other operating expenses 4,971 688 217 100 5,976
--------- --------- --------- ---------- --------
Total other expenses ...... 14,429 3,722 623 445 19,219
--------- --------- --------- ---------- --------
Segment profit (loss) ..... 6,065 2,214 871 (208) 8,942
Intersegment (revenues)
expenses ................. (5) 236 -- (231) --
--------- --------- --------- ---------- --------
Segment profit after
eliminations ............. $ 6,060 $ 2,450 $ 871 $ (439) $ 8,942
========= ========= ========= ========== ========
% of segment profit (loss) 68% 25% 10% -3% 100%
Toal assets at December 31 $ 341,156 $ 189 $ 7 $ 4,395 $ 345,747
Capital expenditures ...... $ 409 $ 143 $ 5 $ -- $ 557
Depreciation and
amortization .............. $ 1,007 $ 125 $ 10 $ -- $ 1,142
Bryn Mawr Bank Corporation, Tax Counsellors of Bryn Mawr, Inc., and Insurance
Counsellors of Bryn Mawr, Inc. have been aggregated in All Other.
Intersegment (revenues) expenses consist of intersegment rent payments to Bryn
Mawr Bank Corporation from other segments and a $5,000 management fee, paid by
Bryn Mawr Bank Corporation to the Bank.
*-Reclassified for comparative purposes.
34
Report of Independent Accountants
To the Board of Directors and Shareholders of Bryn Mawr Bank Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and of cash flows present fairly, in all material respects
the financial position of Bryn Mawr Bank Corporation and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Pricewater Coopers L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 21, 1999
35
PRICE RANGE OF SHARES
1998 1997*
High-Low Quotations High-Low Quotations
------------------------------------------------------------------
High Low Dividend High Low Dividend
Quarter Bid Bid Declared Bid Bid Declared
------------------------------------------------------------------
1st $27 $22 7/8 $0.115 $18 3/8 $13 1/4 $0.09
2nd $28 $24 3/4 0.115 $17 7/8 $16 1/2 0.09
3rd $27 7/8 $24 0.115 $22 15/16 $17 5/8 0.09
4th $27 1/2 $23 1/4 0.12 $27 $22 0.09
The approximate number of holders of record of common stock as of December 31,
1998 was 480.
The shares are traded on the over-the-counter market, and the price information
was obtained from The National Association of Securities Dealers (NASD).
* The 1997 high-low quotations and the dividend declarations have been restated
to reflect the effect of the 2-for-1 stock split, effective September 1,
1998.
36
Bryn Mawr Bank Corpoaration
801 Lancaster Avenue
Bryn Mawr, Pennsylvania 19010-3396