UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities and Exchange Act of 1934.
For Quarter ended June 30, 2006
Commission File Number 0-15261
Bryn Mawr Bank Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania | 23-2434506 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer identification No.) | |
801 Lancaster Avenue, Bryn Mawr, Pennsylvania | 19010 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (610) 525-1700
Not Applicable
Former name, former address and fiscal year, if changed since last report.
Indicate by check whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers class of common stock, as of the latest practicable date.
Class |
Outstanding at August 1, 2006 | |
Common Stock, par value $1 | 8,575,398 |
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED June 30, 2006
Index
PART I - FINANCIAL INFORMATION |
||||
ITEM 1. |
Financial Statements | |||
3 | ||||
7 | ||||
ITEM 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
ITEM 3. |
Quantitative and Qualitative Disclosures About Market Risk | 31 | ||
ITEM 4. |
Controls and Procedures | 31 | ||
PART II OTHER INFORMATION |
31 | |||
ITEM 1. |
Legal Proceedings | 31 | ||
ITEM 1a. |
Risk Factors | 31 | ||
ITEM 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 32 | ||
ITEM 3. |
Defaults Upon Senior Securities | 32 | ||
ITEM 4. |
Submission of Matters to a Vote of Security Holders | 32 | ||
ITEM 5. |
Other Information | 32 | ||
ITEM 6. |
Exhibits | 32 |
2
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(dollars in thousands, except per share data) |
Three Months Ended June 30 |
Six Months Ended June 30 | ||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Net interest income: |
||||||||||||
Interest income: |
||||||||||||
Interest and fees on loans |
$ | 10,616 | $ | 8,849 | $ | 20,543 | $ | 17,197 | ||||
Interest on federal funds sold |
18 | 36 | 84 | 61 | ||||||||
Interest on interest bearing deposits with banks |
8 | 3 | 13 | 21 | ||||||||
Interest and dividends on investment securities |
456 | 277 | 803 | 543 | ||||||||
Total interest and dividend income |
11,098 | 9,165 | 21,443 | 17,822 | ||||||||
Interest expense: |
||||||||||||
Savings, NOW, and market rate accounts |
934 | 647 | 1,755 | 1,209 | ||||||||
Time deposits |
1,646 | 870 | 2,947 | 1,602 | ||||||||
Borrowings |
215 | 27 | 257 | 36 | ||||||||
Total interest expense |
2,795 | 1,544 | 4,959 | 2,847 | ||||||||
Net interest income |
8,303 | 7,621 | 16,484 | 14,975 | ||||||||
Provision for loan losses |
209 | 193 | 363 | 380 | ||||||||
Net interest income after provision for loan losses |
8,094 | 7,428 | 16,121 | 14,595 | ||||||||
Non-interest income: |
||||||||||||
Fees for wealth management services |
3,048 | 2,967 | 6,168 | 5,621 | ||||||||
Service charges on deposits |
397 | 398 | 776 | 793 | ||||||||
Loan servicing and late fees |
282 | 339 | 572 | 678 | ||||||||
Net gain on sale of loans |
254 | 464 | 504 | 922 | ||||||||
Other operating income |
594 | 573 | 1,154 | 1,155 | ||||||||
Total non-interest income |
4,575 | 4,741 | 9,174 | 9,169 | ||||||||
Non-interest expenses: |
||||||||||||
Salaries and wages |
3,834 | 3,758 | 7,663 | 7,265 | ||||||||
Employee benefits |
1,131 | 936 | 2,449 | 2,077 | ||||||||
Occupancy and bank premises |
642 | 581 | 1,266 | 1,137 | ||||||||
Furniture, fixtures, and equipment |
476 | 498 | 958 | 958 | ||||||||
Advertising |
273 | 312 | 473 | 488 | ||||||||
Amortization of mortgage servicing rights |
84 | 210 | 170 | 399 | ||||||||
Professional fees |
209 | 295 | 506 | 598 | ||||||||
Other operating expenses |
1,253 | 1,274 | 2,262 | 2,326 | ||||||||
Total non-interest expenses |
7,902 | 7,864 | 15,747 | 15,248 | ||||||||
Income before income taxes |
4,767 | 4,305 | 9,548 | 8,516 | ||||||||
Income taxes |
1,630 | 1,517 | 3,275 | 2,926 | ||||||||
Net income |
$ | 3,137 | $ | 2,788 | $ | 6,273 | $ | 5,590 | ||||
Basic earnings per common share |
$ | 0.37 | $ | 0.33 | $ | 0.73 | $ | 0.65 | ||||
Diluted earnings per common share* |
$ | 0.36 | $ | 0.32 | $ | 0.72 | $ | 0.64 | ||||
Dividends declared per share |
$ | 0.11 | $ | 0.10 | $ | 0.22 | $ | 0.20 | ||||
Weighted-average basic shares outstanding |
8,577,365 | 8,549,675 | 8,574,038 | 8,570,533 | ||||||||
Dilutive potential common shares |
113,690 | 80,772 | 110,676 | 97,743 | ||||||||
Adjusted weighted-average dilutive shares |
8,691,055 | 8,630,447 | 8,684,714 | 8,668,276 | ||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
3
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Unaudited
(dollars in thousands, except per share data) |
June 30, 2006 |
December 31, 2005 |
||||||
Assets |
||||||||
Cash and due from banks |
$ | 27,529 | $ | 33,896 | ||||
Interest bearing deposits with banks |
642 | 405 | ||||||
Federal funds sold |
| 32,341 | ||||||
Investment securities available for sale, at fair value (amortized cost of $46,787 and $34,090 as of June 30, 2006 and December 31, 2005, respectively) |
45,697 | 33,397 | ||||||
Loans held for sale |
6,369 | 2,765 | ||||||
Portfolio loans |
639,632 | 595,165 | ||||||
Less: Allowance for loan losses |
(7,779 | ) | (7,402 | ) | ||||
Net portfolio loans |
631,853 | 587,763 | ||||||
Premises and equipment, net |
14,572 | 14,622 | ||||||
Accrued interest receivable |
3,523 | 3,265 | ||||||
Deferred income taxes |
1,720 | 709 | ||||||
Mortgage servicing rights |
2,941 | 2,982 | ||||||
Other assets |
16,636 | 15,081 | ||||||
Total assets |
$ | 751,482 | $ | 727,226 | ||||
Liabilities |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 152,092 | $ | 168,042 | ||||
Savings, NOW and market rate accounts |
284,458 | 312,896 | ||||||
Time deposits |
197,980 | 155,322 | ||||||
Total deposits |
634,530 | 636,260 | ||||||
Borrowed funds |
22,700 | | ||||||
Accrued interest payable |
2,936 | 2,143 | ||||||
Other liabilities |
9,661 | 11,310 | ||||||
Total liabilities |
669,827 | 649,713 | ||||||
Shareholders equity |
||||||||
Common stock, par value $1; authorized 25,000,000 shares; issued 11,303,149 and 11,221,899 shares as of June 30, 2006 and December 31, 2005 respectively and outstanding of 8,575,398 and 8,556,255 shares as of June 30, 2006 and December 31, 2005, respectively |
11,303 | 11,222 | ||||||
Paid-in capital in excess of par value |
9,268 | 7,888 | ||||||
Accumulated other comprehensive income, net of taxes |
(943 | ) | (643 | ) | ||||
Retained earnings |
87,316 | 82,930 | ||||||
106,944 | 101,397 | |||||||
Less: Common stock in treasury at cost 2,727,751and 2,665,644 shares as of June 30, 2006 and December 31, 2005 respectively |
(25,289 | ) | (23,884 | ) | ||||
Total shareholders equity |
81,655 | 77,513 | ||||||
Total liabilities and shareholders equity |
$ | 751,482 | $ | 727,226 | ||||
Book value per share |
$ | 9.52 | $ | 9.06 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
4
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(dollars in thousands) |
Six Months Ended June 30 |
|||||||
2006 | 2005 | |||||||
Operating activities: |
||||||||
Net income |
$ | 6,273 | $ | 5,590 | ||||
Adjustments to reconcile net income to net cash (used) provided by operating activities: |
||||||||
Provision for loan losses |
363 | 380 | ||||||
Provision for depreciation and amortization |
732 | 746 | ||||||
Loans originated for resale |
(34,532 | ) | (61,223 | ) | ||||
Proceeds from loans sold |
31,432 | 61,307 | ||||||
Gain on sale of loans |
(504 | ) | (922 | ) | ||||
Provision for deferred income taxes (benefit) |
(849 | ) | (504 | ) | ||||
Change in tax receivable |
| (354 | ) | |||||
Change in accrued interest receivable |
(258 | ) | (319 | ) | ||||
Change in accrued interest payable |
793 | (1,121 | ) | |||||
Change in mortgage servicing rights, net |
41 | 182 | ||||||
Other |
(3,319 | ) | 3,530 | |||||
Net cash provided by operating activities |
172 | 7,292 | ||||||
Investing activities: |
||||||||
Purchases of investment securities available for sale |
(16,306 | ) | (2,258 | ) | ||||
Proceeds from maturity of investment securities |
| | ||||||
Proceeds from sale of investment securities available for sale |
| | ||||||
Proceeds from calls of investment securities |
3,586 | 2,000 | ||||||
Net portfolio loan (originations) repayments |
(44,453 | ) | (28,600 | ) | ||||
Purchases of premises and equipment |
(634 | ) | (909 | ) | ||||
Sale of other real estate owned (OREO) |
25 | 172 | ||||||
OREO Charge-off |
| (25 | ) | |||||
Net cash used by investing activities |
(57,782 | ) | (29,620 | ) | ||||
Financing activities: |
||||||||
Net (decrease) increase demand and savings deposits |
(44,387 | ) | (11,663 | ) | ||||
Net increase (decrease) in time deposits |
42,658 | 16,068 | ||||||
Dividends paid |
(1,887 | ) | (1,716 | ) | ||||
Purchases of treasury stock |
(1,448 | ) | (1,780 | ) | ||||
Retirement of treasury stock |
43 | 40 | ||||||
Change in borrowed funds |
22,700 | | ||||||
Proceeds from issuance of common stock |
1,460 | 430 | ||||||
Net cash provided by financing activities |
19,139 | 1,379 | ||||||
Decrease in cash and cash equivalents |
(38,471 | ) | (20,949 | ) | ||||
Cash and cash equivalents at beginning of period |
66,642 | 55,242 | ||||||
Cash and cash equivalents at end of period |
$ | 28,171 | $ | 34,293 | ||||
Supplemental cash flow information: |
||||||||
Income taxes paid |
$ | 3,810 | $ | 1,148 | ||||
Interest paid |
$ | 4,166 | $ | 3,968 |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
5
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(dollars in thousands) |
Three Months Ended June 30 |
Six Months Ended June 30 |
||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net income |
$ | 3 ,137 | $ | 2,788 | $ | 6,273 | $ | 5,590 | ||||||||
Other comprehensive income: |
||||||||||||||||
Unrealized holding gain (loss) on available-for-sale securities |
(229 | ) | 297 | (461 | ) | (56 | ) | |||||||||
Deferred income tax (expense) benefit on unrealized holding gain (loss) on available for sale securities |
80 | (104 | ) | 161 | 20 | |||||||||||
Total comprehensive income |
$ | 2,988 | $ | 2,981 | $ | 5,973 | $ | 5,554 | ||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
6
BRYN MAWR BANK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006 and 2005
(Unaudited)
1. Basis of Presentation:
The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of Bryn Mawr Bank Corporations (the Corporation) Management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and the results of operations for the interim period presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Corporations 2005 Annual Report on Form 10-K. The Corporations consolidated financial condition and results of operations consist almost entirely of The Bryn Mawr Trust Companys (the Bank) financial condition and results of operations.
Certain prior period amounts have been reclassified to conform to current period presentation.
The results of operations for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year.
2. Earnings Per Common Share:
The Corporation follows the provisions of SFAS No. 128, Earnings Per Share. Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution, computed pursuant to the treasury stock method. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. For the quarter ended June 30, 2006 the weighted average antidilutive shares were 2,250 and for the quarter ended June 30, 2005 the antidilutive shares were 136,083. For the six month period ended June 30, 2006 the weighted average antidilutive shares were 2,587 and for the six month period ended June 30, 2005 the antidilutive shares were 3,250. All weighted average shares, actual shares and per share information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits.
(dollars in thousands, except per share data) |
Three Months Ended June 30 |
Six Months Ended June 30 | ||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Numerator: |
||||||||||||
Net income available to common shareholders |
$ | 3,137 | $ | 2,788 | $ | 6,273 | $ | 5,590 | ||||
Denominator for basic earnings per share weighted average shares outstanding |
8,577,365 | 8,549,675 | 8,574,038 | 8,570,533 | ||||||||
Effect of dilutive potential common shares |
113,690 | 80,772 | 110,676 | 97,743 | ||||||||
Denominator for diluted earnings per shareadjusted weighted average shares outstanding |
8,691,055 | 8,630,447 | 8,684,714 | 8,668,276 | ||||||||
Basic earnings per share |
$ | 0.37 | $ | 0.33 | $ | 0.73 | $ | 0.65 | ||||
Diluted earnings per share |
$ | 0.36 | $ | 0.32 | $ | 0.72 | $ | 0.64 |
3. Allowance for Loan Losses:
The allowance for loan losses is established through a provision for loan losses charged as an expense. Loans are charged against the allowance for loan losses when Management believes that the principal is uncollectible. The allowance for loan losses is maintained at a level that Management believes is sufficient to absorb estimated probable credit losses. Note 1, Summary of Significant Accounting Policies Allowance for Loan Losses, included in the Corporations 2005 Annual Report on Form 10-K contains additional information about Managements determination of the adequacy of the allowance for loan losses.
7
4. Stock Based Compensation:
The Corporation adopted SFAS No. 123R effective January 1, 2006. SFAS 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period. The Corporation previously applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provided the required pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).
Generally, the approach in SFAS 123R to stock-based payment accounting is similar to SFAS 123. However, SFAS 123R requires all share-based payments, including grants of stock options, be recognized as compensation cost in the statement of income at their fair value. The fair value of stock option grants is determined using the Black-Scholes pricing model. The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk free interest rate and annual dividend yield. Pro forma disclosure for periods beginning after January 1, 2006 is not an alternative under SFAS 123R.
The Corporation elected to adopt SFAS 123R using the modified prospective application method in which compensation cost is recognized beginning with the effective date (a) based upon the requirements of SFAS 123R for all share-based payments granted after the effective date, and (b) based on the requirements of SFAS 123 for all awards granted prior to the effective date of SFAS 123R that remain unvested on the effective date.
The Corporation recorded stock-based compensation expense for the three and the six month periods ended June 30, 2006 as follows:
(dollars in thousands, except per share data) |
Three Months Ended June 30, 2006 |
Six Months Ended June 30, 2006 | ||||||||||||||||||
Using Previous Accounting |
SFAS 123R Effects |
As Reported | Using Previous Accounting |
SFAS 123R Effects |
As Reported | |||||||||||||||
Income before taxes |
$ | 4,783 | $ | (16 | ) | $ | 4,767 | $ | 9,603 | $ | (55 | ) | $ | 9,548 | ||||||
Income taxes |
1,635 | 5 | 1,630 | 3,294 | 19 | 3,275 | ||||||||||||||
Net income |
$ | 3,148 | $ | (11 | ) | $ | 3,137 | $ | 6,309 | $ | (36 | ) | $ | 6,273 | ||||||
Basic earnings per share |
$ | 0.37 | | $ | 0.37 | $ | 0.73 | | $ | 0.73 | ||||||||||
Diluted earnings per share |
$ | 0.36 | | $ | 0.36 | $ | 0.72 | | $ | 0.72 |
The proforma net income that would have resulted if the Corporation applied the fair value method of accounting for stock based compensation under SFAS No. 123 for the three and six month periods ended June 30, 2005 is as follows:
(dollars in thousands, except per share data) |
Three Months Ended June 30, 2005 |
Six Months Ended June 30, 2005 | ||||||||||||||||||
As Reported | Pro Forma Adjustment |
Pro Forma If Under SFAS 123 |
As Reported | Pro Forma Adjustment |
Pro Forma If Under SFAS 123 | |||||||||||||||
Income before taxes |
$ | 4,305 | $ | (1,193 | ) | $ | 3,112 | $ | 8,516 | $ | (1,334 | ) | $ | 7,182 | ||||||
Income taxes |
1,517 | 417 | 1,100 | 2,926 | 467 | 2,459 | ||||||||||||||
Net income |
$ | 2,788 | $ | (776 | ) | $ | 2,012 | $ | 5,590 | $ | (867 | ) | $ | 4,723 | ||||||
Basic earnings per share |
$ | 0.33 | (0.09 | ) | $ | 0.24 | $ | 0.65 | $ | (0.10 | ) | $ | 0.55 | |||||||
Diluted earnings per share |
$ | 0.32 | (0.09 | ) | $ | 0.23 | $ | 0.64 | $ | (0.10 | ) | $ | 0.54 |
The Corporations Stock Option Plan (SOP) permits the issuance of options to key employees and Directors to purchase shares of the Corporations common stock. A total of 431,143 shares were authorized in 2004 by the Board of Directors. As of June 30, 2006 there are 17,439 shares available for future grant. The option price is set at the closing price for the stock on the day preceding issuance of grants as determined by the Corporations Board of Directors. 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 be longer than ten years from the date of the grant. The vesting period of option grants issued is also determined by the Corporations Board of Directors.
During 2005 all grants were issued with immediate vesting. Also, during 2005 the vesting period on 83,916 out of money options outstanding was accelerated to avoid stock based compensation expense in future years. The historical vesting period for options issued had been three years. The pre-tax charge which the Corporation expects to avoid in 2006 and 2007 amounts to approximately $253,000 ($193,000 in 2006 and $60,000 in 2007) based on the original vesting periods. During 2006 all grants were issued with a three year vesting period. The SOP provides that the option price at the date of the grant will not be less than the fair market value of the Corporations common stock. The Corporations practice is to generally issue option related shares from authorized but unissued shares.
8
The following table provides information about options outstanding for the three months ended June 30, 2006:
Three Months Ended June 30, 2006 | |||||||||
Shares | Weighted Average Exercise Price |
Weighted Average Grant Date Fair Value | |||||||
Options outstanding March 31, 2006 |
874,008 | $ | 17.68 | $ | 3.80 | ||||
Granted |
3,625 | 21.83 | 5.90 | ||||||
Forfeited |
| | | ||||||
Expired |
| | | ||||||
Exercised |
(20,950 | ) | $ | 17.70 | $ | 3.73 | |||
Options outstanding June 30, 2006 |
856,683 | $ | 17.70 | $ | 3.81 | ||||
The following table provides information about options outstanding for the six months ended June 30, 2006:
Six Months Ended June 30, 2006 | |||||||||
Shares | Weighted Average Exercise Price |
Weighted Average Grant Date Fair Value | |||||||
Options outstanding December 31, 2005 |
934,308 | $ | 17.44 | $ | 3.74 | ||||
Granted |
3,625 | 21.83 | 5.90 | ||||||
Forfeited |
| | | ||||||
Expired |
| | | ||||||
Exercised |
(81,250 | ) | $ | 14.96 | $ | 3.12 | |||
Options outstanding June 30, 2006 |
856,683 | $ | 17.70 | $ | 3.81 | ||||
The following table provides information about unvested options for the three months ended June 30, 2006:
Three Months Ended June 30, 2006 | ||||||
Shares | Weighted Average Grant Date Fair Value | |||||
Unvested options March 31, 2006 |
33,001 | $ | 3.99 | |||
Granted |
3,625 | $ | 5.90 | |||
Vested |
(33,001 | ) | $ | 3.99 | ||
Forfeited |
| | ||||
Unvested options June 30, 2006 |
3,625 | $ | 5.90 | |||
The following table provides information about unvested options for the six months ended June 30, 2006:
Six Months Ended June 30, 2006 | ||||||
Shares | Weighted Average Grant Date Fair Value | |||||
Unvested options December 31, 2005 |
33,334 | $ | 3.98 | |||
Granted |
3,625 | $ | 5.90 | |||
Vested |
(33,334 | ) | $ | 3.98 | ||
Forfeited |
| | ||||
Unvested options June 30, 2006 |
3,625 | $ | 5.90 | |||
9
The total compensation cost on unvested stock options is estimated to be $21 thousand and to be recognized over the 36 month vesting period.
Proceeds, related tax benefits realized from options exercised, and intrinsic value of options exercised during the six month periods ended June 30, 2006 and 2005 were as follows:
(Dollars in thousands) |
2006 | 2005 | ||||
Proceeds from strike price of value of options exercised |
$ | 1,216 | $ | 294 | ||
Related tax benefit recognized |
191 | 94 | ||||
Proceeds of options exercised |
$ | 1,407 | $ | 388 | ||
The intrinsic value of the options exercised during the six months ended June 30, 2006 and 2005 was $546,000 and $268,000, respectively.
The following table provides information about options outstanding and exercisable options at June 30, 2006:
Outstanding | Exercisable | |||||
Number |
856,683 | 853,058 | ||||
Weighted average exercise price |
$ | 17.70 | $ | 17.68 | ||
Aggregate intrinsic value (dollars in thousands) |
$ | 3,664 | $ | 3,663 | ||
Weighted average contractual term |
6.9 | 6.9 |
The weighted average remaining contractual life for options outstanding and weighted average exercise price per share for exercisable options at June 30, 2006 were as follows:
Exercise Price |
Outstanding | Exercisable | ||||||||||
Shares | Weighted Average Remaining Contractual Life (in years) |
Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price | ||||||||
$ 8.45 10.75 |
51,200 | 3.10 | $ | 10.07 | 51,200 | $ | 10.07 | |||||
$12.25 15.15 |
171,400 | 3.53 | 13.32 | 171,400 | 13.32 | |||||||
$16.25 18.91 |
351,033 | 7.54 | 18.35 | 351,033 | 18.35 | |||||||
$19.11 22.68 |
283,050 | 8.65 | 20.91 | 279,425 | 20.90 | |||||||
856,683 | 6.90 | $ | 17.70 | 853,058 | $ | 17.68 | ||||||
For the stock options granted during the three months ended June 30, 2006 and June 30, 2005, the fair value was determined at the date of the grants using a Black-Scholes option-pricing model and the following assumptions:
2006 | 2005 | ||||||||
Grant dated 5/01/06 |
Grant dated 6/29/06 |
Grant dated 5/12/05 |
|||||||
Expected average risk free interest rate |
5.00 | % | 5.00 | % | 3.90 | % | |||
Expected average life (in years) |
6 | 6 | 6 | ||||||
Expected volatility |
23.56 | % | 24.04 | % | 20.41 | % | |||
Expected dividend yield |
1.94 | % | 1.98 | % | 2.12 | % |
5. Pension and Other Post-Retirement Benefit Plans:
The Corporation sponsors two pension plans, the qualified defined benefit pension plan (QDBP) and the non-qualified defined benefit pension plan (SERP), and a post-retirement benefit plan (PRBP).
10
The following table provides a reconciliation of the components of the net periodic benefits cost for the three months and six months ended June 30, 2006 and 2005:
For the Three Months Ended June 30 |
For the Six Months Ended June 30 |
|||||||||||||||||||||||||||||||
Pension Benefits | Post Retirement Benefits | Pension Benefits | Post Retirement Benefits | |||||||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
Service cost |
$ | 323 | $ | 256 | $ | 3 | | $ | 646 | $ | 584 | $ | 6 | $ | 6 | |||||||||||||||||
Interest cost |
434 | 409 | 35 | 22 | 868 | 825 | 70 | 72 | ||||||||||||||||||||||||
Expected return on plan assets |
(557 | ) | (533 | ) | | | (1,114 | ) | (1,077 | ) | | | ||||||||||||||||||||
Amortization of transition obligation |
| | 6 | 7 | | | 12 | 13 | ||||||||||||||||||||||||
Amortization of prior service costs |
32 | 33 | (34 | ) | (69 | ) | 64 | 65 | (68 | ) | (69 | ) | ||||||||||||||||||||
Amortization of net (gain) loss |
141 | 75 | 51 | 51 | 282 | 186 | 102 | 101 | ||||||||||||||||||||||||
Net periodic benefit cost |
$ | 373 | $ | 240 | $ | 61 | $ | 11 | $ | 746 | $ | 583 | $ | 122 | $ | 123 | ||||||||||||||||
As stated in the Corporations 2005 Annual Report, the Corporation does not have any minimum funding requirement for its QDBP for 2006. Additionally, the Corporation is expected to contribute approximately $131 thousand to the SERP plan for 2006. As of June 30, 2006 no contributions have been made to either of the pension plans for 2006. Changes were made to the PRBP in 2005 limiting future increases in plan costs to 120% of the then current benefit.
6. Segment Information:
SFAS No. 131, Segment Reporting, identifies operating segments as components of an enterprise which are evaluated regularly by the Corporations Chief Executive Officer in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in SFAS No. 131 to the results of its operations.
The Corporation has identified four segments as defined by SFAS No. 131 as follows: Banking, Wealth Management, Mortgage Banking and All Other. Footnote 24 Segment Information, in the Notes to the Consolidated Financial Statements in the Corporations 2005 Annual Report on Form 10-K provides additional descriptions of the identified segments.
Segment information for the three and six months ended June 30, 2006 and 2005 is as follows:
(Dollars in thousands) |
Three Months Ended June 30, 2006 | |||||||||||||||||||
Banking | Wealth Management |
Mortgage Banking |
All Other |
Consolidated | ||||||||||||||||
Net interest income |
$ | 8,301 | $ | | $ | | $ | 2 | $ | 8,303 | ||||||||||
Less: Provision for loan losses |
209 | | | | 209 | |||||||||||||||
Net interest income after provision for loan losses |
8,092 | | | 2 | 8,094 | |||||||||||||||
Other income: |
||||||||||||||||||||
Fees for wealth management services |
| 3,048 | | | 3,048 | |||||||||||||||
Other income |
852 | | 601 | 74 | 1,527 | |||||||||||||||
Total other income |
852 | 3,048 | 601 | 74 | 4,575 | |||||||||||||||
Other expenses: |
||||||||||||||||||||
Salaries and benefits |
3,457 | 1,242 | 192 | 74 | 4,965 | |||||||||||||||
Occupancy |
958 | 149 | 41 | (30 | ) | 1,118 | ||||||||||||||
Amortization of mortgage servicing rights |
| | 84 | | 84 | |||||||||||||||
Other operating expense |
1,456 | 255 | 74 | (50 | ) | 1,735 | ||||||||||||||
Total other expense |
5,871 | 1,646 | 391 | (6 | ) | 7,902 | ||||||||||||||
Segment profit (loss) before income taxes |
3,073 | 1,402 | 210 | 82 | 4,767 | |||||||||||||||
Intersegment pretax revenues (expenses)* |
382 | 45 | 0 | (427 | ) | | ||||||||||||||
Segment pretax profit (loss) after eliminations |
$ | 3,455 | $ | 1,447 | $ | 210 | ($ | 345 | ) | $ | 4,767 | |||||||||
% of segment pretax profit (loss) |
72.5 | % | 30.4 | % | 4.4 | % | (7.3 | )% | 100 | % | ||||||||||
(Dollars in thousands) |
Three Months Ended June 30, 2005 | |||||||||||||||||||
Banking | Wealth Management |
Mortgage Banking |
All Other |
Consolidated | ||||||||||||||||
Net interest income |
$ | 7,600 | $ | | $ | | $ | 21 | $ | 7,621 | ||||||||||
Less: Provision for loan losses |
193 | | | | 193 | |||||||||||||||
Net interest income after provision for loan losses |
7,407 | | | 21 | 7,428 | |||||||||||||||
Other income: |
||||||||||||||||||||
Fees for wealth management services |
| 2,967 | | | 2,967 | |||||||||||||||
Other income |
780 | 1 | 919 | 74 | 1,774 | |||||||||||||||
Total other income |
780 | 2,968 | 919 | 74 | 4,741 | |||||||||||||||
Other expenses: |
||||||||||||||||||||
Salaries and benefits |
3,190 | 1,223 | 217 | 64 | 4,694 | |||||||||||||||
Occupancy |
891 | 161 | 58 | (31 | ) | 1,079 | ||||||||||||||
Amortization of mortgage servicing rights |
| | 210 | | 210 | |||||||||||||||
Other operating expense |
1,327 | 271 | 149 | 134 | 1,881 | |||||||||||||||
Total other expense |
5,408 | 1,655 | 634 | 167 | 7,864 | |||||||||||||||
Segment profit (loss) before income taxes |
2,779 | 1,313 | 285 | (72 | ) | 4,305 | ||||||||||||||
Intersegment pretax revenues (expenses)* |
29 | 45 | | (74 | ) | | ||||||||||||||
Segment pretax profit (loss) after eliminations |
$ | 2,808 | $ | 1,358 | $ | 285 | ($ | 146 | ) | $ | 4,305 | |||||||||
% of segment pretax profit (loss) |
65.2 | % | 31.6 | % | 6.6 | % | (3.4 | )% | 100 | % | ||||||||||
(Dollars in thousands) |
Six Months Ended June 30, 2006 |
|||||||||||||||||||
Banking | Wealth Management |
Mortgage Banking |
All Other |
Consolidated | ||||||||||||||||
Net interest income |
$ | 16,472 | $ | | $ | | $ | 12 | $ | 16,484 | ||||||||||
Less: Provision for loan losses |
363 | | | | 363 | |||||||||||||||
Net interest income after provision for loan losses |
16,109 | | | 12 | 16,121 | |||||||||||||||
Other income: |
||||||||||||||||||||
Fees for wealth management services |
| 6,168 | | | 6,168 | |||||||||||||||
Other income |
1,702 | | 1,165 | 139 | 3,006 | |||||||||||||||
Total other income |
1,702 | 6,168 | 1,165 | 139 | 9,174 | |||||||||||||||
Other expenses: |
||||||||||||||||||||
Salaries and benefits |
7,048 | 2,519 | 368 | 177 | 10,112 | |||||||||||||||
Occupancy |
1,887 | 308 | 90 | (61 | ) | 2,224 | ||||||||||||||
Amortization of mortgage servicing rights |
| | 170 | | 170 | |||||||||||||||
Other operating expense |
2,751 | 513 | 141 | (164 | ) | 3,241 | ||||||||||||||
Total other expense |
11,686 | 3,340 | 769 | (48 | ) | 15,747 | ||||||||||||||
Segment profit (loss) before income taxes |
6,125 | 2,828 | 396 | 199 | 9,548 | |||||||||||||||
Intersegment pretax revenues (expenses) * |
362 | 90 | | (452 | ) | | ||||||||||||||
Segment pretax profit (loss) after eliminations |
$ | 6,487 | $ | 2,918 | $ | 396 | $ | (253 | ) | $ | 9,548 | |||||||||
% of segment pretax profit (loss) |
67.9 | % | 30.6 | % | 4.1 | % | (2.6 | )% | 100 | % | ||||||||||
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Six Months Ended June 30, 2005 |
||||||||||||||||||||
Banking | Wealth Management |
Mortgage Banking |
All Other |
Consolidated | ||||||||||||||||
Net interest income |
$ | 14,934 | $ | | $ | | $ | 41 | $ | 14,975 | ||||||||||
Less: Provision for loan losses |
380 | | | | 380 | |||||||||||||||
Net interest income after provision for loan losses |
14,554 | | | 41 | 14,595 | |||||||||||||||
Other income: |
||||||||||||||||||||
Fees for wealth management services |
| 5,621 | | | 5,621 | |||||||||||||||
Other income |
1,641 | 3 | 1,764 | 140 | 3,548 | |||||||||||||||
Total other income |
1,641 | 5,624 | 1,764 | 140 | 9,169 | |||||||||||||||
Other expenses: |
||||||||||||||||||||
Salaries and benefits |
6,398 | 2,350 | 465 | 129 | 9,342 | |||||||||||||||
Occupancy |
1,726 | 315 | 116 | (62 | ) | 2,095 | ||||||||||||||
Amortization of mortgage servicing rights |
| | 399 | | 399 | |||||||||||||||
Other operating expense |
2,435 | 528 | 278 | 171 | 3,412 | |||||||||||||||
Total other expense |
10,559 | 3,193 | 1,258 | 238 | 15,248 | |||||||||||||||
Segment profit (loss) before income taxes |
5,636 | 2,431 | 506 | (57 | ) | 8,516 | ||||||||||||||
Intersegment pretax revenues (expenses) * |
114 | 90 | | (204 | ) | | ||||||||||||||
Segment pretax profit (loss) after eliminations |
$ | 5,750 | $ | 2,521 | $ | 506 | $ | (261 | ) | $ | 8,516 | |||||||||
% of segment pretax profit (loss) |
67.5 | % | 29.6 | % | 6.0 | % | (3.1 | )% | 100.0 | % | ||||||||||
* | Intersegment revenues consist of rental payments, insurance commissions and a management fee. |
7. Mortgage Servicing Rights:
The following summarizes the Corporations activity related to mortgage servicing rights (MSRs) for the six months ended June 30, 2006 and 2005:
(dollars in thousands) |
2006 | 2005 | ||||||
Balance, January 1 |
$ | 2,982 | $ | 3,172 | ||||
Additions |
129 | 217 | ||||||
Amortization |
(170 | ) | (357 | ) | ||||
Impairment |
| (42 | ) | |||||
Sales |
| | ||||||
Balance, June 30 |
$ | 2,941 | $ | 2,990 | ||||
Fair Value |
$ | 4,796 | $ | 3,823 | ||||
There was no impairment of MSRs for the six months ended June 30, 2006. For the six months ended June 30, 2005 there was $42,000 of temporary impairment concentrated in higher rate mortgages. This impairment was reversed in the second half of 2005.
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At June 30, 2006, key economic assumptions and the sensitivity of the current fair value of MSRs to immediate 10 and 20 percent adverse changes in those assumptions are as follows:
(dollars in thousands) |
June 30, 2006 |
|||
Fair value amount of MSRs |
4,796 | |||
Weighted average life (in years) |
7.5 | |||
Prepayment speeds (constant prepayment rate)*: |
10.4 | |||
Impact on fair value: |
||||
10% adverse change |
$ | (162 | ) | |
20% adverse change |
$ | (232 | ) | |
Discount rate: |
||||
Impact on fair value: |
||||
10% adverse change |
$ | (128 | ) | |
20% adverse change |
$ | (258 | ) |
* | Represents the weighted average prepayment rate for the life of the MSR asset. |
These assumptions and sensitivities are hypothetical and should be used with caution. As the table also indicates, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which could magnify or counteract the sensitivities.
8. Impaired Loans:
The following summarizes the Corporations impaired loans as of the applicable dates as follows:
(dollars in thousands) |
June 30, 2006 |
December 31, 2005 |
June 30, 2005 | ||||||
Period end balance |
$ | 866 | $ | 261 | $ | 678 | |||
Average period to date balance |
803 | 825 | 1,286 | ||||||
Loans with specific loss allowances |
| | | ||||||
Charge offs and recoveries |
| | | ||||||
Provision for impaired loans |
| | | ||||||
Year to date income recognized |
$ | 22 | $ | 22 | $ | 17 |
9. Capital:
The Corporation declared and paid a regular dividend of $0.11 per share, during the second quarter of 2006. This payment totaled $944,000. The dividend was increased 9.1% or $0.01 per share to $0.12 per share effective for the dividend declared to shareholders of record on August 7, 2006, payable September 1, 2006.
During the first six months of 2006 the Corporation repurchased 66,500 shares of its common stock for $1.448 million at an average purchase price of $21.78.
On April 28, 2006 the Corporation paid its non-management directors their annual retainer of $12,500 in the form of the Corporations common stock. Each of the 7 non-management directors received 566 shares for a total of 3,962 shares. The price per share was $22.07, the market value on April 27, 2006. On June 29, 2006, the Corporation issued 431 shares of the Corporations common stock to its new non-management director who joined the Board on June 29, 2006 in payment of his prorated annual retainer. The purchase price of the stock was $21.74, the market value of the stock on June 28, 2006. The foregoing transactions were made in reliance upon the exemptions from the registration provisions of the Securities Act of 1933, as amended, provided for by Section 4(2) thereof for transactions not involving a public offering.
10. | Collection of Notes Receivable: |
Notes receivable held by the Corporation relating to the sale of assets of JWR & Co. were paid in full in the first quarter of 2006. The notes receivable had a balance of $954,000 at December 31, 2005. The notes receivable were classified as commercial and industrial loans in the consolidated balance sheet.
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11. New Accounting Pronouncements:
SFAS 123R
Stock Based Compensation - In April of 2005, the FASB issued SFAS No. 123R Share Based Payment an Amendment of FASB No. 123 and APB No. 95. See Note 4, Stock Based Compensation, above for additional information.
SFAS 155
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. This Statement amends FASB Statements No. 133 and No. 140. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This Statement:
a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation;
b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133;
c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;
d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and
e) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Corporation did not early adopt SFAS 155. The Corporation has not yet determined whether this Statement will have a material impact on its consolidated financial statements upon adoption.
SFAS 156
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations:
a) | a transfer of the servicers financial assets that meets the requirements for sale accounting; |
b) | a transfer of the servicers financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities; |
c) | an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. |
2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable;
3) permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:
a) | amortization methodAmortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date; |
b) | fair value measurement methodMeasure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur; |
14
4) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entitys exposure to changes in fair value of servicing assets or servicing liabilities that a service elects to subsequently measure at fair value;
5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this Statement. The Corporation did not early adopt SFAS 156. The Corporation has not yet determined whether this Statement will have a material impact on its consolidated financial statements upon adoption.
FIN 48
In June 2006, FASB issued Financial Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. According to the Interpretation, a tax position is recognized if it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize and should be measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Corporation is not required to adopt FIN 48 until fiscal year 2007, and has not yet determined whether this statement will have a material impact on its consolidated financial statements upon adoption.
ITEM 2 Managements Discussion and Analysis of Results of Operation and Financial Condition
Special Cautionary Notice Regarding Forward Looking Statements Certain of the statements contained in this Report and the documents incorporated by reference herein, may constitute forward-looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Corporation to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include statements with respect to the Corporations financial goals, business plans, business prospects, credit quality, credit risk, reserve adequacy, liquidity, origination and sale of residential mortgage loans, impairment of goodwill, the effect of changes in accounting standards, and market and pricing trends. The words expect, anticipate, intended, plan, believe, seek, estimate, and similar expressions are intended to identify such forward-looking statements. The Corporations actual results may differ materially from the results anticipated by the forward-looking statement due to a variety of factors, including without limitation:
| the effect of future economic conditions on the Corporation and its customers, including economic factors which affect consumer confidence in the securities markets, wealth creation, investment and savings patterns, and the Corporations interest rate risk exposure and credit risk; |
| changes in the securities markets with respect to the market values of financial assets and the stability of particular securities markets; |
| governmental monetary and fiscal policies, as well as legislation and regulatory changes; |
| changes in accounting requirements or interpretations; |
| changes in interest rates on the level and composition of deposits, loan demand, and the value of loan collateral and securities, as well as interest rate risk; |
| the effects of competition from other commercial banks, thrifts, mortgage companies, finance companies, credit unions, securities brokerage firms, insurance companies, money-market and mutual funds and other institutions operating in the Corporations trade market area and elsewhere including institutions operating locally, regionally, nationally and internationally together with such competitors offering banking products and services by mail, telephone, computer and the internet; |
| any extraordinary event (such as the September 11, 2001 events, the war on terrorism and the U.S. Governments response to those events including the war in Iraq); |
15
| the Corporations success in continuing to generate new business in its existing markets, as well as its success in identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time; |
| the Corporations ability to continue to generate investment results for customers and the ability to continue to develop investment products in a manner that meets customers needs; |
| the Corporations timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers; |
| the Corporations ability to originate and sell residential mortgage loans; |
| the accuracy of assumptions underlying the establishment of reserves for loan losses and estimates in the value of collateral, and various financial assets and liabilities and technological changes being more difficult or expensive than anticipated; |
| technological changes being more difficult or expensive than anticipated; and |
| the Corporations success in managing the risks involved in the foregoing. |
All written or oral forward-looking statements attributed to the Corporation are expressly qualified in their entirety by use of the foregoing cautionary statements. All forward-looking statements included in this Report are based upon information presently available, and the Corporation assumes no obligation to update any forward-looking statement.
Brief History of the Bank and Corporation
The Bryn Mawr Trust Company (the Bank) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. In 1986, Bryn Mawr Bank Corporation (the Corporation) was formed and on January 2, 1987, the Bank became a wholly-owned subsidiary of the Corporation. The Bank and Corporation are headquartered in Bryn Mawr, PA, a western suburb of Philadelphia, PA. The Corporation and its subsidiaries provide wealth management, community banking, commercial and consumer lending, residential mortgage lending, insurance and business banking services to its customers through eight full service branches and seven retirement community offices throughout Montgomery, Delaware and Chester counties. The Corporation trades on the NASDAQ Global Market under the symbol BMTC.
The goal of the Corporation is to become a preeminent community bank and wealth management organization.
The Corporation competes in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies, registered investment advisors and mutual fund families. The Corporation and its subsidiaries are regulated by many regulatory agencies including the Securities and Exchange Committee (SEC), NASDAQ, Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking.
Results of Operations
The following is Managements discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for the Corporation. The Corporations consolidated financial condition and results of operations consist almost entirely of the Banks financial condition and results of operations. Current performance does not guarantee, and may not be indicative of similar performance in the future. These interim financial statements are unaudited.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Corporation and its subsidiaries conform with accounting principles generally accepted in the United States of America (US GAAP) applicable to the financial services industry. All significant inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous years financial statements to the current years presentation. In preparing the consolidated financial statements, Management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates.
The allowance for loan losses involves a higher degree of judgment and complexity than other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by Management to be sufficient to absorb estimated probable credit losses. Managements determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, expected loan commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages and general amounts for historical loss experience. The process also
16
considers economic conditions, international events, and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from Management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.
The Corporation recognizes deferred tax assets and liabilities for the future tax effects of temporary differences, net of operating loss carry forwards and tax credits. Deferred tax assets are subject to Managements judgment based upon available evidence that future realization is more likely than not. If Management determines that the Corporation may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.
The valuation of mortgage servicing rights (MSRs) is a critical accounting policy due to the complexity of the quarterly valuation process which is performed by an outside consultant based on data provided by Management. Changes in market interest rates, consumer behavior, demographic trends and other factors influence the value of MSRs.
Executive Overview
The Corporation reported second quarter 2006 diluted earnings per share of $0.36, an increase of $0.04 or 12.5% compared to $0.32 in the same period last year. Net income for the second quarter of 2006 was $3.1 million, an increase of 12.5% or $349 thousand, compared to $2.8 million in last years second quarter. This performance was led by healthy loan growth during the first six months of the year as portfolio loans increased $44.5 million or 7.5% since the end of 2005. At the same time, the Corporation continues to see pressure on deposit gathering activities and the deposit pricing functions as competition is intense.
The major factor contributing to the increase in earnings for the second quarter of 2006 compared to the same period last year was a $703 thousand or 9.1% increase in net interest income (on a tax equivalent basis) to $8.4 million from $7.7 million. The increase in net interest income (on a tax equivalent basis) in the second quarter of 2006 compared to the same period last year was the result of a $48.6 million increase or 7.9% increase in average interest earning assets and a 6 basis point increase in the Corporations net interest margin to 5.04% from 4.98%.
Non-interest income for the second quarter of 2006 decreased $166 thousand or 3.5% compared to the same period in 2005. This is due to a continued decline in residential mortgage related revenues partially offset by an increase of fees for Wealth Management Services. Wealth Management revenue increased 2.7% to $3.048 million from $2.967 million for the same period in 2005. Wealth Management assets under management and administration were $2.195 billion at June 30, 2006, compared with $2.248 billion at December 31, 2005 and $1.901 billion June 30, 2005.
Non-interest expense for the second quarter of 2006 increased $38 thousand or 0.5% when compared to the same period last year as a result of increases in salaries and employee benefits which were partially offset by declines in mortgage servicing rights amortization and a decrease in professional fees.
Diluted earnings per share for the six months ended June 30, 2006, was $0.72, an increase of $0.08 or 12.5%, compared with $0.64 in 2005. Net income for the six months ended June 30, 2006 was $6.3 million, an increase of $683 thousand or 12.2%, compared to $5.6 million in the same period last year.
The major factor contributing to the increase in earnings for the six month period ending June 30, 2006 compared to the same period last year was a $1.6 million or 10.4% increase in net interest income (on a tax equivalent basis), partially offset by a $499 thousand or 3.3% increase in non-interest expenses. The increase in net interest income (on a tax equivalent basis) in the first six months of 2006 compared to the same period last year was the result of a $40.8 million or 6.6% increase in average interest earning assets, and an 18 basis point increase in the Corporations net interest margin to 5.13% from 4.95%.
Non-interest income for the six months ended June 30, 2006, increased nominally when compared to the same period last year as fees for Wealth Management Services increased $547 thousand or 9.7% while other non-interest income categories in the aggregate declined $542 thousand, primarily due to lower residential mortgage related revenue.
The increase in non-interest expense for the six months ended June 30, 2006, was primarily due to increased employment related costs and occupancy expenses, partially offset by reduced mortgage servicing rights amortization and reduced professional fees. The reduction in mortgage servicing rights amortization is expected to continue as new mortgage origination volume is lower than in prior periods. The increase in occupancy expenses is related to rent expense on the new Ardmore branch site.
17
Asset quality remains strong despite an increase in non-performing assets to $1.7 million at June 30, 2006 from $415 thousand at December 31, 2005. The $1.7 million of non-performing loans which excludes other real estate owned consists almost entirely of two first lien residential mortgage loans. Non-performing loans as a percentage of portfolio loans was 0.26% at June 30, 2006. The allowance for loan losses increased to $7.8 million at June 30, 2006 from $7.4 million at December 31, 2005, however the allowance as a percentage of portfolio loans decreased to 1.22% from 1.24% over the same time period. Net loan charge-offs (recoveries) for the six months ended June 30, 2006 and 2005 were ($14 thousand) and $55 thousand, respectively.
Portfolio loans increased $44.5 million or 7.5% to $639.6 million at June 30, 2006 from $595.2 million at December 31, 2005, reflecting a significant increase in commercial mortgage and construction loan closings in the second quarter of 2006. Portfolio loans also increased from Managements decision to portfolio certain residential mortgage loans for asset liability management purposes.
The Corporations interest bearing liabilities at June 30, 2006 included approximately $58 million in wholesale funding compared with $5 million at December 31, 2005. In addition to the wholesale funding, the Corporation has seen a shift in the mix of its core deposits as lower cost interest bearing checking, money market accounts and savings accounts move into higher yielding certificates of deposit. The deposit mix changes and the addition of wholesale funding has resulted in an increase in the cost of interest bearing deposits of 81 basis points for the six months ended June 30, 2006 compared to the six months ended June 30, 2005, and 88 basis points for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. This change in the core deposit mix appears to be a national trend as competition for deposit balances is very intense, high rate advertisements are commonplace and the continued increase in interest rates has resulted in noticeable customer account movement. It is expected that deposit pricing pressure and the flat yield curve will put downward pressure on the net interest margin over the near term.
The Corporation will continue with the expansion of its retail banking footprint with controlled de novo expansion in the suburban Philadelphia market. Construction has started on the Corporations new Ardmore branch and its opening is anticipated in the fourth quarter of 2006. We also expect our new West Chester branch to open in the fourth quarter of 2007. This full service branch will also house the Corporations Chester County loan production center and a regional office for Wealth Management clients. Management is excited about the opportunity to expand our business into the heart of West Chester, the county seat of Chester County, the fastest growing county in Pennsylvania.
The Corporations Board of Directors increased the quarterly dividend $0.01 per share or 9.1% from $0.11 to $0.12 per share, payable September 1, 2006, to shareholders of record as of August 7, 2006.
Key Performance Ratios
Key financial performance ratios for the three months and six months ended June 30, 2006 and 2005 are shown in the table below:
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Return on Average Equity ROE) |
15.70 | % | 15.47 | % | 15.98 | % | 15.70 | % | ||||||||
Return on Average Assets (ROA) |
1.74 | % | 1.65 | % | 1.79 | % | 1.67 | % | ||||||||
Efficiency Ratio |
61.36 | % | 63.6 | % | 61.37 | % | 63.2 | % | ||||||||
Net Interest Margin (TE) |
5.04 | % | 4.98 | % | 5.13 | % | 4.95 | % | ||||||||
Diluted Earnings Per share |
$ | 0.36 | $ | 0.32 | $ | 0.72 | $ | 0.64 | ||||||||
Dividend Per Share |
$ | 0.11 | $ | 0.10 | $ | 0.22 | $ | 0.20 |
June 30 2006 |
December 31 2005 |
June 30 2005 |
||||||||||
Book Value Per Share |
$ | 9.52 | $ | 9.06 | $ | 8.63 | ||||||
Allowance for Loan Losses as a Percentage of Loans |
1.22 | % | 1.24 | % | 1.22 | % |
18
Components of Net Income
Net income is affected by five major elements: Net Interest Income, or the difference between interest income earned on loans and investments and interest expense paid on deposit and borrowed funds; the Provision for Loan Losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans; Non-Interest Income which is made up primarily of certain fees, trust income, residential mortgage activities and gains and losses from the sale of securities; Non-Interest Expenses, which consist primarily of salaries, employee benefits and other operating expenses; and Income Taxes. Each of these major elements will be reviewed in more detail in the following discussion.
NET INTEREST INCOME
The rate volume analysis in the table below analyzes changes in the tax equivalent net interest income for the quarter ended June 30, 2006 compared to June 30, 2005 and for the six months period ended June 30, 2006 compared to June 30, 2005 by its rate and volume components.
Rate /Volume Analysis (Tax Equivalent Basis)
(in thousands) Increase/(Decrease) |
Three Months Ended June 30, 2006 Compared to 2005 |
||||||||||
Volume | Rate | Total | |||||||||
Interest Income: |
|||||||||||
Interest-bearing deposits with banks |
$ | 1 | $ | 4 | $ | 5 | |||||
Federal funds sold |
(26 | ) | 8 | (18 | ) | ||||||
Investment securities available for sale |
80 | 99 | 179 | ||||||||
Loans |
658 | 1,130 | 1,788 | ||||||||
Total interest income |
713 | 1,241 | 1,954 | ||||||||
Interest expense: |
|||||||||||
Savings, NOW and market rate accounts |
(50 | ) | 337 | 287 | |||||||
Time deposits |
253 | 523 | 776 | ||||||||
Short term borrowings |
104 | 84 | 188 | ||||||||
Total interest expense |
307 | 944 | 1,251 | ||||||||
Interest differential |
$ | 406 | $ | 297 | $ | 703 | |||||
(in thousands) Increase/(Decrease) |
Six Months Ended June 30, 2006 Compared to 2005 |
||||||||||
Volume | Rate | Total | |||||||||
Interest-bearing deposits with banks |
$ | (15 | ) | $ | 7 | $ | (8 | ) | |||
Federal funds sold |
(12 | ) | 35 | 23 | |||||||
Investment securities available for sale |
101 | 157 | 258 | ||||||||
Loans |
1,118 | 2,284 | 3,402 | ||||||||
Total interest income |
1,192 | 2,483 | 3,675 | ||||||||
Interest expense: |
|||||||||||
Savings, NOW and market rate accounts |
(86 | ) | 632 | 546 | |||||||
Time deposits |
443 | 902 | 1,345 | ||||||||
Short term borrowings |
116 | 105 | 221 | ||||||||
Total interest expense |
473 | 1,639 | 2,112 | ||||||||
Interest differential |
$ | 719 | $ | 844 | $ | 1,563 | |||||
19
The tables below present the major asset and liability categories on an average daily basis for the periods presented, along with tax equivalent interest income and expense and tax equivalent key rates and yields.
Average Balance and Tax Equivalent Income and Expense and Tax Equivalent Yields
For the Three Months ended June 30, | ||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||
(dollars in thousands) |
Average Balance |
Interest Income/ Expense |
Average Rates Earned/ Paid |
Average Balance |
Interest Income/ Expense |
Average Rates Earned/ Paid |
||||||||||||||
Assets: |
||||||||||||||||||||
Interest-bearing deposits with other banks |
$ | 687 | $ | 8 | 4.67 | % | $ | 536 | $ | 3 | 2.99 | % | ||||||||
Federal funds sold |
1,467 | 18 | 4.92 | % | 5,119 | 36 | 2.82 | % | ||||||||||||
Investment securities available for sale |
44,197 | 475 | 4.31 | % | 34,828 | 296 | 3.41 | % | ||||||||||||
Loans (1) (2) |
620,931 | 10,683 | 6.90 | % | 578,173 | 8,895 | 6.17 | % | ||||||||||||
Total interest earning assets |
667,282 | 11,184 | 6.72 | % | 618,656 | 9,230 | 5.98 | % | ||||||||||||
Cash and due from banks |
24,666 | 33,259 | ||||||||||||||||||
Allowance for loan losses |
(7,686 | ) | (7,251 | ) | ||||||||||||||||
Other assets |
37,803 | 34,975 | ||||||||||||||||||
Total assets |
$ | 722,065 | $ | 679,639 | ||||||||||||||||
Liabilities: |
||||||||||||||||||||
Savings, NOW and market rate accounts |
$ | 294,848 | $ | 934 | 1.27 | % | $ | 319,101 | $ | 647 | 0.81 | % | ||||||||
Time deposits |
166,228 | 1,645 | 3.97 | % | 128,777 | 869 | 2.71 | % | ||||||||||||
Total interest-bearing deposits |
461,076 | 2,579 | 2.24 | % | 447,878 | 1,516 | 1.36 | % | ||||||||||||
Short term borrowings |
16,738 | 216 | 5.18 | % | 3,540 | 28 | 3.17 | % | ||||||||||||
Total interest-bearing liabilities |
477,814 | 2,795 | 2.35 | % | 451,418 | 1,544 | 1.37 | % | ||||||||||||
Noninterest-bearing demand deposits |
150,586 | 146,140 | ||||||||||||||||||
Other liabilities |
13,487 | 9,803 | ||||||||||||||||||
Total noninterest-bearing liabilities |
164,073 | 155,943 | ||||||||||||||||||
Total liabilities |
641,887 | 607,361 | ||||||||||||||||||
Shareholders equity |
80,178 | 72,278 | ||||||||||||||||||
Total liabilities and shareholders equity |
$ | 722,065 | $ | 679,639 | ||||||||||||||||
Net interest spread |
4.37 | % | 4.61 | % | ||||||||||||||||
Effect of noninterest-bearing sources |
.67 | % | 0.37 | % | ||||||||||||||||
Net interest income/ margin on earning assets |
$ | 8,389 | 5.04 | % | $ | 7,686 | 4.98 | % | ||||||||||||
Tax equivalent adjustment |
$ | 86 | .05 | % | $ | 65 | .04 | % | ||||||||||||
The tax equivalent net interest income for the three months ended June, 2006 of $8.389 million was $703 thousand or 9.1% higher than the net interest income for the same period in 2005 of $7.686 million. The analysis above indicates that increased loan volume and an increase in rates were the primary drivers of the increase in net interest income. Average earning assets increased $48.6 million or 7.9% in the second quarter of 2006 compared to the same period in 2005. Average loans grew $42.8 million or 7.4% while investments increased to $9.4 million or 26.9% from the second quarter of 2005.
The tax equivalent average earning asset yield during the second quarter of 2006 of 6.72% was 74 basis points higher than the 5.98% for the same period in 2005. The floating rate loans in portfolio increased as the Fed increased rates and new fixed rate loans were priced in accordance with the current rate environment. The rate paid on average interest bearing liabilities of 2.35% was 98 basis points higher than the 1.37% rate paid during the same period in 2005. This increase is due to an increase in funds borrowed, the need to pay higher rates on interest bearing deposits to remain competitive and an increase in wholesale funding during the first six months of 2006. Average non-interest bearing demand deposits increased by $4.446 million or a 3.0% increase from the second quarter of 2005.
20
Average Balance and Tax Equivalent Income and Expense and Tax Equivalent Yields
For the Six Months ended June 30, | ||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||
(dollars in thousands) |
Average Balance |
Interest Income/ Expense |
Average Rates Earned/ Paid |
Average Balance |
Interest Income/ Expense |
Average Rates Earned/ Paid |
||||||||||||||
Assets: |
||||||||||||||||||||
Interest-bearing deposits with other banks |
$ | 564 | $ | 13 | 4.65 | % | $ | 1,834 | $ | 21 | 2.31 | % | ||||||||
Federal funds sold |
3,801 | 84 | 4.46 | % | 4,769 | 61 | 2.58 | % | ||||||||||||
Investment securities available for sale |
40,653 | 841 | 4.17 | % | 34,429 | 583 | 3.41 | % | ||||||||||||
Loans (1) (2) |
609,860 | 20,670 | 6.83 | % | 573,036 | 17,268 | 6.08 | % | ||||||||||||
Total interest earning assets |
654,878 | 21,608 | 6.65 | % | 614,068 | 17,933 | 5.89 | % | ||||||||||||
Cash and due from banks |
24,500 | 33,308 | ||||||||||||||||||
Allowance for loan losses |
(7,606 | ) | (7,155 | ) | ||||||||||||||||
Other assets |
36,809 | 34,465 | ||||||||||||||||||
Total assets |
$ | 708,581 | $ | 674,686 | ||||||||||||||||
Liabilities: |
||||||||||||||||||||
Savings, NOW and market rate accounts |
$ | 299,867 | $ | 1,755 | 1.18 | % | $ | 322,893 | $ | 1,209 | 0.76 | % | ||||||||
Time deposits |
156,970 | 2,947 | 3.79 | % | 123,018 | 1,602 | 2.63 | % | ||||||||||||
Total interest-bearing deposits |
456,837 | 4,702 | 2.08 | % | 445,911 | 2,811 | 1.27 | % | ||||||||||||
Short term borrowings |
10,177 | 257 | 5.09 | % | 2,401 | 36 | 3.02 | % | ||||||||||||
Total interest-bearing liabilities |
467,014 | 4,959 | 2.14 | % | 448,312 | 2,847 | 1.28 | % | ||||||||||||
Noninterest-bearing demand deposits |
148,941 | 144,792 | ||||||||||||||||||
Other liabilities |
13,451 | 9,796 | ||||||||||||||||||
Total noninterest-bearing liabilities |
162,392 | 154,588 | ||||||||||||||||||
Total liabilities |
629,406 | 602,900 | ||||||||||||||||||
Shareholders equity |
79,175 | 71,786 | ||||||||||||||||||
Total liabilities and shareholders equity |
$ | 708,581 | $ | 674,686 | ||||||||||||||||
Net interest spread |
4.51 | % | 4.61 | % | ||||||||||||||||
Effect of noninterest-bearing sources |
.62 | % | 0.34 | % | ||||||||||||||||
Net interest income/ margin on earning assets |
$ | 16,649 | 5.13 | % | $ | 15,086 | 4.95 | % | ||||||||||||
Tax equivalent adjustment |
$ | 165 | .05 | % | $ | 111 | 0.04 | % | ||||||||||||
(1) | Non-accrual loans have been included in average loan balances, but interest on nonaccrual loans has not been included for purposes of determining interest income. |
(2) | Loans include portfolio loans and loans held for sale. |
Net interest income for the six months ended June 30, 2006 of $16.649 million was $1.563 million or 10.4% higher than the net interest income for the same period in 2005 of $15.086 million. The analysis above indicates that increased loan volume along with the increase in rates were the primary drivers of the increase in net interest income. Average earning assets increased $40.8 million or 6.6% during the first six months of 2006 compared to the same period in 2005. Average loans grew $36.8 million or 6.4% while investments increased $6.2 million or 18.1% over 2005.
The average earning asset yield during the first six months of 2006 of 6.65% was 76 basis points higher than the 5.89% during the same period in 2005 as floating rate loans in the portfolio responded to the Feds rate increases. The rate paid on average interest bearing liabilities of 2.14% in 2006 was 86 basis points higher than the 1.28% in 2005 due to the need to pay higher rates on interest bearing deposits to remain competitive and an increase in the Corporations short term borrowings. Average non-interest bearing demand deposits grew 2.8%, while savings, NOW and market rate accounts decreased 7.1% and time deposits increased 27.6% in the first six months of 2006 compared to the same period in 2005. The growth in time deposits includes an increase in wholesale funding previously mentioned.
21
Net Interest Margin
The Corporations tax equivalent net interest margin increased 6 basis points to 5.04% in the second quarter of 2006 from 4.98% in the same period last year. As rates continue to rise, the yield on earning assets has increased due to the asset sensitivity of the balance sheet. Conversely, the cost of interest bearing deposits has also increased. This is a result of the increasing rate environment and the need to remain competitive with pricing in order to be successful in deposit retention and gathering. The impact of the increasing cost of deposits resulted in a decrease in the net interest margin from 5.19% in the fourth quarter of 2005 and 5.22% in the first quarter of 2006 to 5.04% for the second quarter of 2006. The tax equivalent net interest margin and related components for the past five linked quarters are as follows:
Year |
Quarter | TE Earning Asset Yield |
Interest Bearing Liability Cost |
TE Net Interest Spread |
Effect of Non-Interest Bearing Sources |
TE Net Interest Margin |
|||||||||||
2006 |
2nd | 6.72 | % | 2.35 | % | 4.37 | % | 0.67 | % | 5.04 | % | ||||||
2006 |
1st | 6.58 | % | 1.92 | % | 4.66 | % | 0.56 | % | 5.22 | % | ||||||
2005 |
4th | 6.41 | % | 1.73 | % | 4.68 | % | 0.51 | % | 5.19 | % | ||||||
2005 |
3rd | 6.18 | % | 1.57 | % | 4.61 | % | 0.46 | % | 5.07 | % | ||||||
2005 |
2nd | 5.98 | % | 1.37 | % | 4.61 | % | 0.37 | % | 4.98 | % |
Interest Rate Sensitivity
The Corporation actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. Managements Asset Liability Committee (ALCO), using policies and procedures approved by the Corporations Board of Directors, is responsible for managing the rate interest sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and repricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offering of loan and deposit terms and through borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB).
The Corporation uses several tools to manage its interest rate risk including interest rate sensitivity analysis (aka Gap Analysis), market value of portfolio equity analysis, interest rate simulations under various rate scenarios and net interest margin reports. The results of these reports are compared to limits established by the Corporations Asset Liability Management Policies and appropriate adjustments are made if the results are outside of established limits.
The following table demonstrates the annualized result of an interest rate simulation and the expected effect that a parallel interest rate shift in the yield curve and subjective adjustments in deposit pricing might have on the Corporations projected net interest income over the next 12 months. The changes to net interest income shown below are in compliance with the Corporations policy guidelines. Actual results may differ significantly from the interest rate simulation due to numerous factors including assumptions, the competitive environment, market reactions and customer behavior.
Summary of Interest Rate Simulation
June 30, 2006 | |||||||
(dollars in thousands) |
Change In Net Interest Income Over Next 12 Months |
||||||
Change in Interest Rates |
|||||||
+200 basis points |
$ | 1,631 | 4.77 | % | |||
+100 basis points |
$ | 872 | 2.55 | % | |||
-100 basis points |
$ | (823 | ) | (2.41 | )% | ||
-200 basis points |
$ | (1,754 | ) | (5.13 | )% |
The interest rate simulation above indicates that the Corporations balance sheet as of June 30, 2006 is asset sensitive meaning that an increase in interest rates should increase net interest income and a decline in interest rates will cause a decline in net interest income over the next 12 months. The asset sensitivity position has been reduced during the second quarter of 2006 when compared to December 31, 2005 with the addition of fixed rate commercial loans, residential mortgages and mortgage-backed securities to the asset mix. Additionally, the Corporation purchased a $25 million notional, prime rate based, three-year interest rate floor in April, 2006 for a total cost of $155,000 to mitigate the impact on earnings of anticipated declining rates over the next three years. The expense of this interest rate floor during the second quarter of 2006 was $53 thousand.
22
The following table presents the Corporations interest rate sensitivity position or Gap Analysis as of June 30, 2006
(dollars in thousands) |
0 to 90 Days |
90 to 365 Days |
1-5 Years |
Over 5 Years |
Non-Rate Sensitive |
Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest-bearing deposits with banks |
$ | 642 | | | | | $ | 642 | ||||||||||||||||
Federal funds sold |
| | | | | | ||||||||||||||||||
Investment securities |
2,556 | 8,548 | 23,724 | 10,869 | | 45,697 | ||||||||||||||||||
Loans(1) |
271,859 | 45,285 | 237,256 | 91,601 | | 646,001 | ||||||||||||||||||
Allowance for loan losses |
| | | | (7,779 | ) | (7,779 | ) | ||||||||||||||||
Cash and due from banks |
| | | | 27,529 | 27,529 | ||||||||||||||||||
Other assets |
| | 136 | 303 | 38,953 | 39,392 | ||||||||||||||||||
Total assets |
$ | 275,057 | $ | 53,833 | $ | 261,116 | $ | 102,773 | $ | 58,703 | $ | 751,482 | ||||||||||||
Liabilities and shareholders equity: |
||||||||||||||||||||||||
Non-interest-bearing demand |
$ | 32,733 | $ | 18,846 | $ | 100,513 | | | $ | 152,092 | ||||||||||||||
Savings, NOW and market rate |
47,026 | 39,780 | 151,866 | 45,786 | | 284,458 | ||||||||||||||||||
Time deposits |
87,190 | 92,626 | 18,006 | 158 | | 197,980 | ||||||||||||||||||
Fed funds purchased |
12,700 | | | | | 12,700 | ||||||||||||||||||
Borrowed funds |
10,000 | | | | | 10,000 | ||||||||||||||||||
Other liabilities |
| | | | 12,597 | 12,597 | ||||||||||||||||||
Shareholders equity |
2,916 | 8,749 | 46,660 | 23,330 | | 81,655 | ||||||||||||||||||
Total liabilities and shareholders equity |
$ | 192,565 | $ | 160,001 | $ | 317,045 | $ | 69,274 | $ | 12,597 | $ | 751,482 | ||||||||||||
Interest earning assets |
$ | 275,057 | $ | 53,833 | $ | 260,980 | $ | 102,470 | $ | | $ | 692,340 | ||||||||||||
Interest bearing liabilities |
156,916 | 132,406 | 169,872 | 45,944 | | 505,138 | ||||||||||||||||||
Difference between interest earning assets and interest bearing liabilities |
$ | 118,141 | $ | (78,573 | ) | $ | 91,108 | $ | 56,526 | $ | | $ | 187,202 | |||||||||||
Cumulative difference between interest earning assets and interest bearing liabilities |
$ | 118,141 | $ | 39,568 | $ | 130,676 | $ | 187,202 | $ | | $ | 187,202 | ||||||||||||
Cumulative earning assets as a % of cumulative interest bearing liabilities |
175 | % | 114 | % | 128 | % | 137 | % | ||||||||||||||||
(1) | Loans include portfolio loans and loans held for sale. |
The table above indicates that the Corporation is asset sensitive in the immediate to 90 day time frame and should experience an increase in net interest income in the near term if interest rates rise. The converse is also true.
PROVISION FOR LOAN LOSSES
General Discussion of the Allowance for Loan Losses
The Corporation uses the allowance method of accounting for credit losses. The balance in the allowance for loan losses is determined based on Managements review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including Managements assumptions as to future delinquencies, recoveries and losses.
23
Increases to the allowance for loan losses are implemented through a corresponding provision (expense) in the Corporations statement of income. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.
While Management considers the allowance for loan losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or Managements assumptions as to future delinquencies, recoveries and losses and Managements intent with regard to the disposition of loans. In addition, the Pennsylvania Department of Banking and the Federal Reserve Bank of Philadelphia, as an integral part of their examination process, periodically review the Corporations allowance for loan losses.
The Corporations allowance for loan losses is the accumulation of four components that are calculated based on various independent methodologies. All components of the allowance for loan losses are estimations. Management discusses these estimates earlier in this document under the heading of Critical Accounting Policies, Judgments and Estimates. The four components are as follows:
| Specific Loan Evaluation Component Includes the specific evaluation of larger classified loans |
| Historical Charge-Off Component Applies a five year historical charge-off rate to pools of non-classified loans |
| Additional Factors Component The loan portfolio is broken down into multiple homogenous subclassifications upon which multiple factors (such as delinquency trends, industry concentration, economic conditions, loan terms, and regulatory environment) are evaluated resulting in an allowance amount for each of the subclassifications. The sum of these amounts equals the Additional Factors Component. |
| Unallocated Component This amount represents a reserve against all loans for factors not included in the components above. |
Asset Quality and Analysis of Credit risk
Asset quality remains strong at June 30, 2006 despite an increase in non-performing assets to $1.7 million from $415 thousand at December 31, 2005. The $1.7 million of non-performing loans, which excludes other real estate owned, consist almost entirely of two first lien residential mortgage loans. Nonperforming loans as a percentage of total loans were 26 basis points at June 30, 2006 compared with 7 basis points at December 31, 2005 and 11 basis points at June 30, 2005. The allowance for loan losses as a percentage of total loans was 1.22% at June 30, 2006 compared with 1.24% at December 31, 2005 and 1.22% at June 30, 2005.
Non Performing Assets and Related Ratios
(dollars in thousands) |
June 30, 2006 |
December 31, 2005 |
June 30, 2005 |
|||||||||
Non-accrual loans |
$ | 866 | $ | 261 | $ | 678 | ||||||
Loans 90 days or more past due |
794 | 129 | | |||||||||
Total non performing loans |
1,660 | 390 | 678 | |||||||||
Other real estate owned (OREO) |
| 25 | 210 | |||||||||
Total non performing assets |
$ | 1,660 | $ | 415 | $ | 888 | ||||||
Allowance for loan losses to non performing assets |
468.6 | % | 1,783.60 | % | 816.70 | % | ||||||
Allowance for loan losses to non performing loans |
468.6 | % | 1,897.90 | % | 1,069.60 | % | ||||||
Non performing loans to total loans |
.26 | % | .07 | % | .11 | % | ||||||
Allowance for loan losses to portfolio loans |
1.22 | % | 1.24 | % | 1.22 | % | ||||||
Non performing assets to portfolio assets |
.22 | % | 0.06 | % | 0.13 | % | ||||||
Period end portfolio loans |
$ | 639,632 | $ | 595,165 | $ | 585,833 | ||||||
Average portfolio loans (quarterly average) |
$ | 617,627 | $ | 591,294 | $ | 569,127 | ||||||
Allowance for loan losses |
$ | 7,779 | $ | 7,402 | $ | 7,252 |
24
Summary of Changes in the Allowance For Loan Losses
Three Months Ended June 30, |
Six Months Ended June 30, |
Year Ended December 31, 2005 |
||||||||||||||||||
(dollars in thousands) |
2006 | 2005 | 2006 | 2005 | ||||||||||||||||
Balance, beginning of period |
$ | 7,571 | $ | 7,125 | $ | 7,402 | $ | 6,927 | $ | 6,927 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Consumer |
(5 | ) | (7 | ) | (14 | ) | (9 | ) | (158 | ) | ||||||||||
Commercial and industrial |
| | | | | |||||||||||||||
Real estate |
| (65 | ) | | (65 | ) | (156 | ) | ||||||||||||
Total charge-offs |
(5 | ) | (72 | ) | (14 | ) | (74 | ) | (314 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
Consumer |
3 | 3 | 26 | 8 | 11 | |||||||||||||||
Commercial and industrial |
1 | 2 | 2 | 10 | 12 | |||||||||||||||
Real estate |
| 1 | | 1 | 4 | |||||||||||||||
Total recoveries |
4 | 6 | 28 | 19 | 27 | |||||||||||||||
Net (charge-offs) / recoveries |
(1 | ) | (66 | ) | 14 | (55 | ) | (287 | ) | |||||||||||
Provision for loan losses |
209 | 193 | 363 | 380 | 762 | |||||||||||||||
Balance, end of period |
$ | 7,779 | $ | 7,252 | $ | 7,779 | $ | 7,252 | $ | 7,402 | ||||||||||
NON-INTEREST INCOME
Three months ended June 30, 2006 compared to June 30, 2005
Non-interest income for the second quarter of 2006 was $4.575 million, a decrease of $166 thousand or 3.5% compared with $4.741 million in the same period last year. Fees for Wealth Management services grew $81 thousand or 2.7% to $3.048 million in the second quarter of 2006 from $2.967 million in same period last year. New business development efforts, an April 2005 fee schedule increase, increased estate settlements and growth in wealth assets contributed to these results, partially offset by equity market conditions in the second quarter of 2006. Wealth Management assets under management and administration were $2.195 billion at June 30, 2006 compared to $1.901 billion at June 30, 2005. This asset growth is mainly the result of an acquisition made by a significant client in the third quarter of 2005.
Partially offsetting this higher Wealth Management services revenue were reduced fees from residential mortgage-related activities. Loan servicing and late fees were $282 thousand for the three months ended June 30, 2006, a decrease of $57 thousand or 16.8% from $339 thousand for three months ended June 30, 2005. The volume of loans sold servicing retained declined as more loans were sold servicing released to obtain a higher gain at the time of sale and a decision by Management to hold certain residential mortgage loans in portfolio to help reduce the Corporations asset sensitivity position. Net gain on sale of loans was $254 thousand for the second quarter, a decrease of $210 thousand or 45.3% compared to $464 thousand for the same period last year as a result of the slowdown in mortgage refinance activity compounded by very competitive pricing pressures and Managements decision to portfolio more loans. See the supplemental residential mortgage volume statistics later in this document for additional information.
Six months ended June 30, 2006 compared to June 30, 2005
Non-interest income for the six months ended June 30, 2006 was $9.174 million, an increase of $5 thousand or 0.1% compared with $9.169 million in the same period last year. Fees for Wealth Management services grew $547 thousand or 9.7% to $6.168 million in the second quarter of 2006 from $5.621 million in same period last year. New business development efforts, an April 2005 fee schedule increase, increased estate settlements, asset growth and market performance contributed to these results.
Partially offsetting this higher Wealth Management services revenue were reduced fees from residential mortgage-related activities and lower services charges on deposit accounts. Loan servicing and late fees were $572 thousand for the first six months of 2006, a $106 thousand or 15.6% decrease from $678 thousand for the same period last year. The volume of loans sold servicing retained declined due to more loans being sold servicing released to obtain a higher gain at the time of sale, and a decision by Management to hold certain residential mortgage loans in portfolio to help reduce the Corporations asset sensitivity position. Net gain on sale of loans was $504 thousand for the first six months of 2006, a decrease of $418 thousand or 45.3% compared to $922 thousand for the same period last year as a result of the slowdown in mortgage refinance activity compounded by very competitive pricing pressures and Managements decision to portfolio more loans.
25
NON-INTEREST EXPENSE
Three months ended June 30, 2006 compared to June 30, 2005
Non-interest expense for the second quarter of 2006 was $7.902 million, an increase of $38 thousand or 0.5% compared to $7.864 million in the same period last year. Salaries and wages were $3.834 million for the second quarter of 2006 compared to $3.758 million for the same period last year, a $76 thousand or 2.0% increase which was primarily the result of merit increases and additions to staff. Employee benefits were $1.131 million for the quarter, up $195 thousand or 20.8% compared to $936 thousand for the same period last year. The primary reasons for this increase were related to higher payroll taxes, medical expense, pension expense and post-retirement benefit expenses. Expenses related to the opening of the Exton branch in March 2005 and the rent expense for the Ardmore Branch contributed to the increase in occupancy expense. Other operating expenses include $53 thousand of expense related to the interest rate floor purchased in April 2006.
Partially offsetting these increases in non-interest expense were reductions in the amortization of mortgage servicing rights and professional fees. Amortization of mortgage servicing rights decreased $126 thousand or 60.0% to $84 thousand for the second quarter of 2006 compared to $210 thousand for the same period last year as a result of the lower volume of loans sold serviced for others and slower prepayment speeds of mortgage loans due to the increase in mortgage rates from year to year. Other operating expenses decreased $21 thousand or 1.6% to $1.253 million for the second quarter of 2006 compared to $1.274 million for the second quarter of 2005.
Six months ended June 30, 2006 compared to June 30, 2005
Non-interest expense for the first six months of 2006 was $15.747 million, an increase of $499 thousand or 3.3% compared to $15.248 million in the same period last year. Salaries and wages were $7.663 million for the first six months of 2006 compared to $7.265 million for the same period last year, a $398 thousand or 5.5% increase which was primarily the result of merit increases and additions to staff. Employee benefits were $2.449 million for the first six months of 2006, up $372 thousand or 17.9% compared to $2.077 million for the same period last year. The primary reasons for this increase were related to higher payroll taxes, medical expenses and pension expenses. Expenses related to the opening of the Exton branch in March 2005 and rent expense on the Ardmore Branch contributed to increases in occupancy and furniture, fixtures and equipment expense.
Partially offsetting these increases in non-interest expense were reductions in the amortization of mortgage servicing rights and professional fees. Amortization of mortgage servicing rights decreased $229 thousand or 57.4% to $170 thousand for the first six months of 2006 compared to $399 thousand for the same period last year as a result of the lower volume of loans sold serviced for others as well as slower prepayment speeds of mortgage loans due to the increased mortgage rate environment from year to year. Other operating expenses decreased $64 thousand or 2.8% to $2.262 million for the first six months of 2006 compared to $2.326 million for the first six months of 2005.
INCOME TAXES
Income taxes from operations for the three months ended June 30, 2006 were $1.630 million, an effective tax rate of 34.2% compared to $1.517 million, an effective tax rate of 35.2%, for the same period in 2005. The decrease in the effective tax rate is due to a higher percentage of tax-exempt income to pretax book income for the three months ended June 30, 2006, as compared to the same period in 2005.
Income taxes for the six months ended June 30, 2006 were $3.275 million compared to $2.926 million for the same period in 2005. This represents an effective tax rate for the six months ended June 30, 2006 of 34.3% and an effective tax rate of 34.4% for the same period in 2005.
BALANCE SHEET ANALYSIS
Total assets increased $24.3million or 3.3% from $727.2 million as of December 31, 2005 to $751.5 million as of June 30, 2006. This increase is related to the growth in loans outstanding, specifically in commercial mortgages, construction loans and residential mortgage loans and an increase in investment securities. Offsetting this increase was a decline in fed funds sold that increased at December 31, 2005 due to certain short term deposits. The increase in portfolio loans was $44.5 million or 7.5 % from $595.2 million as of December 31, 2005 to $639.6 million as of June 30, 2006. Average portfolio loans for the second quarter of 2006 increased $26.3 million or 4.5% to $617.6 million compared to $591.3 million in the fourth quarter of 2005.
The table below compares total portfolio loans outstanding at June 30, 2006 and December 31, 2005. Commercial and industrial loans declined $3.8 million from $170.3 million at December 31, 2005 to $166.5 million at June 30, 2006 as interest-sensitive customers used excess cash to pay down floating rate lines as interest rates increased. This decline was more than offset by an increase in commercial mortgage loans of $15.6 million or 9.6% from $162.6 million as of December 31, 2005 to $178.2 million as of June 30, 2006, an increase in construction loans of $19.6 million or 43% from $45.5 million as of December 31, 2006 to $65.1 million as of June 30, 2006 and an increase in residential mortgage loans of $9.2 million or 9.3% from $99.6 million as of December 31, 2005 to $108.8 million as of
26
June 30, 2006. The increase in construction loans is related to the increased usage of lines available to the borrowers and the increase in residential mortgage loans is due to Managements decision to portfolio certain residential mortgage loans as part of the Corporations interest rate risk management process. The Corporation continues to focus its business development efforts on building banking relationships with privately held businesses, non-profits, high quality residential builders and owners of commercial real estate.
Total portfolio loans outstanding at June 30, 2006 and December 31, 2005 are as follows:
(dollars in thousands) |
June 30, 2006 |
December 31, 2005 | ||||
Real estate loans: |
||||||
Commercial mortgage loans |
$ | 178,253 | $ | 162,621 | ||
Home equity lines and loans |
112,157 | 107,699 | ||||
Residential mortgage loans |
108,820 | 99,602 | ||||
Construction loans |
65,097 | 45,523 | ||||
Commercial and industrial loans |
166,442 | 170,283 | ||||
Consumer loans |
8,863 | 9,437 | ||||
Total portfolio loans |
$ | 639,632 | $ | 595,165 | ||
Quarterly average portfolio loans |
$ | 617,627 | $ | 591,294 | ||
Total deposits and borrowings increased $20.9 million from $636.3 million at December 31, 2005 to $657.2 million at June 30, 2006. This increase is driven by an increase in borrowed funds of $22.7 million, which is comprised of $10 million from the FHLB and $12.7 million in overnight fed funds. The increase in borrowed funds supported the 7.5% increase in portfolio loans during the first six month of 2006. The decrease in total deposits of $1.7 million or 0.3% from $636.3 million at December 31, 2005 to $634.5 million at June 30, 2006 is concentrated in savings, NOW and market rate accounts, partially offset by the increase in the time deposits categories detailed below.
Average deposits for the second quarter of 2006 increased $11.1 million or 1.8% to $611.7 million compared to $600.6 million in the fourth quarter of 2005. Due to the highly competitive nature of the financial services business, the Corporation is paying higher rates on certificates of deposit and is utilizing higher rate wholesale CDs. The change in the mix of the Corporations deposits translates into higher interest expenses. It is probable that the higher rate certificates of deposits will make up a greater share of total deposits than they have historically, for the foreseeable future. It is anticipated the funding of asset growth in the future will be aided by continued expansion of the retail banking footprint, with controlled de novo expansion in the suburban Philadelphia market. Construction has started on the Corporations new Ardmore branch, which is anticipated to open in the fourth quarter of 2006. It is also expected that the new West Chester branch will open in the fourth quarter of 2007.
Deposits and borrowings at June 30, 2006 and December 31, 2005 are as follows:
(dollars in thousands) |
June 30, 2006 |
December 31, 2005 | ||||
Non-interest bearing demand |
$ | 152,092 | $ | 168,042 | ||
Savings, NOW and market rate accounts |
284,458 | 312,896 | ||||
Non-wholesale time deposits |
162,980 | 150,322 | ||||
Time deposits from brokers |
20,000 | | ||||
Time deposits from public fund sources |
15,000 | 5,000 | ||||
Total deposits |
634,530 | 636,260 | ||||
Fed funds purchased |
12,700 | | ||||
FHLB advances |
10,000 | | ||||
Total borrowings |
22,700 | | ||||
Total deposits and total borrowings |
$ | 657,230 | $ | 636,260 | ||
Quarterly average deposits |
$ | 611,662 | $ | 600,559 | ||
Quarterly average borrowings |
16,738 | 1,505 | ||||
Quarterly average deposits and borrowings |
$ | 628,400 | $ | 602,064 | ||
27
Supplemental Residential Mortgage Volume Statistics
(dollars in thousands) |
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Residential loans held in portfolio * |
$ | 108,820 | $ | 84,176 | $ | 108,820 | $ | 84,176 | ||||||||
Mortgage originations |
31,996 | 46,010 | 66,417 | 84,559 | ||||||||||||
Mortgage loans sold: |
||||||||||||||||
Servicing retained |
3,615 | 9,972 | 10,625 | 23,759 | ||||||||||||
Servicing released |
13,127 | 16,817 | 20,563 | 37,026 | ||||||||||||
Servicing retained % |
21.6 | % | 37.2 | % | 34.1 | % | 39.1 | % | ||||||||
Servicing released % |
78.4 | % | 62.8 | % | 65.9 | % | 60.9 | % | ||||||||
Loans serviced for others * |
395,091 | 465,780 | 395,091 | 465,780 | ||||||||||||
Mortgage servicing rights (MSRS)* |
2,941 | 2,990 | 2,941 | 2,990 | ||||||||||||
Net gain on sale of loans |
254 | 464 | 504 | 922 | ||||||||||||
Loan servicing and late fees |
282 | 339 | 572 | 678 | ||||||||||||
Amortization of MSRs |
$ | 84 | $ | 210 | $ | 170 | $ | 399 |
* | period end balance |
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Capital
Consolidated shareholders equity of the Corporation was $81.7 million or 10.9% of total assets, as of June 30, 2006, compared to $77.5 million or 10.7% of total assets, as of December 31, 2005. The following table presents the Corporations and Banks capital ratios and the minimum capital requirements to be considered Well Capitalized by regulators as of June 30, 2006, and December 31, 2005:
Ratio | Minimum Ratio to be Well Capitalized |
|||||
June 30, 2006: |
||||||
Total (Tier II) Capital to Risk Weighted Assets |
||||||
Consolidated |
12.51 | % | 10 | % | ||
Bank |
11.54 | % | 10 | % | ||
Tier I Capital to Risk Weighted Assets |
||||||
Consolidated |
11.43 | % | 6 | % | ||
Bank |
10.45 | % | 6 | % | ||
Tier I Leverage Ratio (Tier I Capital to Total Quarterly Average Assets) |
||||||
Consolidated |
11.39 | % | 5 | % | ||
Bank |
10.41 | % | 5 | % | ||
December 31, 2005: |
||||||
Total (Tier II) Capital to Risk Weighted Assets |
||||||
Consolidated |
12.46 | % | 10 | % | ||
Bank |
11.47 | % | 10 | % | ||
Tier I Capital to Risk Weighted Assets |
||||||
Consolidated |
11.38 | % | 6 | % | ||
Bank |
10.38 | % | 6 | % | ||
Tier I Leverage Ratio (Tier I Capital to Total Quarterly Average Assets) |
||||||
Consolidated |
11.25 | % | 5 | % | ||
Bank |
10.26 | % | 5 | % |
Both the Corporation and the Bank exceed the required capital levels to be considered Well Capitalized by their respective regulators at the end of each period presented.
Neither the Corporation nor the Bank are under any agreement with regulatory authorities, nor is Management aware of any current recommendations by the regulatory authorities, which, if such recommendations were implemented, would have a material effect on liquidity, capital resources or operations of the Corporation.
Liquidity
The Corporation manages its liquidity position on a daily basis as part of the daily settlement function and continuously as part of the formal asset liability management process. The Corporations liquidity is maintained by managing its core deposits as the primary source, and purchasing federal funds, selling loans in the secondary market, borrowing from the FHLB and selling securities as its secondary sources. Availability with the FHLB was approximately $230 million as of June 30, 2006. Overnight Fed Funds lines consist of lines from six banks totaling $48 million. Quarterly, ALCO reviews the Corporations liquidity needs and reports its findings to the Risk Management Committee of the Corporations Board of Directors.
The deposit gathering process has become very competitive as most financial institutions are struggling to retain and attract deposits. Additionally, the Corporation is seeing a shift from lower rate NOW and savings accounts into higher rate certificates of deposit. These factors have put upward pressure on funding costs and have led Management to tap into wholesale funding sources to support asset growth.
As of June 30, 2006, the Corporation had $22.7 million in overnight and short term borrowings. Additionally during the first six months of 2006 the corporation obtained $20 million wholesale CDs and $15 million of public deposits for the Corporations liquidity needs. Additional alternative funding sources are being evaluated.
Off Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
29
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at June 30, 2006 were $347 million.
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporations obligation under standby letters of credit at June 30, 2006 amounted to $11.888 million.
Estimated fair values of the Corporations off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.
Contractual Cash Obligations of the Corporation as of June 30, 2006:
(In thousands) |
Total | Within 1 Year |
2 - 3 Years |
4 - 5 Years |
After 5 Years | ||||||||||
Deposits without a stated maturity |
$ | 436,550 | $ | 436,550 | |||||||||||
Consumer certificates of deposit |
197,980 | 179,816 | 17,770 | 236 | 158 | ||||||||||
Operating leases |
19,883 | 914 | 1,596 | 1,495 | 15,878 | ||||||||||
Purchase obligations |
1,697 | 990 | 572 | 135 | | ||||||||||
Non-discretionary pension contributions |
| | | | | ||||||||||
Total |
$ | 656,110 | $ | 618,270 | $ | 19,938 | $ | 1,866 | $ | 16,036 | |||||
Section 404 of Sarbanes Oxley Act of 2002
The Corporation and its Management completed compliance procedures relating to Section 404 of the Sarbanes Oxley Act of 2002 (SOX 404) for the fiscal year ended December 31, 2005 as documented in the Corporations Form 10-K. Management continues to devote considerable effort in 2006 to assure continued compliance with all aspects of SOX 404 during 2006.
Other Information
| Opening of New Full Service Branch Offices in Newtown Square and Exton |
During the first quarter of 2004, the Bank established a new full service branch office in Newtown Square, Pennsylvania, thereby enabling the Bank to both broaden and strengthen its footprint in Delaware County, Pennsylvania. This new branch had deposits of $23.1 million as of June 30, 2006. In March of 2005, the Bank established a new full service branch in Exton, Pennsylvania. The Exton branch had deposits of $10.6 million as of June 30, 2006. The Bank anticipates measured expansion as previously stated.
| Branches Under Construction |
The Corporation will continue with the expansion of its retail banking footprint with controlled de novo expansion in the suburban Philadelphia market. Construction has started on the Corporations new Ardmore branch and its opening is anticipated in the fourth quarter of 2006. We also expect our new West Chester branch to open in the fourth quarter of 2007. This full service branch will also house the Corporations Chester County loan production center and a regional office for Wealth Management clients. Management is excited about the opportunity to expand our business into the heart of West Chester, the county seat of Chester County, the fastest growing county in Pennsylvania.
| Effects of Inflation |
Inflation has some impact on the Corporations operating costs. Unlike many industrial companies, however, substantially all of the Corporations assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporations performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
| Effect of Government Monetary Policies |
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate
30
the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.
The Corporation is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Corporations operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation cannot be predicted.
| Regulatory Matters and Pending Legislation |
Management is not aware of any current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, an impact on the Corporations results of operations.
In February, 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005. This legislation will merge the Bank Insurance Fund and the Savings Association Insurance Fund into one fund, increase insurance coverage for retirement accounts to $250,000, adjust the maximum deposit insurance for inflation after March 31, 2010 and give the FDIC greater flexibility in setting insurance assessments.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the Corporations assessment of its sensitivity to market risks since its presentation in the 2005 Annual Report on Form 10-K filed with the SEC.
ITEM 4. Controls and Procedures
As of the end of the period covered by the report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporations management, including the Corporations Chief Executive Officer, Frederick C. Peters II, and Chief Financial Officer, J. Duncan Smith, of the effectiveness of the design and operation of the Corporations disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporations periodic SEC filings.
There have not been any changes in the Corporations internal controls over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
None.
There have been no material changes to the risk factors disclosed in the Corporations 2005 Annual Report on Form 10-K.
31
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following tables present the shares repurchased by the Corporation during the second quarter of 2006 (1) (2) :
Period |
Total Number of shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs | |||||
April 1, 2006 April 30, 2006 |
242 | $ | 21.61 | | 419,000 | ||||
May 1, 2006 May 31, 2006 |
25,500 | $ | 21.94 | 25,500 | 393,500 | ||||
June 1, 2006 June 30, 2006 |
673 | $ | 23.90 | | 393,500 | ||||
Total |
26,415 | $ | 21.98 | 25,500 | 393,500 | ||||
Notes to this table:
(1) | On February 24, 2006, the Board of Directors of the Corporation adopted a new stock repurchase program (the 2006 Program) under which the Corporation may repurchase up to 450,000 shares of the Corporations common stock, not to exceed $10 million. The 2006 Program was publicly announced in a Press Release dated February 24, 2006. There is no expiration date on the 2006 Program and the Corporation has no plans for an early termination of the 2006 Program. All shares purchased through the 2006 Program were accomplished in open market transactions. |
(2) | From April, 2006 to June, 2006, 915 shares were purchased by the Corporations Thrift Plan and deferred compensation plan through open market transactions by the Corporations Wealth Management Division investment personnel. |
On April 28, 2006 the Corporation paid its non-management directors their annual retainer of $12,500 in the form of the Corporations common stock. Each of the 7 non-management directors received 566 shares for a total of 3,962 shares. The price per share was $22.07, the market value on April 27, 2006. On June 29, 2006, the Corporation issued 431 shares of the Corporations common stock to its new non-management director who joined the Board on June 29, 2006 in payment of his prorated annual retainer. The purchase price of the stock was $21.74, the market value of the stock on June 28, 2006. the foregoing transactions were made in reliance upon the exemptions from the registration provisions of the Securities Act of 1933, as amended, provided for by Section 4(2) thereof for transactions not involving a public offering.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to Vote of Security Holders
The Corporation held its Annual Meeting of Shareholders on April 25, 2006.
1. The shareholders elected David E. Lees as a Class III director to serve the remaining term of a Class III director to expire in 2009 and Francis J. Leto as a Class IV director for a four year term:
Director |
For | Withheld | ||
David E. Lees |
7,476,353 | 88,765 | ||
Francis J. Leto |
7,361,504 | 203,614 |
The following directors continued in office after the Annual Meeting: Andrea F. Gilbert, Wendell F. Holland, Frederick C. Peters II, B. Loyall Taylor, Nancy J. Vickers and Thomas A. Williams.
None
32
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Bryn Mawr Bank Corporation | ||||
Date: August 4, 2006 | By: | /s/ FREDERICK C. PETERS II | ||
Frederick C. Peters II | ||||
President & Chief Executive Officer | ||||
Date: August 4, 2006 | By: | /s/ J. DUNCAN SMITH | ||
J. Duncan Smith | ||||
Treasurer & Chief Financial Officer |
Form 10-Q
Index to Exhibits
a) Exhibits
Exhibit 31.1 | -Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a). | |
Exhibit 31.2 | -Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a). | |
Exhibit 32.1 | -Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.2 | -Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Form 10-Q
33